What is an Entire Agreement Clause?
An entire agreement clause is a common feature of legal agreements as it enables the agreement to operate upon an agreed basis. The typical ‘entire agreement’ clause will aim to prevent the introduction of ‘extrinsic’ evidence (for example other documents or statements made alongside the entering into an agreement) to a fact finding exercise if the parties have indicated via the agreement that the document represents the full and final agreement between them. Where an agreement contains an entire agreement clause, it operates so as to render the terms of the contract exclusive. The parties may well have intentions outside of the terms of their agreement , but if they have stipulated explicitly that no other agreement will apply, such a clause should prevent the application of those extraneous terms in favour of looking solely at the terms stated in the contract. This is not to say that the clause will always be effective, as the efficacy of an entire agreement clause is a question of interpretation – factors such as the context of the parties, the nature of the document and the language of the clause itself will be evaluated in any contractual dispute before a ruling is made on the extent of documents such a clause serves to exclude.
Importance in Contract Law
The Role In Contract Law Of The Entire Agreement Clause
At its core, the entire agreement or merger clause in a contract serves as a jurisdictional gatekeeper- stating with crystal clarity that all of the covenants and agreements of the parties as to the subject matter of the agreement are contained within the four corners of the contract itself and that there are no outside agreements of any kind that can change or modify its terms. The gatekeeping function of the entire agreement clause is most often used for one of two purposes in contract law. First, entire agreement clauses typically are relied on to seek to preclude a party to a contract from arguing that an extrinsic agreement or understanding was reached between the parties that has not been incorporated into the final form of the contract. Second, in a limited number of situations, courts have invalidated a contract in its entirety on the basis of the entire agreement clause where it is demonstrated that the parties intended to use the clause to bar any future, oral modification to the contract. Put simply, therefore, the entire agreement clause in a contract is used in contract law to support the doctrine of merger.
Advantages of an Entire Agreement Clause
When parties to an agreement execute a written contract with an entire agreement clause, it is possible to avoid or limit misunderstandings and misinterpretations of the contract provisions. The benefits of entire agreement clauses are numerous. Entire agreement clauses work to limit the circumstances when a court may consider extrinsic or outside evidence to assist in interpreting or otherwise giving effect to a contract. Further, entire agreement clauses provide certainty that the contract is not subject to any verbal changes or amendments of which the parties are unaware. This is particularly important in a commercial context where some parties may forget that they have verbally agreed to amend their written contract.
Overall, by including an entire agreement clause, the parties will likely be able to avoid a variety of other issues, including allegations of duress, misrepresentation, mistake, and ambiguities. Overall, the entire agreement clause minimizes the risk of litigation arising from the contract, because the parties are able to rely on the certainty created by the contract.
In addition, the inclusion of an entire agreement clause can assist in minimizing damages for breach of contract. For this reason, the clause will help mitigate the losses of both parties. In the event that a court finds that there has been a breach, the aggrieved party will only be awarded damages in accordance with the terms set out in the contract alone. A court will not consider oral and extrinsic evidence to determine the extent of damages. However, in the absence of an entire agreement clause, depending on the circumstances, a court may consider extrinsic evidence in calculating the damages for breach, potentially to the detriment of the party seeking compensation for breach of contract.
The entire agreement clause is also useful in assisting parties to evaluate their risks before entering into an agreement. When negotiating a contract, the parties must assess the legal impact of the entire agreement clause and the risks to each party of omitting the clause. This can be an important factor for determining whether a contract is commercially viable.
However, parties must keep in mind that, in certain circumstances, an entire agreement clause may not act as a complete bar to expunging a contract. Recent case law has illustrated the limitations of the entire agreement clause, as discussed below.
Shafron v KRG Insurance Brokers (Western) Inc (2009), [2009] 1 S.C.R. 357. Shafron and KRG were two insurance brokers in McGill, Quebec and Calgary, Alberta respectively. Both parties had students in the same class in a business course in McGill. Mr. Shafron proposed to Mrs. KRG that they move to Calgary so that she could take advantage of better business opportunities. This move was to be conditional on the following: Mrs. KRG would relocate to Calgary; Mrs. KRG would work for KRG’s Calgary office for three years; and KRG would pay for the relocation expenses. After Mrs. KRG relocated to Calgary, she was appointed as a shareholder and Vice President of KRG Calgary. At this time, she signed a contract that outlined the terms of her employment. The contract included an entire agreement clause which stated: There are no representations, warranties, conditions or agreements [other than those expressly set forth herein] and this Agreement constitutes the entire contract between the parties hereto and supersedes any other agreement or understanding entered into between the parties.
