The Underlying Problem
The underlying problem is a recurrent one. By way of a hypothetical example,the systems designers and programmers of a software house customise one of theirsoftware products to comply with a description of functionality set out in awritten contract entered into by someone in their sales department and abusiness customer. After the system is delivered the customer refuses to pay,complaining that additional functionality had been agreed with the salesdepartment (either orally or in correspondence) or that the capabilities of theexisting product had been misrepresented by that department. If the customer’slawyers become involved they will characterise any pre-contract statements ascollateral warranties or misrepresentations. Even if the statements relied upon(or their intended effect) are disputed, the financial risks of arbitration orlitigation, or the need to maintain a good image in terms of customer service(or a combination of both) may, in the light of the size and value of theproject, persuade the software house that it should opt for a compromisesolution in which, for example, it enhances the system and the customershoulders a small part of the additional cost. Nevertheless, in terms of profit,the project may have ceased to be of any value to the software house. In anendeavour to prevent a similar situation arising in the future, the softwarehouse consults its lawyers.
The Recommendation
The recommendation made to the software house is that it should include anentire agreement clause (linked with an exclusion clause in respect ofmisrepresentations) in all its future contracts. In fact this is the onlypotential solution available. Entire agreement clauses come in all shapes andsizes, and their precise effect in any particular case will depend upon thewords used and the circumstances in which they are sought to be applied.However, a simple example might provide:
‘This Agreement contains the entire and only agreement between the partiesand the parties acknowledge and agree that no representation has been made to,or relied upon by, either of them except as may be recorded herein.’
The object of such a clause, to use the colourful language of Mr JusticeLightman in his judgment in Inntrepreneur Pub Co v East Crown Ltd 2 is to
‘preclude a party to a written agreement from threshing through theundergrowth and finding in the course of negotiations some (chance) remark orstatement (often long-forgotten or difficult to recall or explain) on which tofound a claim …to the existence of a collateral warranty.’
More immediately, the object of such clauses is to seek to overcome theeffects of the erosion of the so-called parol evidence rule.
The Parol Evidence Rule
Obviously, problems of the nature described above are commonplace, and wereexperienced in numerous fields of commercial activity long before IT was evendreamed of. At one time these problems were mitigated in the courts by a strictappliance of the parol3 evidence rule. A formulation of the rule which wasaccepted by the House of Lords was in the following terms:
‘parol testimony cannot be received to contradict, vary, add to or subtractfrom the terms of a written contract, or the terms in which the parties havedeliberately agreed to record any part of the contract.’4
In spite of the term ‘parol’ the rule applies to all material, whetheroral or written, not recorded in the written contract.5 The effect of this rulewas mitigated by various exceptions. In the mid-19th century it was firmlyestablished by the decision of the court in Harris v Reckett6 that the rule‘only applies where the parties to an agreement reduce it to writing, andagree or intend that the writing shall be their agreement.’ As a result, therehave been numerous cases in which evidence has been admitted to show that it wasnot the intention of the parties, objectively judged, to regulate their rightsin relation to a particular transaction solely by reference to a writtenagreement between them, or in which the courts have found that in addition tothe written agreement a collateral contract had been made or a collateralwarranty had been given.7 Such results are rationalised on the basis that‘[t]he parol agreement neither alters nor adds to the written one, but is anindependent agreement.’8 By way of example, in Couchman v Hill9 oralstatements made at a cattle sale by a vendor and auctioneer that a heifer wasunserved were held to override written conditions that all lots must be takensubject to and were sold with ‘all faults, imperfections and errors ofdescription’, so that the claimant was able to recover damages when, later,the heifer was found to be in calf and died as a result of carrying a calf attoo young an age. In further striking applications of this approach, landlordswho had induced others to enter into leases on the strength of representationsthat covenants in the proposed leases would not be enforced were held to haveentered into collateral contracts or warranties which overrode, and preventedthem from enforcing, the covenants.10
Subsequent Developments
Seeking to capitalise on the dictum in Harris v Reckett that the parolevidence rule will apply where the parties to an agreement reduce it to writingand agree that the writing shall be their agreement, legal draftsmen came upwith the entire agreement clauses. The response of the court to these clausesinitially tended not to be supportive. In Brikom Investments Limited v Carr11the Court of Appeal held that an entire agreement clause did not have the effectof preventing a tenant from relying on the landlord’s oral assurances, givenbefore entering into a lease, that repairing covenants in the proposed leasewould not be strictly enforced, Lord Denning MR stating:
‘All I need say about that clause is that it is of no avail to thelandlords whatever. The cases are legion in which such a clause is of no effectin the face of an express promise or representation on which the other side hasrelied …’
Lord Denning did not give the names of his legion of cases, and the authorityto which he did refer did not in fact involve an entire agreement clause.Nevertheless, similar treatment had been meted out to an entire agreement clausein the earlier decision of the Court of Appeal in Felstone Tile Company Ltd vWinget Ltd,12 and in subsequent decisions, including, in the IT field, theunreported decision of Mr Justice Steyn in Eurodynamics Systems Plc v GeneralAutomation Ltd,13 such clauses have met with the same fate.
