Can you exclude pre-contractual misrepresentations?

The Court of Appeal has found that a boilerplate entire agreement clause was effective in excluding collateral warranties, but not liability for misrepresentation.

Dangers of relying on boilerplate clauses

An entire agreement clause in a contract asserts that the contract constitutes the whole agreement between the parties and seeks to prevent the parties from relying on any preceding agreements, negotiations or discussions in any subsequent claims. Entire agreement clauses form part of the boiler plate provisions of many agreements, and are frequently litigated in circumstances where the alleged wrongdoer seeks to rely upon the clause to argue that the innocent party cannot rely upon pre-contractual misrepresentations.

A recent Court of Appeal decision provides a useful reminder of the dangers of relying on standard, boilerplate versions of such clauses without a full understanding of what the clause will and will not exclude. In Axa Sun Life Services plc v Campbell Martin Ltd and others [2011] EWCA Civ 133, the Court of Appeal held that a clause in written contracts that stated that the contract would "supersede" "any prior provisions, agreements, representations, undertakings or implications, whether made orally or in writing…relating to the subject matter of [the] agreement" was effective in preventing claims for breach of collateral warranty, but did not exclude liability for claims based on misrepresentations.

Drafting tips

In Campbell Martin the claimant sought recovery of sums due under agreements with the defendant companies (and their personal guarantors) appointed to sell investment, mortgage and insurance products on its behalf. When the defendants sought to rely on alleged misrepresentations in defending those claims, in the absence of a clause specifically excluding misrepresentation, the claimant looked to boilerplate entire agreement clause to preclude the alleged misrepresentations.

Lord Justice Rix considered that the use of the word "representations", sandwiched where it was in the entire agreement clause, was not enough. He agreed with the conclusions of Ramsey J in BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86, in relation to a similar clause, that the clause only sought to ensure that prior representations did not become terms of the contract. All the other parts of the clause referred to what the parties had agreed, and the use of the words "representations" and "supersede" had to be read in that context, rather than the context of excluding liability in misrepresentation. This was supported by the use of the term "supersede", rather than "exclude", indicating that exclusion of liability was not the purpose of the clause. The fact that surrounding clauses were concerned with matters of contractual agreement e.g. variation, was a further nail in the coffin.

Parties are, therefore, well advised to heed the Court of Appeal’s affirmation that clear language is required, either within the entire agreement clause itself or separately. In either case, a specific formulation to expressly preclude liability for misrepresentation should be used, such as one which states the parties’ agreement that no representations have been made (as in Springwell Navigation Corporation v JP Morgan Chase Bank [2010] EWCA Civ 1221); or that there has been no reliance on any representations; or which expressly excludes liability for misrepresentation or uses a combination of these.

It is important to note that parties cannot exclude pre-contractual representations which are said to be fraudulent.

Is your Entire Agreement clause reasonable?

The Court of Appeal acknowledged that an entire agreement clause of the kind in this case was not an exemption clause of the kind normally covered by the Unfair Contract Terms Act 1977 ("UCTA"). As the contracts in question, however, were on the claimant’s standard terms of business, section 3(2)(b)(i) UCTA requires that such a clause, by which a party claims to be entitled to render a contractual performance substantially different from that which was reasonably expected of him, has to satisfy a “reasonableness” test.

The Court of Appeal held that pre-contractual representations or promises may affect the performance that is reasonably expected of a party. As such, in attempting to exclude collateral warranties or representations, the entire agreement clause was subject to the reasonableness test. The Court also considered that section 3 of the Misrepresentation Act 1967 would also have imposed this requirement, had the clause been found to exclude liability for misrepresentation.

Their Lordships considered that the clause in this case was reasonable. The contract was made between commercial organisations in a commercial context. Even though the claimant was a much larger organisation, the defendants, as financial advisers, were accustomed to dealing with such agreements and could be expected to have read them. The Court of Appeal acknowledged that an entire agreement clause excluding collateral warranties is a common clause and that it was well sign-posted in this case. Importantly, the contracts had short notice periods, so the companies would not be tied up for extensive periods. Sensible parties would not expect their agreement to be cluttered with oral collateral agreements.

Lawyers Shane Gleghorn, Julie Simpson Day