Entire agreement clauses in construction contracts

There is a growing trend in construction contracts to use entire agreement clauses. These clauses seek to prevent claims, particularly claims that were not envisaged by the parties when they priced the contract.

Construction contracts can take a long time to negotiate. At the end of the process there may be a large bundle of reciprocal rights and obligations spanning numerous documents, not to mention the possible effect of any oral representations made by the parties. Any one of these rights and obligations could potentially form the basis of a claim for damages. It makes managing risk and pricing contracts difficult.

That is why there is a growing trend in the construction contracts to use entire agreement clauses. These clauses seek to prevent claims, particularly claims that were not envisaged by the parties when they priced the contract. The idea is that the contract represents a complete code of rights and obligations between the parties.

Entire agreement clauses often contain two types of statements:

• that the agreement represents the entire agreement between the parties and supersedes any earlier agreement; and
• an acknowledgment that the parties have not relied upon any statements or representations made by the other party, other than those set out in the agreement.

When disputes arise, however, parties often seek to avoid the effect of such clauses, particularly when the contract does not contain the agreement that one party thought had been reached. How do the courts deal with entire agreement clauses and the frequent attempts to circumvent them?

The Court of Appeal robustly upheld an entire agreement clause in Strachan & Henshaw v Stein Industrie (UK) Ltd (1997), finding that the clause, which stated that the express terms of the contract were "exclusive of the rights, obligations and liabilities of each of [the parties] to the other" was sufficient to preclude a claim for common law damages for breach of contract.

The Court noted that there was commercial common sense in providing expressly for the claims the parties intended to be allowed and excluding all others, even if the effect of that was to reduce important contractual obligations to unenforceable declarations of intent.

Parties sometimes claim that they were induced to enter into contracts on the basis of oral pre-contract representations that subsequently turned out to be un-true. E A Grimstead & Son Ltd v McGarrigan (1999) concerned an agreement for the sale and purchase of shares. The purchaser claimed damages for misrepresentation and alternatively for breach of collateral warranties said to have been made at the time of the misrepresentation.

Clause 2.5 of the agreement stated: "The Purchaser confirms that it has not relied on any warranty representation or undertaking of or on behalf of the Vendors… save for any representation or warranty or undertaking expressly set out [in the Agreement]…". Another clause stated that: "no party hereto has entered into this Agreement in reliance on any representation, warranty or undertaking of any other party which is not set out or referred to in this Agreement".

It was held that these acknowledgements of non-reliance were "capable of operating as an evidential estoppel" to prevent the party who has given the acknowledgement from subsequently asserting that it had in fact relied upon representations not included in the contract. However, in order to establish an estoppel it is necessary for the party to whom the acknowledgement was made to prove the following:

• that the acknowledgement was clear and unequivocal;
• that the purchaser intended that the vendor should act upon the acknowledgement; and
• that the vendor had believed the acknowledgement made to be true and had acted upon it

Lord Justice Chadwick usefully summed up the court's approach to entire agreement clauses:

"…it is reasonable to assume that the parties desire commercial certainty…They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings…it is reasonable to assume that the price to be paid reflects the commercial risk which each party - or, more usually, the purchaser – is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give...It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted."

In Watford Electronics Ltd v Sanderson CFL Ltd (2001) the court considered a contract for the supply and purchase of a bespoke integrated software system. The contract stated: "The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract".

The system failed to perform properly, and the Claimant claimed damages on the grounds that it was induced to sign the contract on the basis of representations made by the Defendant (for instance, in its sales literature) that were false. The Court held that the acknowledgment of non-reliance prevented the Claimant from asserting that he had relied upon the Defendant's pre-contract representations.

The court also found that where the parties have agreed an entire agreement clause which excludes liability for pre-contractual representations, the clause may also defeat any claim for misrepresentation since "Where both parties to the contact have acknowledged, in the document itself, that they have not relied upon any pre-contract representation, it would be bizarre (unless compelled to do so by the words which they have used) to attribute to them an intention to exclude a liability which they must have thought could never arise".

Entire agreement clauses can preclude claims based on collateral warranties, implied terms and misrepresentation. The Courts have taken a bullish, commercial approach to interpreting them, where freedom to contract outweighs other considerations. Where does this leave the parties? They should be careful in drafting or accepting entire agreement clauses. The effect of them is to restrict the types of claims that the parties can bring – parties must therefore consider whether the written contract addresses all the issues and possible situations that might arise. On the up side, the clause will apply mutually to both parties, providing certainty and ensuring that all relevant terms are expressed in the contract.

For further information please contact Ben Worthington on +44 (0)20 7367 3569 or at [email protected]