What happens at the end

Have you heard the one about the brown Smartie clause? Apparently, in the 1980s the management of a well-known rock band would require the owners of the venues where it played to enter into a lengthy contract. Towards the back of this was a clause that obliged the management to ensure that each dressing room contained a bowl of Smarties from which every brown one had been removed.

What was the purpose of this clause? To see if the stadium management had read the contract.

I have always taken this particular story to heart. Watch the clauses at the back of the contract. They tend to be short and often deal with things such as notices and so on which, while important, are not central to the commercial issues between the parties. However, hidden away among them you may find an “entire agreement clause”. This can be important, particularly if something goes wrong.

What is an entire agreement clause? It can be a number of things. It could be a statement about what documents are taken to form the contract and, importantly, what documents are not. It could, however, also go on to say something about the parties’ rights and remedies. This can be significant, because in stating what you can do under the contract, sometimes the clause will tell you what you cannot do. This can be important if you fall out with the other party or you are seeking a remedy for breach of contract.

Standard form contracts contain a variety of entire agreement clauses. At one end, the JCT building contracts repeatedly state that their express provisions are “without prejudice to any other rights and remedies” available to the parties. In other words, not only do you have whatever the contract permits, you also have your rights at common law, such as a right of set off or to claim damages for breach of contract.

At the other end of the spectrum there is condition 44.4 of the MF/1 General Conditions of Contract, which contains an onerous entire agreement provision, which the court upheld in Strachan & Henshaw Limited vs Stein Industrie (UK) Ltd 1997, even though this limited the parties’ remedies solely to those set out in the contract itself.

Remember that the desire to achieve certainty of risk allocation at the beginning of the contract can become a fetter on the remedies available to you

A consequence of the court’s decision in Strachan & Henshaw was to preclude a claim for damages at common law, even though this in effect reduced some contractual obligations to virtually unenforceable declarations of intent. Will the court always take this approach? Perhaps not: in another case (Mostcash Plc vs Fluor Ltd 2002) the judge refused to give the words in the entire agreement clause their ordinary natural meaning on the basis that to do so would lack “commercial common sense” and might not provide an adequate remedy for a breach of some of the contractor’s obligations.

This would seem at first sight to be a rather different approach from Strachan & Henshaw, which perhaps indicates that the court is going to look at each case on its own facts. If the language is clear enough, the court will probably give effect to it because this is what the parties agreed. If it is not, it seems that the court may try and find a way around enforcing a clause that would appear to deny a party its remedies.

Given the potentially onerous effect of these clauses, why enter into them? The answer is that they provide certainty in terms of the documents that comprise the contract and the remedies available to the parties. As a result it is not only understandable that they are used but probably necessary so as to define the parties’ liability and enable a meaningful risk assessment when negotiating the contract.

What you need to remember, however, is that the desire to achieve certainty of risk allocation and quantification at the beginning of the contract can become a fetter on the remedies available if things go wrong. This is not a reason not to use an exclusive remedy clause but it does emphasise that when you are entering into them you need to look at them carefully.