Beware what you wish for

More and more often I see “entire agreement” clauses creeping into constrution contracts. These beasts are also known as “entire understanding clauses”, “four corners clauses” or “zipper clauses”. Many names, one meaning. But why would lawyers want to use one name when they can think up four?

Lloyd vs Sutcliffe, which was one of Fenwick Elliott’s “cases of the week” on the Building website recently, touched on one aspect of this subject, so it seems timely to delve into the wider topic.

First of all, what is an entire agreement clause (EAC)? It is a clause stating that your whole agreement is right there, in the contract before you. No supplementary evidence based on correspondence, discussions and so on is to be admissible. The parties have agreed to dispense with that.

Now, there is much to be said for an EAC. Even where all previous negotiations have been in writing, ambiguity can be rife. Lawyers are probably more guilty than most of answering points with the ubiquitous “noted”. Noted how, exactly? Noted and accepted as part of the deal, or noted as you might note your four-year old’s desire for a quad bike for his next birthday? EACs, in theory, put an end to all that uncertainty. You can assess the risks involved and price the job accordingly. That is the plus side.

However, as always, everything hangs on the drafting. If you get it right, fine – but get it just slightly wrong and everything can go hideously wrong.

An EAC will never take its first breath if it tries to exclude liability for pre-contractual misrepresentations. For that reason, the EAC’s best friend – the non-reliance clause – is often invited to the party as well, as long as it can pass a reasonableness test to confirm that the parties are not relying on pre-contractual representations. It is generally advised that the contract also specifically state that there is no attempt to exclude liability for fraud, so averting another fatal blow to the EAC’s fragile life.

As always, everything hangs on the drafting. If you get it right, fine – but get it just slightly wrong and everything can go hideously wrong

Further problems arise where the EAC simply does not sit well with the rest of the contract. On several occasions I have seen a separate clause in a contract stating that the agreement is “without prejudice to any other rights and remedies”. This may, depending on the drafting of the EAC, be contradictory to it: an unfortunate example of lawyers on autopilot, dragging in clauses from different pro-formas and shoving them all together in an ill-fitting jigsaw. Of the two clauses, my money would be on the EAC falling away.

Parties should also ponder long and hard about whether they really want to exclude all other rights and remedies. Having your rights neatly boxed up and ribboned is all very well but a widely drafted EAC may also prevent you from claiming your common law rights, such as the right to set-off sums relating to other matters, or to rely on implied terms (and remember, those are usually implied in the first place because legislators believe parties are likely to want and need them).

This brings me back to Lloyd vs Sutcliffe. To remind you briefly, a developer agreed to develop a landowner’s plot in return for an equal share of the profit. Through a jaw-dropping omission, they made no mention of the profit share in their written agreement and nobody’s jaw dropped further than the developer’s when it realised this.

Worse still, for the developer, the agreement contained an EAC and that, trumpeted the landowner, should end all that talk of equal profit share. However, the court galloped to the developer’s rescue, citing “estoppel” (a legal cry of “foul” when something happens that is clearly unfair and not the basis on which the parties have acted). The court went on to clarify that EACs could only preclude reliance on matters arising before the date of agreement and fully covered by it.

In short, the courts take the same view of EACs as they do of anything else that restricts the parties’ usual rights at law – that is, a pretty dim one. If the language and intent is clear, the courts will enforce an EAC but don’t think for one moment that they will rush to embrace it.