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The Effectiveness of Entire Agreement Clauses

About The Author

Helen Morse (Writer)

Helen is studying Law (European & International) LLB at the University of Sheffield, now entering her final year having spent an Erasmus year at the University of Vienna, Austria. Helen is interested in international and commercial law. Outside of law, Helene is a keen sports woman, playing at county level.

It is very unlikely you will come across a modern commercial contract that does not contain some sort of Entire Agreement Clause (EAC). Such a clause stipulates that the contract in question represents the entire agreement between the parties. Consequently, anything outside of the contract is not binding. This has two main legal effects. Firstly, it prevents the parties being liable for any statements or representations made during pre-contractual negotiations, which are subsequently not included in the final contract. Secondly, it imposes a legal duty on the parties to faithfully follow the terms of the contract, as EACs will often include provisions along the lines of:

...no addition, amendment or modification of this Agreement shall be effective unless it is in writing and signed by and on behalf of both parties.

Seemingly, EACs increase commercial certainty as it is advantageous to all those involved that all the terms of the agreement are contained within one easy-to-access document. An EAC also compels both parties to acknowledge they are bound only to the final contract and if they wish to vary the agreement they must pursue a formal legal process. However, there are circumstances when it would appear a lack of common sense to strictly adhere to the original terms; in reality contracts are often varied or waivedthrough the course of dealing. This has led to an increase in litigation and judicial examination of the conclusiveness of EACs. Do EACs still serve a meaningful purpose or have they simply become part of the worthless legal jargon contained in so many commercial contracts?

Many cases, including Inntrepreneur Pub Co Ltd and another v Sweeney [2006] and AXA Sun Life Services plc v Campbell Martin Limited and others [2011], have concerned the legal effect of collateral agreements or representations made during pre-contractual negotiations even when the eventual contract contains an EAC, (see ‘Further Reading’ for articles covering this issue). However, the focus of this article will be on a series of cases that have scrutinised whether a contract can be varied or waived legally by the parties conduct alone, and if so, when they may do so, despite provisions within an EAC prohibiting such a method.

Chronological Examination of the Approach of the UK Courts

Historically, the courts took a very a narrow approach, viewing contracts with EACs as absolute. This is demonstrated in the unreported case of United Bank Limited v Asif [2000], where, on appeal to strike out the case, Thorpe LJ unquestionably accepted the conclusiveness of the provision within the EAC that:

No variation of this Deed shall be valid or effective unless made by one or more instruments in writing signed by the parties to this Deed.

His lordship refused to entertain the notion that a valid variation to the original deed had been made orally.

However, opinions such as this had been confined to decisions on summary judgment or strike out applications. Slowly, hints were emerging from the judiciary that the position of the courts towards variation and waiver of contracts was not set and there may be room for more flexibility. In the case of I-Way Ltd v World Online Telecom UK Ltd [2002], even though the Court of Appeal declined to give a summary judgment in favour of the defendant holding that the law was not sufficiently settled, it appears from the Judges’ comments that attitudes towards EACs were shifting. Sedley LJ stated, “in the absence of decisive English authority...there is room for debate and movement on the question.” He also acknowledged the assertions from the trial Judge that, even though the modification to the agreement relied on was purely by conduct, “a real prospect of the claimants establishing that such a variation” existed, notwithstanding the fact there was a clause that provided, “… no addition, amendment or modification of this Agreement shall be effective unless it is in writing and signed by and on behalf of both parties.” Schiemann LJ agreed with Sedley LJ and was impressed by the submission by World Online that the purpose of an EAC is not to prevent the recognition of oral variations, but rather, to avoid unfounded allegations of such variations being made.

Following decisions seemed to favour the I-Way approach. In Spring Finance Limited v HS Real Company LLC [2011] it was unnecessary for Judge Mackie to express a considered view on the facts of this particular case, but he did comment that there could, in theory, be an oral variation to the contract in question, regardless of a clause requiring that it be in writing. Similarly, in McKay v Centurion Credit Resources [2011] Judge Keyser was not forced to conclude either way, as he could establish no evidence of a waiver from the facts of the case. Nonetheless, he did find, “some attraction” in Judge Mackie’s remarks, thus falling on the side of I-Way, rather than the stricter approach taken in Asif.

Even though these cases seem to suggest the I-Way approach was prevailing, the law was far from a state of certainty. In all the decisions, the facts of the cases meant the judges were not obliged to conclusively decide whether a contract could be varied or waivedby conduct, they merely expressed their opinion in the hypothetical. Equally, it was simply held that provisions prohibiting variation or waiver in writing might not be categorical; there was little exploration into the scope or limits of their assertions.

