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One size fits all?

13 December 10

Entire agreement clauses, like many others, may have to be tailored to the particular contract in question to achieve the desired result

by Pamela Abbott

Most commercial contracts contain some “boilerplate” clauses. Because such clauses appear as a matter of course, they are all too often pasted into contracts without proper consideration having been given as to whether the standard wording they contain is actually suitable for the particular circumstances. An example of such a clause is the entire agreement clause (the “EAC”).

The purpose of an EAC is to prevent the parties from being liable for any statements or representations that they have made which are not set out in the contract itself. If any heads of terms, side letters or other documents are to continue to have effect, this must be specifically stated if an EAC is included.

Two cases have been decided in England this year which highlight significant points in relation to EACs. While these decisions come from south of the border, the law is much the same in both jurisdictions and they would be persuasive here.

Rectification

The facts and decision in the case of Surgicraft Ltd v Paradigm Biodevices Inc [2010] EWHC 1921 (Ch) and a discussion on the interaction of the remedy of rectification and EACs can be found in last month’s Journal (Malcolm Combe, “The whole deal”, Journal, November, 24). In a nutshell, in this case the High Court had to decide whether an EAC prevents the court from rectifying an agreement.

The court can grant the remedy of rectification where a document intended to express or give effect to an agreement fails to set out accurately the common intention of the parties at the date it was made.

The court in this case found that the contract did not reflect what both parties had intended, and rejected Surgicraft’s argument that the EAC was a bar to rectification.

The judge found that the purpose of an EAC is to limit contractual claims arising from dealings outside the contract, whereas the aim of rectification is different – it exists to correct a mistake the parties have made in getting a contract to express their true agreement.

The judge did say the outcome might have been different if there had been evidence that the EAC was actually considered and negotiated by the parties, rather than inserted as boilerplate. If Surgicraft had intended at the time the contract was made that the EAC’s inclusion should effect a bar to rectification, its solicitors should have tweaked the standard wording to that effect.

Misrepresentation

The other significant case is BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC). It focused on whether an EAC excluded liability for negligent pre-contractual misrepresentations.

When a project awarded by Sky to HP did not go as planned (running massively over time and budget), Sky sued for damages on the basis of alleged fraudulent and negligent misrepresentations made by HP about the type of matters that are routinely discussed before parties enter into a contract with one another, such as resources, cost, time, manner of fulfilment etc.

It is trite law that liability for fraudulent misrepresentation cannot be excluded from a contract. If information provided pre-contract later turns out to be wrong, provided the party claiming loss can overcome the high hurdles set to establish fraud, the inclusion of an EAC is not a bar to suing. However, what if the high standard for fraud is not met, yet the pre-contractual information given was incorrect and the party providing it failed to take reasonable care when providing that information?

HP argued that the EAC (which contained boilerplate wording) had the effect that they had no liability for negligent pre-contractual misrepresentations.

The judge found that an EAC with standard wording prevents representations made pre-contract having effect in documents such as side agreements, but does not exclude liability under the law of negligent misrepresentation or prevent the injured party relying on the representations in a delictual claim.

If it is the parties’ intention that negligent pre-contractual misrepresentations are to be excluded, the EAC should be tailored to the individual circumstances and clear wording to achieve that effect included, bearing in mind that exclusion clauses are strictly construed.

Overfamiliar?

The key point to take away is that, when preparing any commercial contract, you should not insert clauses with standard wording simply because you are used to seeing them there. Although some types of clause usually contain boilerplate wording, this does not mean that they are of any less significance than individually negotiated parts of the contract.

It is always worth considering whether standard wording is appropriate in the given circumstances or whether clauses should be adjusted to reflect the actual situation – and that goes for all typically boilerplate clauses, not just EACs.

Pamela Abbott, solicitor, CCW LLP

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