Not in full agreement

Contractual disputes that need to be resolved by the courts, including those reaching the appellate courts, often yield no new insights into the law, but many of these judgments concern basic principles of contractual interpretation and serve as useful warnings to draftsmen, whose motto should be 'clarity at all times'.

In Lloyd v Sutcliffe ([2007] EWCA Civ 153) L bought options through his company N Ltd to purchase and develop two properties. S, an experienced builder, entered into an oral agreement with L to develop the sites, in return for which S would become a 50 per cent shareholder of N Ltd.

Subsequently, this oral understanding was changed so that one of the two sites, Willes Road, would be transferred instead to MG Ltd, owned by L and his partner.

S would still manage the development of both sites, but would have no shareholding in MG Ltd. The High Court found that it was clearly intended that there would be a joint venture agreement between MG Ltd and S in relation to Willes Road whereby S would benefit from the development of the site.

In January 2002, L & S signed a shareholders' agreement under which N Ltd was transferred to L and S as 50/50 shareholders. The shareholders' agreement (the 2002 agreement) set out how one site, Dunchurch Road, was to be purchased and developed. It also referred to how the Willes Road option to purchase would be exercised and then transferred to MG Ltd. This agreement contained the following clause 'This agreement supersedes any previous agreement between the parties in relation to the matters dealt with herein and represents the entire understanding between the parties in relation thereto.'

The Willes Road option was assigned to MG Ltd. S later loaned money to MG Ltd and applied for and received planning permission on behalf of MG Ltd. S had also instructed lawyers to draft a Willes Road joint venture agreement with MG Ltd and L. However, the relationship between S and L broke down almost immediately thereafter. S sued for breach of contract and/or relief pursuant to the doctrine of proprietary estoppel. At the preliminary hearing on liability, the High Court dismissed the breach of contract part of the claim in respect of Willes Road as it was held that no separate Willes Road agreement was actually concluded.

However, despite the existence of the 'entire agreement' clause, the High Court ruled that the 2002 agreement did not alter the original understanding of the parties that S would share the profits of the Willes Road development. The 2002 agreement merely altered the mechanism for receipt of that half share to a proposed joint venture agreement.

Agreement equity

As a result, the High Court held that an equity had arisen in favour of S in respect of the proprietary estoppel claim as it would be unconscionable for L and MG Ltd to deny that it was intended that S would participate in the profits made in the development.

L and MG Ltd appealed, inter alia, on the grounds that the entire agreement clause in the 2002 agreement prevented S relying on any material outside the 2002 agreement which might evidence an understanding regarding Willes Road. The entire agreement clause was expressed to be 'in relation to the matters dealt with herein'. The question before the Court of Appeal was whether S's rights and obligations in relation to Willes Road were 'dealt with' in the 2002 agreement. Wilson LJ, giving the main judgment, answered in the negative.

The Court referred to the Shorter Oxford English Dictionary definition of 'dealt with' as meaning to 'act in regard to', 'to handle' or 'handle effectively', 'grapple with', and, in particular, 'dispose of' [para 25]. The 2002 agreement did not 'dispose of' the understanding in relation to the Willes Road development, other than stating that the Willes Road option would not be owned by N Ltd. Therefore the understanding in relation to Willes Road did not come within the wording of the entire agreement clause.

Dispute over language

Clear? Not to Kay LJ, who disagreed. He observed that Wilson LJ had focussed on some, but not all, of the synonyms of 'deal with' to be found in the Shorter Oxford English Dictionary. Kay LJ felt that the agreement did sufficiently 'deal with' Willes Road in that it provided for its future legal ownership in a way which was at variance with the previous understanding.

Despite this lack of consensus as to the proper construction of the entire agreement clause, all the judges concurred in that the appeal should be dismissed as, on the facts, the clause was irrelevant anyway. The parties had, several months after the date of the 2002 agreement, reiterated their understanding that S was to participate equally with L in sharing the Willes Road profits. Wilson LJ pointed out that: '[The entire agreement] can preclude reliance only on such understandings extraneous to it as had arisen prior to its date' [para. 28].

This is an obvious though important point. If parties have signed up to an effective entire agreement clause, they should take care not to reopen discussions thereafter. If they were to do so, the previous entire agreement clause can have no relevance to subsequent understandings.

Ravennavi SpA v New Century Shipbuilding Co. Ltd ([2006] EWHC 733) is an example of a short form entire agreement clause that achieved its purpose for the party seeking to rely upon it. The High Court considered whether a 2003 written agreement creating an option to require oil tankers to be built came within the 'subject matter' of two later agreements signed in 2004 between the parties for the actual construction of the ships.

The 2003 option agreement contained a delivery clause with a further clause providing for an earlier delivery date if there was a 'possibility' that New Century Shipbuilding Co. Ltd could offer such earlier delivery dates.