The terms of the employment contract were later disputed after KRG terminated the employment of Mrs. KRG.
Shafron argued that the agreement was unenforceable due to the McGill university course syllabus, which contained a non-competition clause regulating the business activities of students for three years throughout Canada. Shafron submitted that he attended this class with Mrs. KRG, and he assumed that the term of the non-competition clause would likewise apply in his contract with KRG.
Prior to this case, the Supreme Court of Canada held that entire agreement clauses exclude or limit the admissibility of extrinsic evidence in interpreting a written contract. The Supreme Court generally limits the use of extrinsic evidence unless the parties intend to vary, add, or delete from the written document. However, the Court will admit extrinsic evidence if the circumstances of the contract warrant the admissibility of parol evidence.
The Supreme Court unanimously ruled that there was not sufficient evidence to prove that the terms of the McGill course syllabus were incorporated into the parties’ contract, as the language used in the written contract made it clear that the parties agreed that the written contract contained the full intentions of the parties. The Supreme Court further commented that the parties had negotiated the terms of the contract, as evidenced by the fact that the non-competition provision was drawn to their attention and struck down.
In Ageas Insurance Co of Canada v Chubb Insurance Co of Canada et al, [2016] ONSC 1847 (CanLII), the plaintiff brought a declaratory judgment against the defendants on whether they had an obligation to pay an insurance claim of approximately $3.3 million.
Ageas argued that it issued and the defendants issued duplicate certificates of insurance covering the same property for the same period. Ageas insisted that these duplicative insurance certificates were binding and that they must pay the full insurance claim. The defendants contested the validity of the insurance policy, and argued that the insurance policy was void ab initio.
The defendants argued that Ageas incorporated several contract documents into the insurance policy, including the master policy, property schedule, and its own certificate of insurance. The defendant argued that the master policy contained two entire agreement clauses, which expressly excluded other documents, including the property schedule, from forming part of the insurance policy.
The master policy contained the following entire agreement clauses: The Policy is the entire contract of insurance between the Insured and the insurer. No broker, agent or other person is authorized to vary, waive or change any of the terms or conditions of this Policy or any of the endorsements or riders hereto. All information on or in any proposal, application, certificate of insurance, endorsement, endorsement slip, policy III, binder, or other document of any type submitted to the insurer, is made to form a part of this Policy and the renewal or replacement thereof.
No alteration of this Policy shall be made except by endorsement signed by the Insurer.
Risks and Limitations
Potential Pitfalls and Limitations of Entire Agreement Provisions
One of the potential pitfalls, as with all clauses in a contract, is that the courts may sidestep the provision where it is contrary to public policy or good morals.
The ability to restrict the ability of parties to rely on prior representations or agreements must be balanced against the need for clarity and conciseness (and minimisation of disputes) where parties are sophisticated and experienced. In particular, there may be an exception where a party seeks to be able to have recourse to enforce representations as an alternative to a contractual term that may be deficient in some way.
It is important to be aware, therefore, that the entire agreement clause does not affect or preclude claims on the grounds of misrepresentations.
A clear example is where a statement is made as to future events that is a prediction or assessment of what may happen. "Expression of opinion or judgment about the future are not actionable as misrepresentations" See Arora v Lord Mayor and Citizens of London (No 2) [1966] 1 WLR 1003 (Court of Appeal).
While the general rule is that entire agreements clauses exclude pre-contractor terms, they do not have the effect of overriding express, written contractual terms, which may conflict with or contradict them. In addition, there is a presumption that entire agreements provisions do not operate retrospectively.
There is no statutory requirement for an entire agreement clause to be in the contract and it may be implied by the court or be clear from the circumstances. However, it is arguably best practice to have a clear entire contract provision included in the contract so that parties’ intentions are explicitly clear.
Having an entire agreements provision in a contract may also have the effect of potentially disapplying any applicable implied terms depending upon the wording. For instance, a court may consider that if parties intend a contract not to be qualified by any implied terms or other terms, they should wishing to do so, provide for this in the written contract. An entire agreement clause has been held not to prevent the implication of terms into a contract where this is necessary to give the contract business efficacy or a sensible meaning, or where this is required to imply a term under the Sale of Goods Act 1979. See Arora v Lord Mayor and Citizens of London (No 2) [1966] 1 WLR 1003 and Hutton v Warren [1977] 2 All ER 1039.
