Entire agreement clause definition
An entire agreement clause ("EAC") is a standard component in many contracts, although not always well understood. Generally speaking, an EAC defines the memorable maxim that "the whole agreement between the parties" is embodied in a written contract as part of the legal relationship between them. An EAC can be generally described as an attempt by one party to prevent the other from subsequently claiming any contractual right or obligation allegedly falling outside the written contract. Such an attempt by one party necessitates a response from the other party, and the EAC therefore assumes that the latter party is either in a sound position to resist the argument, or that such party will not wish to rely on any such argument.
An EAC operates to exclude oral agreements, prior agreements, contemporaneous agreements or other negotiations (such as representations (excluding fraudulent representations), written and oral). The language of the clause itself determines its reach and scope. For example the wording of the clause may exempt from its operation pre-contractual representations, fraud notwithstanding. Such an approach is unhelpful, as any party simply wishing to preserve its rights in respect of a deliberate non-disclosure of material facts must include an additional clause to this effect.
The purpose of an EAC is often to achieve finality between the parties. A party may benefit from achieving an EAC because it may prevent a subsequent contract claim. An example will suffice here. If the parties enter into a written contract which is silent as to interest on overdue payments , the debtor might otherwise be prepared to argue that this reflected the terms of the parties’ agreement. However, if the parties agree upon an EAC in the written contract, the debtor may not be able to rely upon the silent term, even if it reflects the parties’ true agreement.
Given the above, an EAC has the potential to exclude from subsequent consideration any previous agreement between the parties. If it is the case that there are significant advantages to be gained from achieving an EAC, then it is also obvious that the parties may seek to contract themselves out of giving such an advantage to the counterparty. Indeed, an EAC can sometimes benefit both parties. An EAC requires one party to sacrifice the benefits of a non-excludable verbal agreement, for example (a problem for the innocent party, who may be displaced by the EAC). However, the EAC may be useful to the other party, in protecting goodwill, trade secrets or confidential information. The commercial reality is that the existence of an EAC in the written contract frequently limits the power of the parties to themselves supersede the written contract.
In summary therefore, the role of an EAC is to avoid the existence of peripheral (and potentially fruitful) arguments between the parties unrelated to the words of the written contract. For this reason, in legal interpretation – and in the best interest of the parties – precision is paramount.
Importance of entire agreement clauses
Entire Agreement Clauses, sometimes called the Entire Agreement or Merger clause, are a very important part of any contractual agreement. Often considered formalities in legal text, these clauses serve as a practical way to manage the expectations and behavior of the contracting parties and significantly minimize the likelihood of future disputes. Entire Agreement clauses delineate the official agreement of the parties and should be considered the final say such disputes that ever arise concerning the signed contract.
More specifically, Entire Agreement clauses serve three specific purposes:
The court in Maginn v. Federal Termite & Pest Control, Inc., 303 Ark. 482, 797 S.W.2d 415 (Ark. App. 1990), found Entire Agreement clauses to be one of the most critical tools to confirm the intent of the party in a contract. Citing prior case law, the court noted: It is the general rule with respect to contractual interpretation that the intention of the parties prevails, and it is presumed that the parties intended the language in the contract to have meaning and effect. See Chatman v. Givens, 271 Ark. 644, 649, 609 S.W.2d 882, 885 (1986) (it is the prerogative of the parties to make their bargain, and they are bound by its terms, thereby evidencing their intention to be responsible for it). The cardinal rule is to ascertain the intention of the parties from the operative words used. Isolation of words and phrases is not permitted. As Maginn well illustrates, Entire Agreement clauses will be read broadly and used to deem as settled other claims outside the language of the contract unless there is an explicit exception to those claims. Whether these clauses are in the context of an implied contract or a written one, Entire Agreement clauses often prevent parties from making other claims and arguing other points of interests as the law considers the intention of the parties to be resolved in the contract. Given case law precedent, parties should be more admonished than reassured by this specific language.
Legal effect of entire agreement clauses
As discussed in the preceding section, an entire agreement clause may provide greater certainty that the parties will not be able to rely on verbal or email statements as a basis for a breach of contract claim. However, the enforceability and interpretation of an entire agreement clause can also be contentious issues in dispute resolution. The legal implication of entire agreement clauses depends on whether they are deemed to be enforceable agreements at all, or a solemnization of an intention not to be legally bound until certain formalities are complete. In other words, the party alleging that a later-written agreement is enforceable does not necessarily bear a legal onus with respect to proving the enforcement of an earlier entire agreement clause. The burden may be on the party seeking to enforce the later agreement to establish its enforceability. In PHH Mortgage Corporation v. Nelson, the Ontario Court of Appeal held that: [a] clear expression by the parties that no agreement will become binding until its terms are reduced to writing and formally approved by the Ministry is sufficient to create an agreement in principle and to bar summary judgment unless the party seeking to enforce the agreement can show that it was intended to be legally bound. Another potential problem with entire agreement clauses is that they do not always prevent parties from testifying about statements and understandings that existed prior to the formation of a written contract and that were not included in the written document.