In 2013, the opportunity finally arose for the point to be considered in more depth in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013]. Several complex issues arose out of the dispute, but the relevant facts for the purpose of this article are as follows.

Under an Exclusivity Agreement, Energy Venture Partners were to retain a fee as way of commission for their involvement in the negotiation and sale of Malabu’s interest in an oil prospecting license for an oil field located in the offshore territorial waters of Nigeria. Notably, under the Exclusivity Agreement, the fee was to be determined by express agreement between the parties. However, no agreed price for the fee was ever made orally or in writing. Malabu therefore submitted Energy Venture Partners was not entitled to any fee as it had not been agreed upon and an EAC within the original Exclusivity Agreement provided that, “no additions, amendment to or modifications of [the] Agreement shall be effective unless it is in writing duly signed on behalf of the parties.” To me, and any other mere bystander, looking at the most basic of facts, it seems highly unfair that by sticking firmly to the terms of the original Agreement, Energy Venture Partners, who worked hard in securing a sale of Malabu’s assets, could lose such a huge amount of money.

In her judgment, Gloster LJ seemed to share this instinct and thus inferred from the parties’ conduct that there was in fact an implied agreement between the parties that Energy Venture Partners would be paid a reasonable fee for its services. In her opinion, “where the evidence on the balance of probabilities establishes such variation was indeed concluded,” by the parties’ conduct, this is sufficient to vary the original agreement, despite the existence of an EAC.

At last there is now authority from the UK judiciary that a contract can be varied or waived by the parties conduct alone, in spite of an EAC.

When Will Conduct Vary or Waiver Written Terms?

Gloster LJ emphasised in her judgment that:

... [T]he question whether the entire agreement clause has been overridden is necessarily fact-sensitive.

However, she did suggest that where the relationship between the parties is of a more formal nature, “the factual matrix of the contract and other circumstances may well preclude the raising of an alleged oral variation to defeat an entire agreement clause.” On the other hand, she submitted that where the contractual relationship is between two individuals operating under more unusual circumstances, it is more likely the evidence will establish that, “the parties, by their oral agreement and/or conduct, have varied the basis of their contractual dealings.” Whilst declining to lay the limits of the legal effects the parties’ conduct may have, Gloster LJ's comments still offer some useful guidance on how future disputes may be decided.

Where does this leave the Entire Agreement Clause?

The evaluation of the above set of cases suggests that, if the courts are willing to accept variation or waiver by conduct notwithstanding the presence of an EAC, the purpose of such a clause has become redundant. However, one should not jump straight to this conclusion without further examination into all the legal effects of EACs because, as mentioned before, they serve more than one function. Equally, to write-off EACs completely would come at the cost of commercial certainty, which should not be compromised. In spite of this, maybe the time has come for our lawyers to rethink the way in which EACs are drafted. In the light of the Energy Ventures Partners decision, I would put forward the proposition that EACs must not be lost in the small print of a lengthy contract and it is the lawyers’ responsibility to highlight to the parties the possible consequences of the terms of such clauses. After such a dialogue, depending on the parties’ wishes, the Entire EAC should then be worded to allow, or expressly prohibit, conduct as a valid variation or waiver method. With an increased understanding of what they are agreeing to when the parties sign a contract containing an EAC, it would hopefully decrease the likelihood of disputes such as that in Energy Ventures Partners arising again.

Conclusion

It is certainly not the end of the line for the EAC, but it is clear from the circumstances in Energy Venture Partners that it would lack sound commercial judgment for the courts to take a contract with an EAC as read. Gloster LJ was right to seize the opportunity when it finally arose to set out authority that a contract can be varied or waived by conduct, notwithstanding the existence of an EAC.

Some may argue Gloster LJ’s judgment does not go far enough and we are still left in a state of uncertainty surrounding exactly what type of conduct can amount to a valid variation or how consistent the conduct has to be to waiver a term of a written agreement. However, as any commercial lawyer will tell you, no two transactions or business relationships are the same so it would be nonsensical to attempt to establish a set of rules to apply to all contracts. Equally, the dispute itself highlights why EACs cannot be viewed as a one-size-fits-all clause and thus they should be carefully drafted in line with the needs of the contract parties. The decision in Energy Venture Partners has brought with it some welcome clarity to the law, but has left enough flexibility for the courts to rule appropriately to the unique set of facts of the particular contractual relationship before it.

Further Reading:

‘Entire Agreement Clauses – A Necessary Evil?

‘Entire Agreement Clauses In Derivatives Contracts’

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Tagged: Commercial Law, Contract Law

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