And finally, an entire agreement provision does not prevent or override the effect of a duty of good faith on parties to a contract. Whether a party owes such a duty to another, whether express and/or implied, is a matter of construction of the relevant provisions of a contract and the particular facts of the case against the general background.
Crafting a Strong Entire Agreement Clause
A well-drafted entire agreement clause should be clear, comprehensive and free from ambiguity. At minimum, an entire agreement clause will set out the documents that comprise the contract, which parties are bound by it and what rights and obligations arise. In drafting an effective entire agreement clause you should be able to answer yes to the following questions: If you cannot answer yes to any of the questions above, then your entire agreement clause may be susceptible to challenge. At common law a party seeking to argue that a contract or a clause within a contract should be set aside may argue that there was no meeting of the minds. To the extent the meaning of your contract is unclear it may be challenged on this basis. Even in the face of a clear intention , the doctrine of mutual mistake may be employed to seek avoidance of the contract where factors are present that indicate the parties prior to entering into the contract: Drafting an effective entire agreement clause involves balancing the need for clarity with the need for brevity. An example of an entire agreement clause is: "This Contract and any appendices constitute the entire agreement between the parties in relation to its subject matter and supersedes all prior agreements and negotiations between the parties (unless otherwise provided herein)."
Judicial Analysis and Case Examples
The courts generally have given a broad effect to such clauses, and the Fifth Circuit, in In re TMI, Inc., 903 F.2d 525 (5th Cir. 1990) at 569, has noted that "[w]hen a contract contains an integration clause, under Texas law Courts presume that the writing expresses the entire agreement between the parties."
Because the intent of the parties’ agreement may not be represented in the contemplation language contained in the contract, parties should be particularly cautious when referencing other contracts or documents in the language they use in the contract. The caution becomes even more salient when the parties’ initials go on every page or where there is a thorough and seemingly comprehensive "entire agreement" provision.
For instance, in Holland v. Nat’l Rail Passenger Corp., 68 F.3d 441 (6th Cir. 1995), the case deals with a claim for breach of contract that was brought under another contract and not the actual contract signed by the parties. The individual hired to fix the problems in the boiler failed to do so. The new owner of the boiler attempted to recover under the repair contract and National Rail Passenger Corporation’s (NRC) contract with The Table Machine Company (The Table). The Table moved for dismissal of the new owner’s complaint because of an entire agreement clause that prevented the new owner from seeking to enforce the contract between NRC and The Table. The Table also sought attorneys’ fees. The entire agreement clause specifically listed the parties to the contract as NRC and The Table Machine Company. Moreover, the language expressly stated the contract was the only one that The Table would enter with the NRC.
The Court of Appeals, affirming the lower court’s granting of The Table’s motion to dismiss, held that the new owner could not bring a claim based on the contract between The Table and the NRC. In making this determination, the Sixth Circuit reasoned that the language established the parties to the contract and that the entire agreement language negated any other agreement, that all future contracts would be entered into by the parties at bar. (There was no indication that there was another contract between The Table and the NRC.) Moreover, the Sixth Circuit found that the clause was enforceable against the new owner to prevent recovery of repair costs even though the new owner was not a party to the contract. For these reasons, the Sixth Circuit held the new owner could not bring a claim for breach of contract against The Table under the NRC/Table contract.
Common Inquiries
What is the purpose of the entire agreement clause?
The entire agreement clause serves to confirm that the contract documents express the full and final agreement between the parties. It acts as a type of "merger" clause that discharges and cancels out previous negotiations and understandings, limiting the scope of permissible evidence in the event of a dispute.
Is it necessary for any contract to contain an entire agreement clause?
While not a requirement, it is highly advisable to include one in any contract. It establishes a clear understanding that there are no other agreements between the parties that affect or modify the terms of the contract.
What kind of evidence is generally prohibited by the entire agreement clause?
A contract that features an entire agreement clause will tend to preclude the admissibility of evidence from earlier discussions , negotiations and exchanges between the parties in the dispute resolution process. However, some courts retain the discretion to permit some limited evidence when warranted.
Is the entire agreement clause applicable in cases outside of breach of contract?
The entire agreement clause is not unique to breach of contract actions. The same benefits may be realized in various contexts with different circumstances. For instance, it may be useful in a tort claim to establish that the contract was the primary agreement between the parties, as opposed to verbal agreements and/or guarantees outside of the written agreement.
Can the entire agreement clause be modified after the contract is finalized?
No. The contractual agreement may be rewritten, but the paragraph regarding the entire agreement or merger clause must remain intact once the contract has been executed.