The efficacy of entire agreement clauses was further complicated by theenactment of the Unfair Contract Terms Act 1977 (UCTA) which in somecircumstances invalidates contract terms or notices which purport to exclude orrestrict certain types of liability, including liability for negligence, unlessthe terms or notice comply with statutory requirements as to reasonableness.Similar provisions are applied by virtue of s 3 of the Misrepresentation Act1967 to misrepresentations inducing contracts.
However, in a number of recent cases entire agreement clauses have been heldto be effective. In Deepak Fertilisers etc v ICI14 the relevant clause providedthat:
‘This contract comprises the entire agreement between the parties, asdetailed in the various Articles and Annexures and there are not any agreements,understandings, promises or conditions, oral or written, expressed or implied,concerning the subject matter which are not merged into this contract andsuperseded hereby. This contract may be amended in the future only in writingexecuted by the parties.
The Court of Appeal held that this wording excluded any collateral warranty(but not any misrepresentations). Similarly, entire agreement clauses wereupheld in Huber Investments v Private DIY Company15 and in Inntrepreneur Pub Cov East Crown Ltd.16 In McGrath v Shah17 the view was expressed, in the contextof a dispute concerning a contract for the sale of land, that an entireagreement clause was not affected by s 3 of the Misrepresentation Act 1967because that provision, which is in terms directed to the exclusion orrestriction of liability for misrepresentation or of remedies arising by reasonof misrepresentation, was not apt to cover ‘a contractual provision whichseeks to define where the contractual terms are actually to be found’, butthat in any event the inclusion of such a clause in a contract of that naturewas eminently fair and reasonable. Subsequently, in Grimstead and Son Ltd vMcGarrigan,18 Chadwick LJ expressed the view that the fact that the parties hadhad the advice of accountants and solicitors before entering into their contractrendered the terms of an entire agreement clause fair and reasonable. Similarlyin Watford Electronics Ltd v Sanderson CFL Ltd19 the Court of Appeal held thatthe inclusion in a contract of a term which, when read together with an entireagreement clause had the effect of excluding liability for pre-contractrepresentations, was fair and reasonable, principally because its terms,including the price, had been negotiated between experienced businessmenrepresenting substantial companies of equal bargaining power.
It should be noted, however, that whatever an entire agreement clause mayachieve it will not be enforced if it is a sham, as was the case in OroleumLimited v Sigmoid Resources NV,20 where a contract for the supply of crude oilprovided that it would not be delivered to a boycotted country when in fact thetrue intention was that it would be. Nor can the clause prevent the parties fromsubsequently agreeing to vary the contract including it. Furthermore, it is alsoabsolutely clear that pre-contract negotiations will be affected by a contractterm only if the wording is aptly drafted. Thus a term which merely providesthat the written contract constitutes ‘the entire agreement and understandingbetween the parties’ will be ineffective to exclude liability formisrepresentations because it does not clearly so provide. Otherwise, theefficacy of entire agreement clauses is less straightforward and is discussedfurther below.
‘Agreed’ Facts
As can be seen, the clauses under discussion typically purport to record as amatter of fact that the agreement including them is the parties’ entireagreement. Often these will be linked with a provision that ‘no representationhas been made to or relied upon by either party etc’, or a provision insimilar terms. Generally such provisions will not prevent one party adducingevidence that what has been recorded is not in fact true, ie alleging that thewritten agreement does not reflect the entirety of what was agreed, or thatthere was a causative misrepresentation.
This, and an explanation of the ingredients of estoppel which work to theopposite effect, was explained by the Court of Appeal in Lowe v Lombank Ltd,21where a finance company sought to rely upon untrue statements in a hire-purchaseagreement which the claimant had signed:
This curiously drafted clause was never brought to the notice of theplaintiff and its effect was not made clear to her … It is expressed to be anacknowledgment, that is to say, a representation, by the plaintiff that she hadnot made known by implication that the car was required for a particularpurpose, that is, as a means of transport and also an agreement that she had notmade that purpose known to the defendants …To call it an agreement as well asan acknowledgment by the plaintiff cannot convert a statement as to past facts,known by both parties to be untrue, into a contractual obligation, which isessentially a promise by the promisor to the promisee that acts will be done inthe future or that facts exist at the time of the promise or will exist in thefuture. To say that the hirer “agrees” that he has not done something in thepast means no more than that the hirer, at the request of the owner, representsthat he has not done that thing in the past. If intended by the hirer to beacted upon by the person to whom the representation is made, believed to be trueby such person and acted upon by such person to his detriment, it can give riseto an estoppel: it cannot give rise to any positive contractual obligation.Although contained in the same document as the contract, it is not a contractualpromise.’22
Obviously, if an arbitrator or judge is satisfied that one party did make aparticular pre-contract representation that party will not be able to establishthat he believed a statement in the written contract that no such statement wasmade. The prospects of establishing an estoppel may be a little better where thestatement in the written contract is to the effect that the other party “hasnot relied upon” any pre-contract representation that was made to him, though,again, the party may have an uphill battle, in evidential terms, if the court orarbitrator is satisfied that a pre-contract representation was actually made andwas of a nature likely to act as an inducement to the representee to enter intothe contract. However, as can be seen, generally, a term in the contract thatcertain matters are agreed to be facts is unlikely to achieve much if the truthis shown to be different.
