Entire agreement clause means what it says

Arguments based on the Contractual Remedies Act and the Fair Trading Act to exclude the effect of an entire agreement clause proved unsuccessful in a recent Court of Appeal case.

It is common for parties to include an entire agreement clause as part of a sale and purchase agreement to restrict the rights and obligations of the parties to those set out in the agreement itself. This provides commercial certainty for the parties, as it means that the entire agreement between the parties is recorded in one document and precludes liability for any earlier provisional agreements or representations made by the parties during the negotiation stage of a transaction.

Recent case

The facts

In a recent Court of Appeal case¹, the parties to a sale and purchase agreement for shares in a maintenance company (CPS) included the following entire agreement clause in the agreement:"This agreement ... 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..."

After completion, the purchaser discovered it had bought CPS for a significant overvalue as a result of some materially incorrect financial statements provided by the vendors during the negotiation period. However, none of the vendors' representations and warranties set out in clause 7 of the agreement covered the particular errors contained in the financial information provided by the vendors. Therefore, in order to recover the full extent of losses the purchaser had suffered, the purchaser brought a claim for damages based on the earlier misrepresentations made by the vendors under the Contractual Remedies Act 1979 and the Fair Trading Act 1986.

The High Court concluded that the purchaser had relied on the financial statements generally in deciding to proceed with the purchase of CPS and on the price, but dismissed the purchaser's misrepresentation cause of action (under section 6 of the Contractual Remedies Act) on the basis of the entire agreement clause. The High Court also dismissed the action under the Fair Trading Act. (For details of the High Court decision see the article Entire agreement clause limits available remedies in the Spring 2008 issue of Commercial Quarterly.)

The claim under the Contractual Remedies Act

Basis of claim

Where parties to a contract have excluded prior representations by them through a provision in the contract (such as in this case through the wording of the entire agreement clause), the Contractual Remedies Act allows a court to inquire into whether there has been an actionable misrepresentation if the court considers that the contractual 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.

In the Court of Appeal the purchaser claimed that the High Court was wrong to find it was fair and reasonable that the entire agreement clause should be conclusive between the parties because, although the parties were relatively sophisticated and had access to legal advice:

• the purchaser had made its reliance on the vendors' representations clear during the negotiation process;

• the errors in the accounts were significant and (although there was no finding of fraud by the High Court) resulted from the vendors' (who were also the directors of CPS) negligence and/or recklessness;

• the vendors deliberately tried to conceal accounting errors after the agreement was signed; and

• there was no evidence that the entire agreement clause was specifically drawn to the attention of either party or even discussed.

Court of Appeal's decision

The Court of Appeal rejected this argument noting that there was nothing inherently unfair in such an exclusionary clause and that:

• on the facts it was irrelevant whether the clause was discussed by the parties especially given the agreement was drafted by the party trying to negate its effect;

• there was nothing inconsistent between the inclusion of the entire agreement clause and the parties' conduct during the negotiation period;

• the fact that the errors in the accounts may have been significant and the result of negligence (or recklessness) on the part of the vendors was irrelevant when considered against the plain words of the entire agreement clause;

• to deny the entire agreement clause its natural meaning would in effect reinstate a representation that the parties had agreed was of historical importance or inoperative and would convert the alleged representations about the profitability of the business into an implied warranty when they were expressly excluded; and

• it would not be fair and reasonable to allow the purchaser to invoke the statutory protection to circumvent the effect of provisions which it had deliberately structured for its own benefit.

The claim under the Fair Trading Act

The Fair Trading Act (the FTA) creates an independent statutory liability for misrepresentations made in trade. Section 9 of the FTA provides that no person "shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive." To establish liability under section 9 a plaintiff must show that:

• the parties were in trade;
• the conduct was capable of being misleading;
• the plaintiff was in fact misled by the conduct;
• it was reasonable that the plaintiffs were misled; and
• the plaintiff's reliance on the misleading or deceptive conduct caused it to suffer loss.

The question of whether the parties were "in trade" when negotiating the sale for the purposes of section 9 was not at issue as this point was conceded in the High Court and not raised on appeal.

In the High Court the judge held the cause of action under the FTA 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 CPS, 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 High Court's view the cause of action under the FTA failed on either basis.

The purchaser argued that the High Court had been wrong to dismiss its FTA cause of action on the basis that the court had applied the entire agreement clause to defeat the claim. The Court of Appeal, however, found that the High Court had dismissed this cause of action, not on the basis of the clause, but on a finding that the purchaser had acted unreasonably in protecting its position by failing to make proper inquiry into the accuracy of the accounts, and that as a result the directors' conduct did not cause the purchaser's loss.

As an aside, the Court of Appeal also addressed the purchaser's argument that the High Court was wrong to hold that the vendors' conduct as a whole was not misleading and deceptive by the presence of the entire agreement clause.

The Court of Appeal disagreed with the purchaser's argument. It is settled that a party cannot contract out of the section 9 FTA prohibition. However, the phrase "contract out" is seen by the courts as a starting point rather than an absolute, particularly in the context of commercial transactions involving substantially independently advised parties negotiating from positions of equality. Accordingly, while mechanisms such as an entire agreement clause are not determinative, it has been accepted that they are relevant to a section 9 analysis.

In this case the combined effect of the entire agreement clause and the express warranties given by the vendors in clause 7 was not to affect or alter the legal character of the directors' pre-contractual conduct. The parties had agreed there should be no general or implied warranties and that only the express warranties were of operative force. In effect, the parties agreed that what the vendors had said or done before the agreement no longer mattered, breaking the chain of causation necessary to uphold a claim under section 9.

Practical implications

An entire agreement clause should not be treated as a non-negotiable boilerplate clause buried in the final pages of an agreement. This case highlights the importance of parties spending time to consider whether an entire agreement clause is relevant to the contract and, if included, whether it is worded to reflect the intention of the parties. In particular, it is important to ensure that where an entire agreement clause is included in an agreement consideration is given to the following:

• 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.

• 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.

 

¹ PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611

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For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.