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28 August 2018
A recent case(1) serves as a lesson that context is key to a watertight entire agreement clause.
The purchasers of Nottingham Forest Football Club brought various claims against the club's sellers, including one for negligent misrepresentation. They alleged that the sellers had misrepresented the extent of the club's liabilities to the tune of over £3 million. The sellers denied the claim and argued that the share purchase agreement provided a contractual procedure for dealing with any misrepresentations of the club's liabilities, and therefore any claims should be dealt with in accordance with that procedure and the relevant entire agreement clause should be read in that context. The clause read:
This agreement (together with 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.
The buyer argued that:
In doing so, it relied on AXA – a key Court of Appeal decision on entire agreement clauses.(2)
In AXA, while the Court of Appeal shied away from setting out a particular form of wording, it provided the following guidelines:
In Nottingham Forest the parties had gone to considerable trouble to set up contractual procedures to deal with claims likely to arise in respect of the agreement 'within its four walls' by including various indemnities, particularly in relation to claims relating to any misstatement of the club's liabilities. This demonstrated the core intention that the parties should be precluded from making claims outside the contractual procedures of the agreement.
The court did not agree that the entire agreement clause was intended only to extinguish or supersede contractual matters or was therefore intended only to exclude claims arising out of or based on prior, informal or collateral agreements made between the parties. The matters listed were expressed in the widest terms and included not only matters of a potentially contractual nature (eg, 'drafts' and 'agreements'), but also matters which are not necessarily or even obviously matters of an exclusively contractual nature (eg, 'correspondence', 'negotiations' and 'representations'). In contrast, in the clause in AXA the word 'representation' was sandwiched between words of an obviously contractual nature such that its meaning was derived from that context.
If an entire agreement clause which aims to limit or exclude liability is clear and the contractual context is consistent with that aim, it will be upheld – even though it does not follow the formulations referred to in the AXA decision. Clear contractual procedures which demonstrate a clear intention to deal with potentially excluded claims 'within its four walls' will be persuasive.
However, those drafting contracts would be well advised to adopt one of the typical formulations in AXA to minimise any potential uncertainty regarding the effectiveness of entire agreement clauses.
For further information on this topic please contact Geraldine Elliott or Edward Holmes at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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