Genuine Intentions
It would be unfortunate if parties who genuinely intend that their rights inrelation to a particular transaction should be governed exclusively by the termsof a written contract were unable to achieve that result. In fact there isnothing to prevent such parties entering into such an agreement, and if that istheir clear intent it will be enforced on the basis that their agreementcontains express or implied mutual promises not to assert any right other thanone which arises under the terms of the written record of the agreement. When anentire agreement clause is effective to exclude reliance upon anypre-contractual statements not recorded in the agreement, it is because, on itstrue construction, it contains such mutual promises. One view is that anappropriately worded entire agreement clause not only indicates, but also isdecisive as to, the parties’ firm intentions. This view was expressed by MrJustice Lightman in Inntrepreneur Pub Co v East Crown Ltd23 when he stated that:
‘…such a clause constitutes a binding agreement between the parties thatthe full contractual terms are to be found in the document containing the clauseand not elsewhere and that, accordingly, any promises or assurances made in thecourse of the negotiations (which, in the absence of such a clause, might haveeffect as a collateral warranty) shall have no contractual force, save in so faras they are reflected and given effect in that document. The operation of theclause is not to render evidence of the collateral warranty inadmissible inevidence … it is to denude what would otherwise constitute a collateralwarranty of legal effect.’
However, as has been seen, the opposite view in relation to a lease whichincorporated an entire agreement clause was taken by the Court of Appeal inBrikom Investments v Carr,24 where Lord Justice Roskill stated:
‘When two parties are about to enter into an agreement for a lease – alease which imposes upon the lessee a very burdensome obligation in respect torepairs – I can see no reason why one party cannot say to the other, “Inrelation to those outstanding matters, whatever may be our legal position underthe terms of the lease, we will not as landlords enforce that obligation againstyou”. I see no reason why effect should not be given to such a position. Ithink the evidence shows that that was the position here; there was a perfectlygood collateral contract between these two parties.’25
It would appear that Mr Justice Lightman may not have been aware of thisdecision, or of the earlier decision of the Court of Appeal in Felstone TileCompany Ltd v Winget Ltd,26 since neither of these cases is referred to in hisjudgment.
The view of the Law Commission is that an entire agreement clause:
‘may have a strong persuasive effect but if it were proved that,notwithstanding the clause, the parties actually intended some additional termto be of contractual effect, the court would give effect to that term becausesuch was the intention of the parties.’27
In the opinion of the authors of this article the view of the Law Commissionis to be preferred.
If it is correct, then a party who enters into a written contract includingan entire agreement clause will have an evidential hurdle to overcome when heasserts that the contract does not in fact reflect the entire agreement betweenthe parties, but he will be at liberty to adduce evidence to support his case.The decision of the court or arbitrator will depend upon the facts andcircumstances in each case. In cases where the written terms have been subjectto substantial negotiation or where lawyers have been involved in advising or inthe drafting of the terms, it will be more difficult (and often impossible) toshow that the parties did not intend their rights to be regulated exclusively bythose terms. In other cases where, for example, the entire agreement clause isone of a set of standard terms which has not been subject to negotiation, theopposite may apply. It is also clear that in some kinds of transactions (eg thesale of land or shares, or, perhaps, substantial software development contracts)it will generally be more difficult to escape the consequences of entering intoa contract incorporating an entire agreement clause. Nonetheless, the result ineach case will turn upon its own facts.
If it is correct that an entire agreement clause will be ineffective wherethe parties actually intended some additional term to be of contractual effect,neither party, in such circumstances, would need to resort to UCTA in order tobe able to rely on that additional term. If, however, the clause were held to beeffective, the situation would be different. The questions which would thenarise would be, firstly, whether the provisions of UCTA would apply at all, andsecondly whether it would be possible to satisfy the court or arbitrator thatthe clause was a fair and reasonable one to have included in the contract. Thesecond question will not be considered in detail in this article, since it isone which cannot be answered in the abstract but only on the facts of eachparticular case and about which there is now considerable legal authority. Sofar as the first question is concerned, it has been argued28 that an entireagreement clause is not caught by s 2 or 3 of UCTA because those sections onlyapply to clauses which ‘exclude or restrict liability’, and that an entireagreement clause has the effect that no liability arises because of the factualstate of affairs which it records. This appears to be a somewhat circularargument which ought not to apply except in a case where it has first beenestablished (without taking the clause itself into account) that the partiesgenuinely intended their rights to be governed exclusively by the terms of thewritten contract.