Exceptions to entire agreement clauses
Generally, England recognises an implied exception to the strict rule and will allow a party to argue and rely on a prior oral representation where it is alleged fraud or misrepresentation has been committed. One example of this can be seen in the case of an entire agreement clause which fails to exclude liability for deliberate "fraudulent" misrepresentations concerning certain matters made by one party to the other in the negotiations. So, the rule may still be applied where a fraud has been committed in relation to excluding liability for certain material representations made during negotiations. England also recognises a potential common law though limited exception to the rule of exclusion at the time of formalising the contract. An exclusion clause that operates to prevent the party from pursuing what may be a valid claim of misrepresentation, fraud or mistake brought about by the agent acting on the party’s behalf may not be enforceable. This has also been seen in instances where statements have been made as an inducement to enter into the entire agreement, whether in the contract or absence of acceptance so as to affect the position of a party and so carry some degree of liability and responsibility.
Drafting entire agreement clauses
The drafting of a proper entire agreement clause requires careful consideration of the fundamental elements and limits of a contract.
There are three elements to consider: (i) parties to be bound by the clause; (ii) agreements to be captured by the clause; and (iii) terms that will provide enforceability to the clause. Parties to be bound by the clause Before an entire agreement clause can become operative, it is essential to define who the parties to the contract are. In an agreement between two parties, the clause will be limited to the two parties to the contract. In circumstances where the agreement is between a third party and one of the parties to the contract, the clause cannot be relied upon unless express reference is made to the third party in the clause. Parties other than those expressly mentioned in the clause cannot rely directly on the entire agreement clause itself. In some circumstances, such as a corporate group or in joint ventures, disputes may arise as to whether a clause can be relied upon. The possibility of common directors or officers who may sign on behalf of different companies within a corporate group, or on behalf of the joint venture in which they are involved, makes the drafting of the clause more difficult in these scenarios. Agreements to be captured by the clause An entire agreement clause is intended to deal with the issue of what will form the written record of the agreement between the parties. It must be clear as to what documents will comprise the written record of the agreement. A well drafted clause will clearly state which documents will comprise the written record of the agreement. Where there are no documents that form part of the entire agreement clause, one cannot look to the clause itself to determine whether the entire agreement clause excludes oral evidence. The absence of documents will force one to resort to interpretation of the written document. Final details that provide enforceability to the clause The clause must be enforceable. If parties to the contract are unable to enforce the clause , it will not serve the function of a complete representation of the agreed terms and could result in uncertainty. The clause should accordingly be sufficiently specific to be readily capable of being enforced. Although an entire agreement clause should be a simple statement in the contract confirming that it constitutes the sole written record of the agreement between the parties, any reservations or exclusions must be clear. The insertion of reservations and qualifications in the clause might render it unnecessarily difficult to understand. The entire agreement clause is often the last clause of the agreement and parties frequently justify the imprecise treatment of the clause because of the need to redact certain sensitive commercial information. However, reservations are not ordinarily necessary to protect the integrity of an entire agreement clause. If a reservation is imposed, parties will most certainly argue with each other over what is within the scope of the reservation. A common reservation is that no representation has been made unless recorded in the agreement and that communications that preceded the signing of the agreement do not constitute representations. However, a reservation along these lines may render difficult the progressive disclosure of the agreement as the negotiations proceed. It is quite common for parties to exchange drafts of the same agreement at various stages of negotiation. These drafts will usually constitute agreement, and the events leading up to execution of the last draft will form the basis of the agreement. If an entire agreement clause excludes from consideration all pre-qualifying communications and earlier drafts, many important aspects of the agreement may fall away. A sentence of this nature should be avoided in entire agreement clauses.
