Entire agreement clauses don’t work

Made claims about the services you’re offering?  Don’t want to be contractually bound by those claims?  Then you should bear in mind the message from the courts that so-called ‘entire agreement clauses’ don’t work; or at least, they won’t do everything you might have intended them to, which, for any party about to accept a contract for services, should cause extra pause for thought before signing on the dotted line, writes Richard Nicholas, an IT lawyer at Browne Jacobson LLP.

Less ‘entire’ than you might hope

Twice now the courts have sent this message. Recently it was the Court of Appeal – in the case, the judges took a similar line to the first instance ruling by the High Court in BSkyB v IT contractor EDS.  The judges’ conclusion was that an entire agreement clause stating the agreement constituted, “the entire agreement between the parties” and would “supersede any previous promises, agreements, representations, undertakings or implications” made prior to the contract, was NOT enough to exclude liability for misrepresentations made outside the contract terms. Although it will prevent collateral warranties arising, the supplier would still be bound by representations made in negotiations unless these were excluded in the most express terms (which the above wording didn’t provide).

How to exclude liability

As a supplier, if you want to exclude liability for misrepresentation you need to have either an explicit exclusion of liability for misrepresentation or, better still a statement that neither party has relied upon statements not included in the contract, as highlighted in the Vedatech Corporation case (paragraph 53 of the judgement).

How to exclude sales talk

Suppliers who want to exclude comments made by their salespeople, or ‘salesy’ comments which the supplier personally made in negotiations, need to check the relevant small print of their contracts. Conversely, and potentially unnerving for suppliers, for those seeking to bring a claim for misrepresentation, this judgement, like BSkyB v EDS, breaks down an important obstacle to bringing a claim. 

The significance of getting it wrong? 

As EDS learned to their cost – this is potentially very significant.  A successful claim for misrepresentation may allow the innocent party to rescind the contract (effectively returning to the position where no contract was entered into).  If the misrepresentation is found also to have been made fraudulently then the innocent party may be entitled to claim unlimited damages in respect of that claim – regardless of any cap on liability in the agreement.  As always – prevention is better than cure so it’s worth being clear from the start about the basis on which the contract is entered.

Thursday 5th May 2011