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09 Jul 2009

Entire agreement clauses - what do they seek to do? Do they work?

by John Fairbairn, Timothy Webb

Entire agreement clauses often appear in contracts that are the subject of disputes. The clause's precise terms and other evidence may be critical to the court's determination of its effect.

Entire agreement clauses (EACs) state that the document as executed by the parties constitutes their "entire agreement". It is common for commercial contracts to include EACs as part of the standard boilerplate clauses. Depending on the positions being adopted in a dispute, parties may seek to enforce them or avoid them. This article analyses the various purposes of EACs and the extent to which they can be relied on to achieve those aims.

What do EACs seek to do?

An EAC may, depending on its wording, seek to:

  • record the agreement of the parties that all the express terms are stated in a document, thereby excluding other alleged express terms;
  • preclude a term that might otherwise be implied;
  • inhibit (perhaps estop) a party from claiming that it was induced to enter the contract by some inaccurate representation of the other party;
  • indicate that the parties wish to deter courts from resort to “factual context” or “surrounding circumstances” when interpreting the contract; and/or
  • nullify the effect of any previous agreements or collateral contracts between the parties.

How likely are EACs to achieve those aims?

Exclude other express terms

An EAC may seek to indicate the parties’ intention that there are no other express terms of the agreement. The aim is to prevent any further contractual obligations arising outside the terms of the document.

However, such a term cannot be conclusive, because the contract is the agreement not the document – whether the document evidences that agreement is a question of fact. The agreement is determined from the totality of the parties’ words and conduct. If the evidence put forward by the parties as to what comprises the contract is inconsistent (such as an EAC in the document, plus a clear separate promissory statement in addition to or in conflict with the document), the court will weigh the evidence to determine the contractual terms. An EAC does not have the effect of automatically excluding evidence of other terms - all relevant circumstantial evidence is prima facie admissible for this purpose.

However, although an EAC is not conclusive, a party who agreed to such a clause would usually find it very difficult to convince a court that the document containing the EAC was intended to be only a partial record of the parties’ agreement.

Exclude implied terms

An EAC may seek to preclude terms that would otherwise be implied. To have this effect, the EAC must expressly operate as an exclusion clause in relation to implied terms, akin to the provision considered in L’Estrange v F Graucob Ltd [1934] 2 KB 394. In that case, the court held that the EAC providing that "any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded" [emphasis added] was effective to preclude an implied term that a machine would be fit for the purpose for which it was purchased.

In contrast, an EAC that simply seeks to integrate the agreement in a document will not of itself prevent the implication of terms. In Hart v MacDonald (1910) 10 CLR 417, the High Court considered an EAC which stated that “there is no agreement or understanding between [the parties] not embodied” in the document. The Court found that the EAC did not preclude the implication of a promise by the defendant.

Ultimately, whether an EAC precludes terms that would otherwise be implied will depend on the wording of the clause.

Finally, an EAC cannot exclude certain terms implied by statute. For example, section 68 of the Trade Practices Act 1974 (Cth) declares void any term of a contract which purports to exclude terms implied under Part V, Division 2 of that Act. Moreover, under section 53(g) of that Act, it is an offence to make a misleading representation concerning the existence, exclusion or effect of any right or remedy. This is generally regarded as meaning that the mere use of an EAC which might be seen as attempting improperly to exclude the statutory implied terms contravenes the section. Accordingly, an EAC should include the phrase “to the extent permitted by law” to make it clear that it does not purport to exclude terms which cannot by law be excluded.

Operate as a “no reliance” clause

An EAC may seek to operate as a “no representation or reliance” clause by inhibiting (perhaps estopping) a party from claiming that it was induced to enter the contract by some inaccurate representation of the other party. Although it is generally possible for an EAC to exclude or limit liability arising for misrepresentations under the general law, there are four key qualifications.

First, if a misrepresentation was fraudulent, an EAC cannot be effective to exclude that fraud.

Second, for non-fraudulent misrepresentations, there are conflicting authorities as to whether an EAC can exclude the misrepresentation and deprive a party of the right to rescind the contract (which may otherwise be available). In Byers v Dorotea Pty Ltd (1986) 69 ALR 715, Justice Pincus held that an EAC was effective to defeat a claim to rescind based upon innocent misrepresentation. In the more recent decision of MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152, Justice MacPherson (with whom Justice Moynihan agreed) held that "it does, I think, remain an open question in this Court whether [an EAC] is capable of excluding reference to a pre-contractual misrepresentation that is innocent". He observed that it was "difficult to see" why equitable relief is not still available in respect of a contract induced by innocent misrepresentation, notwithstanding an EAC.

Third, it is not possible to contract out of the misleading conduct provisions of consumer protection legislation. However, while not being able to exclude the statutory prohibition, an appropriate EAC may have some evidentiary effect in helping to prove either that no misleading conduct occurred, or that such conduct did not in fact induce the party to which it was addressed to enter into the contract.

Fourth, the case law is divided on whether it is possible for an EAC to preclude resort to estoppel based on pre-contractual representations. In Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267 at 279, JusticeBryson held that an estoppel aimed at qualifying a clear contractual term could not be enforced if, in order to establish it, resort was had to pre-contractual conduct when an EAC expressly excluded resort to such material. He expressed a clear preference for the view that an EAC was effective to prevent an estoppel. The opposite view – that contract cannot trump estoppel – was expressed by Justice Allsop (with whom Justices Drummond and Mansfield agreed) in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at 543-4.

Limit resort to evidence of factual matrix

An EAC may seek to indicate the parties’ intention or expectation that the court should limit its resort to extrinsic evidence of the factual matrix for the purpose of construction. However, given the move to contextualism in interpretation, the extent to which courts will be prepared to limit recourse to context remains to be seen.

Nullify other agreements

An EAC may stipulate that the contract replaces any previous agreements between the parties (whether in relation to the same subject matter or otherwise). Depending on its terms, the EAC may also seek to nullify any collateral contracts. The extent to which it achieves this latter aim will, as with determining whether an EAC has excluded other express terms, depend on the weight of evidence.

Conclusion

An EAC may seek to have a range of legal consequences. The effect of the clause will depend on its terms, the factual context in which it was agreed and, for certain matters, the determination of legal principles which are presently unsettled.

In the event of threatened or commenced litigation, it is important to carefully consider whether the evidence and law support the effect of the EAC which is asserted by you or the other party.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.