The 2004 agreements for the construction of the ships omitted this clause and contained a short form entire agreement clause as follows: 'This contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this contract prior to the signing of the contract'.

Ravennavi claimed that a provision for an earlier delivery had been agreed in the 2003 option agreements and should be legally binding. However, the High Court disagreed and held that the entire agreement clause in the 2004 agreement was wide enough to defeat the provisions as to an earlier delivery date.

Safer approach

It can be seen from these two cases that great care needs to be taken in ensuring that an entire agreement clause covers what you want it to cover. But is this easier said than done?

Consider the following example: Buyer Ltd is acquiring by way of a business acquisition some of the assets of Seller Ltd. The parties discuss and exchange correspondence relating to the transfer of a trademark. The business sale agreement contains an entire agreement clause as in Ravennavi.

The agreement lists a large number of assets, but there is no mention of the trademark. Buyer Ltd later claims that the parties had entered into a binding contract in relation to the trademark. The seller points to the entire agreement clause stating that it

constitutes the entire agreement in relation to 'the subject matter of this contract'. The buyer later argues that the agreement did not relate to the subject matter of the trademark at all.

One approach to take would be to expand upon the wording to state expressly that the 'subject matter' to which the entire agreement clause 'includes but is not limited to the following'. This would make the wording of the clause ungainly but it would be more difficult to the other side to argue that a particular matter did not fall within its compass.

Another approach may be to ensure that an asset such as the trademark is indeed expressly contained within the subject matter of the agreement by, for instance, defining it as an asset that is to be excluded from the sale.

Other issues with entire agreement clauses

A typical entire agreement clause will contain the following:

• A statement that the agreement forms the whole agreement between the parties.
• The parties have not relied upon any statement, warranty or representation in entering into the agreement, other than as contained in the agreement.
• The clause does not apply to fraud.

For a party to sue on for misrepresentation, he must show that he relied upon an incorrect statement of fact. The non-reliance statement is seeking to prevent a party from claiming for misrepresentation for precontractual statements unless such statements are repeated within the agreement.

A seller will sometimes insert a clause stating that a buyer's remedies are contractual only. The buyer should resist this as its effect would be to exclude the buyer's right to claim for misrepresentation, thereby precluding the remedy of rescission and the assessment of damages on the tortious basis.

It is thought that a clause worded as above must satisfy the reasonableness test. Section 3 of the Misrepresentation Act 1967 provides that any attempt to limit or exclude a remedy for misrepresentation must be reasonable. Arguably, this is the effect of such a clause.

The reference to 'fraud' stems from an obiter statement by Jacob J in Thomas Witter & Co. Ltd v TBP Industries Ltd ([1996] 2 All ER 573). The apparent logic being that if the clause is indeed an attempt to exclude liability for misrepresentation, it can be construed as applying to all types of misrepresentation, including fraud, and it can never be

reasonable to exclude liability for fraud. Hence, the carve-out for fraud in typical entire agreement clauses. The need for this carve-out has been doubted by, for example, the High Court in Zanzibar v British Aerospace ([2000] 1 WLR 2333) though is common practice, for the avoidance of doubt, simply to refer to fraud.

Estoppel operation

In Grimstead Ltd v McGarrigan ([1999] WL 852482), the Court of Appeal felt that a non-reliance statement could operate as an estoppel preventing a party from claiming reliance if he had clearly stated that he had not done so. More recently, the Court of Appeal in Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd ([2006] EWCA Civ 386) has endorsed the effectiveness of a non-reliance clause to operate as a contractual estoppel.

However, a non-reliance statement does not automatically prevent a buyer from claiming that he did indeed rely on a representation that was not repeated in the agreement. In Watford Electronics Ltd v Sanderson Ltd ([2001] EWCA Civ 317), referring back to Grimstead, Chadwick LJ confirmed that the party seeking to rely on the statement of

non-reliance must prove that:

• The statement is clear and unequivocal;
• He had intended that the other party should act upon the statement; and
• The other party had believed the statement to be true and had relied upon it.

Therefore, if a seller knew that a buyer was in fact relying on a statement outside the agreement, the seller would not be permitted to use the buyer's acknowledgment of

non-reliance as an estoppel. The burden of proof is on the seller, being the party seeking to rely on the non-reliance statement.

Upholding agreements

Courts are likely to uphold entire agreement clauses for very good commercial reasons. In Grimstead Ltd v McGarrigan the court referred to the need for commercial certainty; and secondly, because 'it is reasonable to assume that the price to be paid reflects the commercial risk which each party, or more usually the purchaser, is willing to accept' (per Chadwick LJ).

However, commercial and legal certainty can only be achieved if the wording of the entire agreement clause is sufficiently clear and wide enough to cover what it is intended to cover.