December 17, 2014 by MATTHEW SWANSON & ERIC LITTLE
Contracting parties want at least two things in every case: certainty as to the terms of their agreement and assurance the agreement will be enforceable according to those terms. Where the parties have reduced their agreement to writing, they improve their chances of achieving these objectives through careful drafting and using an “entire agreement” clause.
While the entire agreement clause is sometimes glossed over as part of the “boilerplate” in a commercial contract, it can be a very useful provision if the parties subsequently disagree as to the terms of the contract or its proper interpretation. An entire agreement clause helps ensure that the parties’ respective rights and obligations under the contract are limited to only those that are expressly contained within the four corners of the contract. Entire agreement clauses should be drafted with care.
Entire agreement clauses typically aim to exclude all representations and warranties, whether oral or written, that are not explicitly set out in the written contract. By forcing contracting parties to ensure all of the representations and warranties they relied on when they entered into the agreement are expressly incorporated into the final written contract, such clauses provide certainty to the parties that the written contract is the entire, complete and final agreement. If properly drafted, an entire agreement clause prevents further terms from being read into a written contract, and may preclude evidence of pre-contractual discussions, negotiations and agreements among the parties from being considered as an aid to interpreting the contract.
Generally speaking, an entire agreement clause will be enforceable against a party who had knowledge of its terms and understood its effect when he or she entered into the contract in question. If the parties to the contract were both sophisticated commercial entities with relatively equal bargaining power, the chances that the entire agreement clause will be strictly enforced are relatively high. If they each received independent legal advice in relation to the contract, then the chances of the clause being enforced are greater. Conversely, if one of the parties was not as sophisticated as the other, the contract was in a standard form and it was not negotiated in any meaningful way, it may be less likely that the clause will be strictly enforced against the less sophisticated party.
For an entire agreement clause to be effective against claims based on negligent misrepresentation, the language of the clause may need to exclude those claims. Otherwise, a court may be unwilling to find that the parties deliberately intended to rule them out when they entered into the contract. Given this, entire agreement clauses should be drafted clearly and carefully. The parties should give due consideration to what is and is not included in the contract, and the types of claims they would like to avoid.
When drafting or negotiating the terms of an entire agreement clause, parties should consider the following:
If the parties intend for any related documents or agreements to be included in the contract, those documents or agreements should be expressly defined as part of the contract or incorporated by reference.
While in practice it may be difficult for contracting parties to reduce all of their expectations to writing, the more care and attention they devote to this in drafting their agreements, the more certain they can be that all parties fully understand the terms they have agreed to, and that the agreement will be enforceable.