Entire agreement clause limits available remedies

The High Court has held that the wording of an entire agreement clause in a sale and purchase agreement was sufficient to prevent a claim under the Contractual Remedies Act for all prior innocent or negligent misrepresentations made by the vendor.

In the Winter 2007 issue of Commercial Quarterly we discussed the importance of ensuring that the standard boilerplate clauses, including entire agreement clauses, found on the final pages of an agreement are not treated as an afterthought.

The use of the term "boilerplate clause" originates from the newspaper business, which in earlier times used boilerplates (mats with boiling lead poured into them to create a plate) to print syndicated columns and articles for subscribing newspapers. Since an article printed on a boilerplate could not be altered, the term came to be used by lawyers to refer to clauses which did not change through repeated usage in documents for different applications. Examples of boilerplate clauses include notice, governing law, assignment, severability, waiver and counterpart clauses. However, these clauses should always be reviewed carefully to check that the wording reflects the intention of the contracting parties and is relevant to the transaction.

The entire agreement clause

Generally, a properly drafted entire agreement clause will require a court to disregard evidence of prior (or contemporaneous) agreements or representations, whether consistent or inconsistent, within the scope of the contract. It is therefore important to consider whether or not an entire agreement clause is appropriate in the given circumstances. For instance, if acting for the purchaser in a sale and purchase agreement, the purchaser may wish to rely on oral representations and documents that have passed between the parties during the negotiation stage, whereas the vendor will want to ensure that an entire agreement clause is included to confirm that the agreement represents the exclusive contract between the parties.

Recent case

This was the situation in a recent High Court case¹ which involved a sale and purchase agreement containing an entire agreement clause in these terms:

"This agreement (and any Schedules to it) constitutes the entire agreement between the parties and supersedes all prior agreements, understandings, negotiations, representations, and discussions, whether oral or written, of the parties. The vendors make the representations and warranties set forth in clause 7 and no others..."

The clause sought to exclude damages for any pre-contractual representations that were not included in clause 7 of the agreement. Unfortunately for the purchaser, in this case the representations and warranties in "clause 7" relating to the accounts of the sale company did not capture the full level of errors in the financial information and accounts provided to the purchaser prior to it entering into the agreement. Clause 7 only referred to the disclosure of liabilities in the financial statements as at a certain date whereas the purchaser later discovered that there had been duplicated invoices, an overstatement as to debtors, and other discrepancies which had also distorted the true financial position of the sale company. The purchaser therefore needed to be able to rely on earlier representations made by the vendors in relation to the accounts in order to recover the full extent of losses it had suffered by paying, as it turned out, an overvalued price for the sale company.

The purchaser's claims

The purchaser put forward three arguments to exclude the effect of the entire agreement clause based on the Contractual Remedies Act 1979 and the Fair Trading Act 1986.

First it argued that pre-contractual representations by the vendors made in relation to the sale company's profitability were fraudulent misrepresentations and as such the entire agreement clause did not prevent the court from inquiring into the question of loss arising from pre-contractual misrepresentations under the Contractual Remedies Act.

The purchaser's second cause of action also was based on the Contractual Remedies Act overriding the entire agreement clause. Under this cause of action the purchaser argued that even if fraud was not established on the facts, that since the errors in the financial information and accounts were so great and the vendors had provided assurances that they were accurate, the court should not be prevented by the "entire agreement" clause from inquiring into the loss from pre-contractual misrepresentations under the Contractual Remedies Act.

The third basis put forward by the purchaser was that section 9 of the Fair Trading Act, which prohibits conduct in trade that is misleading and deceptive, is mandatory and if the defendants are found to be in breach of section 9 the "entire agreement" clause does not apply.

The Contractual Remedies Act

The Contractual Remedies Act allows a court to inquire into whether there has been a misrepresentation where the parties have excluded such inquiry through a provision in the contract (in this case through the wording of the entire agreement clause) if the court considers that the provision is not "fair and reasonable", having regard to all the circumstances of the case. The circumstances include the subject matter and the value of the transaction, the respective bargaining strengths of the parties, and the question of whether any party was represented or advised by a solicitor at the time of negotiations or at any other relevant time.

Court's decision

The court agreed that if the pre-contractual misrepresentations were made fraudulently then it would not have been "fair and reasonable" for the entire agreement clause to apply. However, fraud was not proven on the facts so the first cause of action failed.

