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Time to Rethink Entire Agreement Clauses in Your Contracts

on Thursday, 15 November 2018.

Parties to contracts should now think more carefully about what they include as a non-reliance statement, if they want it to be enforceable.

Background

The clauses at the back of commercial agreements are often referred to as the "boiler plate". The "entire agreement" clause is an important part of the boiler plate. It looks to state that everything contained in the written agreement is the entire agreement, and there is nothing else that applies. The clause also seeks to exclude a party's ability to rely on any pre-contractual statements or representations. The idea of the non-reliance statement is to rule out a claim for misrepresentation. A misrepresentation occurs when one party makes a statement to another, the other party relies on that statement and enters into the contract as a result, the statement is actually (or turns out to be) untrue, and the innocent party suffers damage or loss.

The reason for excluding prior representations and statements is to give certainty as to what is agreed and what are the rights and remedies if something goes wrong - ie just what is in the contract. However, excluding misrepresentations in this way is subject to a legal test of reasonableness. The exclusion has to be reasonable in order to be enforceable - otherwise, a court will strike it out.

The Court of Appeal has had to consider the reasonableness of a non-reliance statement in the recent case of First Tower Trustees Limited v CDS. As a result of that decision, parties to contracts should now think more carefully about what they include as a non-reliance statement, if they want it to be enforceable.

Facts of the Case

First Tower granted a lease and an agreement to lease to CDS. In the lease, CDS acknowledged that it had not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of First Tower. In the agreement for lease, there was a similar statement, except that there was a carve out for statements or representations made in writing by First Tower's solicitors in response to CDS's written queries.

First Tower's written response to CDS's written enquiries said they were not aware of any environmental problems and would tell CDS if that position changed. First Tower later became aware of an asbestos issue, but did not inform CDS. CDS later made a claim that there had been a misrepresentation. First Tower said that there could not be a claim because of the entire agreement clause.

The High Court said that the entire agreement clause in the lease was not reasonable as it would have meant the pre-contract enquiries were worthless - it was too wide. The clause in the agreement for lease was better, but on the facts it did not help First Tower because it should have told CDS of the asbestos.

Court of Appeal Decision

The Court of Appeal has now rejected First Tower's appeal.

A clause that does not allow any reliance on replies to enquiries so that the landlord could say what it likes without any come-back (except in the case of fraud) and without information, would be unreasonable. This is particularly the case in the property world, where pre-contractual enquiries have particular importance.

Comment

Although this is a case about property, it has a wider impact on all commercial contracts. In many instances, it may be acceptable to rule out any pre-contractual representations and statements through a wide non-reliance clause, just as First Tower had sought to do here. However, where there is an expectation of reliance on pre-contractual statements and where an exclusion of the effect of those statements would leave a party without a remedy, that would be unreasonable.

In this case, the carve-out in the agreement for lease meant that the clause in that contract was upheld as reasonable (even though it did not help First Tower on the facts, because First Tower had not complied with the answers it gave in the pre-contractual enquiries).

The message is clear: do not just apply standard entire agreement clause boiler plate to every contract without thinking. Always consider whether there should be a carve-out from the non-reliance clause given the particular circumstances of that contract. Otherwise, the whole clause may be struck out.

This case can also be contrasted with another one recently in the High Court, where the High Court upheld an entire agreement clause in a share purchase agreement. The seller had misstated the target's liabilities in the pre-sale due diligence process. In that case, though, there were clear indemnities in the share purchase agreement itself, so the purchaser had an appropriate remedy. The High Court therefore upheld the entire agreement clause, as this was the intention of the parties.


If you want advice on how to draft an entire agreement clause in your commercial contracts, please contact Paul Gershlick in our Commercial Contracts team on 01923 919 320.