Further, as the author of the argument points out, in Cremdean Properties vNash,29 Bridge LJ indicated that, in his view, exclusion clauses which purportedto deny the very existence of a representation did not avoid the effect of s 3of the Misrepresentation Act 1967. Furthermore, the similar argument in relationto disclaimers and duties of care in the tort of negligence has been tacitlyruled out by House of Lords decisions such as Smith v Bush30 and Henderson vMerrett Syndicates Ltd,31 where it was stated that the existence of a duty ofcare is to be ascertained without regard to any disclaimer of responsibility andthat the reasonableness of the disclaimer for the purposes of UCTA is to beconsidered later.
For the same reasons one can question the suggestion, made in McGrath vShah,32 that s 3 of the Misrepresentation Act 1967 would not apply to entireagreement clauses.
Conclusion
The following conclusions may be drawn:
The effect of an entire agreement clause will be that the party who hasentered into an agreement containing such a clause and who wishes to circumventit will have an evidential difficulty in showing that the clause is untrue, butbeing only an evidential difficulty he may well be able to surmount it.
Entire agreement clauses, whether or not linked with exclusions of pre-contractrepresentations, may fall within the scope of UCTA or the equivalent provisionsof the Misrepresentation Act 1967.
Such clauses, therefore, are not a complete panacea for problems of the natureexperienced by the software house as described at the beginning of this article.
Nevertheless, if the clause forms part of genuine negotiations, it could well beeffective as delimiting the scope of the material which is to regulate therights of the parties, or its inclusion in the contract may be regarded as fairand reasonable and thus as complying with the statutory requirements of UCTA andthe Misrepresentation Act 1967.
In any event, a party to a contract who is entirely satisfied that it does notwish to rely upon anything said or written during pre-contract negotiations isunlikely to have anything to lose by seeking to include such a clause in awritten contract, provided that party remains aware that such clauses are notnecessarily foolproof.
David Blunt QC and Kirsten Houghton are barristers and members of the ITGroup at 4
Pump Court, Temple, London, EC4Y 7AN (www.4pumpcourt.com) and may be contactedthrough their clerks via e-mail at chambers@4pumpcourt.com.
Endnotes
1. eg Inntrepreneur Pub Co v East Crown Ltd [2000] 41 EG 209. WatfordElectronics Ltd v Sanderson CFL Ltd [2001] EWCA CIV 317 (reviewed on p xx).
2. See Note 1.
3. ie “oral”.
4. Bank of Australasia v Palmer [1897] AC 540 at 545 per Lord Morris.
5. See Chitty on Contracts 28th ed, vol. 1, para 12-095.
6. Harris v Reckett (1859) 4 H and N.I at 7 per Pollock CB.
7. This is not however permissible where by law a contract is required to be inwriting eg a contract for the disposition of an interest in land.
8. Mann v Nunn (1874) 30 LT 526, 527.
9. Couchman v Hill [1947] 1 KB 554.
10. City of Westminster Properties (1934) Ltd v Mudd [1959] Ch 129: BrikomInvestments Limited v Carr [1979] 1 QB 467: International Press Centre Limited vNorwich Union [1986] 36 BLR 130.
11. [1979] 1 QB 467.
12. [1936] 3 All ER473.
13. Unreported, QBD, 6 September 1988. In spite of an entire agreement clause itwas held that there was a collateral contract based on oral representations thatthe systems which were also to be purchased from the defendants would have aspooler and a multi-tracking facility and that the claimants would be providedwith a screen formatting program.
14. [1999] 1 LL Rep. 387.
15. Unreported, Ch D 16 June 1995.
16. Above.
17. (1989) 57 P&CR 451.
18. Unreported, CA, 27 October 1999.
19. Above.
20. Unreported, QBD, 29 January 1991.
21. [1960] 1 WKR 196.
22. See Diplock J at 204. See also Thomas Witter Ltd v TJP Industries Ltd [1996]2 All ER 573 and the cases cited at notes 1 and 17 above.
23. See note 1 above.
24. See note 10 above.
25. See page 488 E to F.
26. See ntoe 12 above.
27. Law Com 154 Cmnd. 9700 (1976) para. 2.15.
28. Knight, The Acquisition of Private Comnpanies (6th ed) at 123.
29. [1977] 24 EG 547.
30. [1990] 1 AC 831.
31. [1995] 2 AC 405.
32. Above.
