Monday, February 13, 2012

Entire Agreement Clauses

Many forms of contracts, particularly commercial contracts, tend to contain a variety of so-called “boilerplate” clauses (i.e., clauses with standard wording that are routinely used). One type of boilerplate clause that is often included in contracts – and frequently plays an important role when contracts gone awry are litigated – is the “entire agreement” clause.

The purpose of an entire agreement clause is to make clear that the agreement between the parties is solely what is stated in the written contract, and to prevent the parties to the contract from subsequently raising claims that statements or representations made during contractual negotiations, and prior to the signing of the written contract, constitute additional terms of the agreement or some form of side agreement. That is, the parties include an entire agreement clause in the contract to prevent those pre-contract statements and representations from having any contractual force.

An entire agreement clause often contains the following elements:
• An entire agreement statement: a statement in the contract that the parties agree that the terms of the contract between them are to be found within the text of the contract document and nowhere else. All entire agreement clauses include this element;

• An exclusion of liability for misrepresentation: most entire agreement clauses include one or more of the following:
1. an acknowledgment by the parties that they have not relied on any representation which is not set out in the contract;
2. a statement excluding liability for misrepresentation; and
3. a statement limiting remedies for misrepresentation to those available for breach of contract; and

• A carve-out for fraud: An express statement that the entire agreement clause is not intended to exclude liability for fraudulent misrepresentation. This carve-out is sometimes not included and some argue it is unnecessary. If it is included, a carve-out for fraud from any other clause that seeks to limit the parties’ liability should be included in the contract, or the courts may draw conclusions from the discrepancy.

When reviewing an entire agreement clause, there are some important pitfalls to be aware of and avoid:
• If the contract includes schedules or other attachments, it is important to check that the definition of the “contract” includes these schedules or other attachments.

• If there are multiple contracts forming part of the same transaction, it is important to include them in the wording of the entire agreement clause, for example: “This agreement and [list other agreements] constitute the entire agreement between the parties….”.

An example of a comprehensive entire agreement clause would be as follows:

“1. This agreement [and [list other relevant agreements, if applicable]] constitutes the entire agreement between the parties and supersedes and extinguishes all previous drafts, agreements, arrangements and understandings between them, whether written or oral, relating to this subject matter.

2. Each party acknowledges that in entering into this agreement it does not rely on, and shall have no remedies in respect of, any representation or warranty (whether made innocently or negligently) that is not set out in this agreement.

3. No party shall have any claim for innocent or negligent misrepresentation based upon any statement in this agreement.

4. [optional] Nothing in this clause shall limit or exclude any liability for fraud.”