On the second cause of action, the court agreed that the purchaser would have established that innocent or negligent misrepresentations were made and that the purchaser was induced to enter into the agreement at the price it did on the basis of those misrepresentations if there had not been an "entire agreement" clause. However, in the court's view it was not "fair and reasonable" for the court to inquire into damages under the Contractual Remedies Act on the facts of the case. Factors which led the court to reach this conclusion were as follows:

• Although the court acknowledged that the extent of due diligence undertaken by the purchaser need not have gone as far as a full audit, the purchaser could have made enquiries of the sale company's external accountant. The purchaser was aware that the accounts were a compilation only (limited primarily to collecting, classifying and summarising the information provided by the sale company to its external accountant) and were not audited.

• There was no imbalance in the bargaining power between the parties.

• The purchaser had access to legal advice and it was irrelevant that the lawyer's involvement was minimal.

• It was open to the purchaser to include a warranty in the agreement in respect of the financial position of the sale company. It could also have negotiated an adjustment in price if the audited position was materially different from the accounts supplied. Evidence suggested that the purchaser did not cover these issues in the agreement as this "would have resulted in a higher sale price".

• There was nothing inherently unfair about the entire agreement clause or the warranty clause.

As a result, the purchaser's second cause of action also failed.

The Fair Trading Act

The purchaser's alternative cause of action was based on the Fair Trading Act 1986 (FTA). The question here was whether there could be any liability under section 9 of the FTA given the contractual agreement included an entire agreement clause and limited the representations and warranties to those set out in the agreement. The purchaser argued that these provisions had no effect on the vendors' liability under the FTA. The vendors argued that in order to establish a claim for damages under section 9, the purchaser must establish that it relied on the misleading or deceptive conduct and that this caused it to suffer loss. In assessing what is reasonable reliance, the purchaser argued that the court should have regard to the commercial context (which in this case included the fact that the parties had agreed to the inclusion of the entire agreement clause and the limitation on warranties). Particular reference was made to Des Forges v Wright². In that case Justice Elias (as she then was) said that section 9 of the FTA should not be "turned into a general warranty by a vendor of the expectations of the purchaser" and that "[t]he Fair Trading Act 1986 is not designed to provide a guarantee to purchasers who fail to look after their own interests in a manner which is reasonable in the circumstances".

Court's decision

On the facts, Justice Mallon considered that this is exactly what section 9 would turn into if this cause of action succeeded. That is, a "general warranty" despite the parties agreement to the inclusion of the entire agreement clause and the specific warranties in clause 7 of the agreement.

In the court's view it was relevant to take into account the commercial context of the negotiations and as a result the cause of action failed in two ways. First, the vendors' conduct as a whole was not misleading and deceptive because, although they made misrepresentations, the parties agreed that the only relevant representations were those specified in the agreement (through the inclusion of the entire agreement clause). Secondly, even if it was misleading and deceptive conduct, it did not cause the purchaser's loss. The vendors supplied accounts and financial information that misrepresented the financial position of the sale company, but the purchaser had the opportunity to make further inquiry and did not do so. Moreover, the purchaser agreed that there would only be liability in respect of representations that were included as warranties in clause 7 of the agreement. As a result, in the court's view the cause of action under the FTA failed on either basis.

Practical implications

In this case we have seen an illustration of how a standard boilerplate clause can impact on the remedies available to an aggrieved party. It highlights the importance of parties spending some time considering whether a boilerplate clause is relevant to the contract and is worded to reflect the intention of the parties. A boilerplate clause should not be seen as a non-negotiable part of the contract.

In the case of an entire agreement clause, it is important to ensure that where this clause is included in an agreement consideration is given to the following:

• Confirm that there are no other documents which form part of the agreement between the parties. For example, there may be a confidentiality agreement and ancillary transaction documents such as service or supply agreements in place which form a part of the overall agreement between the parties. If there are, then reference to such agreements should be included in the wording of the entire agreement clause to clarify that they form part of the "entire agreement" between the parties. It may also be appropriate to include details of specific agreements which are to be superseded by the agreement to avoid any ambiguity.

• Confirm that, if and where appropriate, all relevant terms from any preliminary documents provided and representations made during the pre-contract negotiations have been incorporated into, or covered by the provisions of the contract.

¹ PAE (New Zealand) Ltd v Brosnahan & Others (Unreported Judgment, HC, Wellington, CIV 2005-485-843; 10 September 2008)

² [1996] 2 NZLR 758

Enquiries and information

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