Commercial contracts usually include an ‘entire agreement’ clause saying that the contract constitutes the entire agreement between the parties in relation to the subject matter of the contract.
The aim is to stop one party trying to claim that something – for example, a (mis)representation they made before the contract was signed – which is not written into the final version of the contract still has legal force. Without an entire agreement clause parties to a contract could end up in endless legal battles about whether and which pre-contract statements should be treated as part of the final agreement, and which shouldn’t, so entire agreement clauses provide crucial certainty if there’s a dispute between the parties later.
However, if the parties decide they want to vary a contract which contains an entire agreement clause, they need to be careful.
In a recent legal dispute a supplier provided different services to a customer under two contracts. One was a standard form contract (the ‘main contract’). The main contract’s terms said the customer could only terminate it if the supplier was in default. The other was a separate, bespoke contract for specialist, additional services (the ‘bespoke contract’). The customer could terminate that contract at any time by giving one month’s notice.
The customer later proposed to amalgamate the two contracts, for administrative convenience. The parties therefore entered into a very short variation agreement to vary the main contract by adding the new services to it.
The customer later tried to terminate the specialist, additional services by giving one month’s notice of termination. It said that the changes made to the main contract under the variation agreement had been too vague and uncertain to be legally effective. Particularly, the variation agreement had failed to include a definition of certain unusual words in the main contract that were necessary for the changes to make sense. The specialist services were therefore still being supplied under the old bespoke agreement, and the customer could therefore terminate the services on one month’s notice.
The supplier argued that the necessary definition of those unusual words were in the original bespoke agreement, so the customer could refer to that definition to help interpret them in the main contract. The changes to the main contract were therefore valid, and the specialist services could only be terminated if the supplier was at fault. Which it wasn’t.
The customer countered by pointing to the entire agreement clause. It said that the entire agreement clause meant that the definition in the bespoke agreement could not be referred to unless it had been expressly included in the main contract – and it hadn’t.
Luckily for the supplier, the court decided that, where terms used in a contract are ‘unconventional’ (ie as in this case, they are unusual and it is not possible to give them a meaning without referring to extrinsic evidence), it is lawful – ‘indeed, vital’ – to refer to that extrinsic evidence to help define those terms. It ruled that the definition in the bespoke agreement amounted to extrinsic evidence for these purposes, and could be referred to when interpreting the unusual words introduced into the main agreement – despite what the entire agreement clause in the main contract said – because the extrinsic evidence did not add to or alter the words used in the main contract. It just explained what they meant.
So if the undefined words had been ‘conventional’, the supplier would have lost – the entire agreement clause would have been effective.
The ruling makes it clear that varying a contract – especially if the contract being varied contains an entire agreement clause – can be a complex business, and it’s easy to get it wrong. So parties varying a contract with an entire agreement clause in it should make sure they define all terms used in the variation fully, or risk disputes over whether the changes are certain enough to be legally binding.
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