Ensuring An Entire Agreement Clause Is Fit For Purpose

A recent High Court decision has confirmed that clear words to exclude misrepresentation claims are needed in an entire agreement clause intended to exclude liability for misrepresentation.

Background

Liability for misrepresentation arises if:

one party makes a false statement; the other party relies on that statement in deciding to enter the agreement; and that other party suffers loss as a result. There have been various cases in which a party, as a defence against liability for a claim for misrepresentation, has tried to rely on an entire agreement clause that denies contractual force to statements other than those in the final agreement.

Facts

In our summer 2018 edition, we reported (click here for the facts) on a preliminary decision of the High Court in which the master held that an entire agreement clause, when construed in the context of the share purchase agreement as a whole, excluded the seller's liability for misrepresentation. This was despite the fact that the clause did not include wording to negate reliance or exclude liability for misrepresentation. As noted in that report, the master's approach was inconsistent with the general judicial approach that clear words are necessary to exclude liability for misrepresentation.

The clause in question read as follows:

"This agreement (together with the documents referred to in it) constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter."

Decision

On appeal by the buyer, the High Court judge reversed the master's decision. He held that this entire agreement clause was not effective to exclude misrepresentation claims as there was no "clear wording establishing an intention to go beyond defining the scope of the contractual agreement and exclude other claims".

The reference to representations, correspondence, negotiations etc. did not amount to clear wording establishing an intention to go beyond defining the scope of the contractual agreement. All of those terms were consistent with matters that might, in the absence of an entire agreement clause, be relied upon to found a claim to a collateral agreement or collateral warranty (i.e. the scope of the contractual agreement).

The mere possibility that the words used might be capable of founding...