Mistakes to avoid
Marketers often make the mistake of failing to include a whole array of seemingly unrelated matters in the clause. Many of those matters are sometimes best left to a different section in the agreement, but they may have to be included in the broader entire agreement clause in order for the entire agreement clause to have the effect you intend. A common mistake is to specify the entire agreement as being "this agreement and any exhibits or schedules hereto." This mistake manifests itself in two ways. First, a marketer will specify that the entire agreement is just the agreement and any exhibits or schedules. However, the marketer later discovers that it forgot to include a signed agreement between the parties related to the subject of the agreement. If that other agreement existed before the other agreement, it might not be incorporated into the new contract. In many states, case law provides that the consideration paid later (the current contract’s value) was simply being paid in advance for the value received earlier. Thus the other agreement may be enforceable despite not being attached, especially if from all other evidence it is clear that the subject of the two contracts is the same. This is likely not the intention of the marketers because the new agreement may include additional obligations due to the party with the earlier agreement, such as an OEM or co-promotion obligation. A second mistake is the other side recognizing that if the other agreement is signed after the subject agreement, it is not automatically incorporated into the subject agreement because the subject agreement fails to refer to it as an additional agreement on the subject matter, so it tried to reference it in the subject agreement without naming it. While case law may allow this, the less the parties "lift" the language of one agreement into another, the better. So if the subject agreement says that it includes all prior agreements (not called out in the subject agreement), the other side will realize it’s an improper incorporation even though the goal is the same and the same obligation appears in both the prior and current agreement. Another common mistake, especially for contract marketers involved in co-promotions, is to forget to incorporate the protocol for allocation of expenses or revenues. While the entire agreement may cover all prior agreements, if the allocation has to do with how expenses are allocated, which is separate from revenue sharing, it may need to be incorporated separately into the current agreement. This can cause issues between the parties, especially if both contracts seem to have the same cost sharing calculation. Also, brands are caught unawares that many of their standard forms are not entire agreement provisions. There are many provisions that try to refer to prior agreements as long as those prior agreements are attached or that refer to obligations covered by those prior agreements that have to do with duration and termination. For example, let’s say a contract of a one-year term that has a 60-day notice of non-renewal appears in a standard form contract. The supplier and the customer sign this. However, the supplier then orders product, which is governed by a terms and conditions agreement to which the supplier had agreed. That terms and condition agreement allows that on 30 days’ notice the supplier can terminate the entire agreement, including the supply purchase order provision, and initiate a new agreement with better terms. This is permissible (and typical). However, if the supplier tries to do this, the customer will claim that the supplier has to comply with the non-renewal notice in the agreement, which is 60 days. If the customer prevails, then it becomes a pricing negotiation for the first 60 days either at the existing price or at a price that the supplier had to charge two years ago … not much fun. If the entire agreement is properly drafted so that its definition covers more than just the purchase order, but also ensures that the supplier does not have a right to terminate during the first year, then that issue is avoided.
Effect on amendments
Subsequent to the execution of a contract, circumstances might compel the parties to amend its provisions. The agreement may need modification due to a change in business, technology, or law; an alteration to the scope of services; or the need to correct the terms agreed to by the parties. Article 13 of the model version of the General Conditions of the Canadian Institute of Steel Construction’s website states that "[n]o order, written changes or sketches shall be effective except as a change order executed by the Owner." Similarly, The Canadian Construction Documents Committee’s (CCDC) CCDC 2 (2008), Stipulated Price Contract, states at Article 1.3.1 that "[n]either a Change Order nor any other order, request for payment, concurrence or consent shall invalidate the Contract."
While most parties are familiar with the concept of entire agreement clauses, less appreciated is their effect on the amendment and maintenance of a construction contract. The presence of such a clause indicates that the parties intend the contract as a complete and final expression of their agreement. Court have therefore held that it is the parties who determine when and how to alter a contract’s contents, including in circumstances where a contravening contract is presented for signature by a contractor. In Alpa Construction Ltd. v. The Edmonton (City), the Alberta Court of Appeal found that where the parties execute an entire agreement clause, the subsequent creation of a new agreement by one party could not override that intention. Therefore, in order for the subsequent agreement to form part of the contract and alter the parties’ obligations under it, it would need to pass through the same creation process required for the original . In other words, the parties must negotiate and execute a further writing.
A similar outcome was reached in Stiller v. MEND Canada – Christians Suspected Taken Backwards. In that case, the Alberta Court of Queen’s Bench held that correspondence explaining the process of entering into a further agreement to amend a contract was sufficiently clear and complete to evidence the parties’ intention that such a contract amendment could occur. In particular, the court deemed the following passage from the later dated correspondence as a clear and unambiguous expression of the intention to sign a new agreement relating to the disputed matter: "You are correct in stating that the land purchase will be made through a special meeting and the process for convening this meeting will follow proper protocol. We are not necessarily looking at the Sept. 26, 2007, date that was approved. If that date is not suitable, we will schedule a new meeting with proper notice." As evidence that all the conditions in the agreement were met, the court noted that the parties appeared before "the Special Meeting" called for the purposes of the contract amendment, the required forms were completed and the contract met with the requisite approval.
These decisions suggest that an entire agreement clause does not preclude the addition of further documents to the contract after execution. Rather, they suggest that the parties will need to agree to a new contract in order for the contents of that document to be legally binding in the context of the agreement. Where a party believes their entitlement would be better served by a new agreement, they should obtain confirmation that the other side is willing to go through a new agreement process to ensure the proposed changes are actionable.