Clause does not bar court from correcting contract, rules High Court

Some contracts contain an 'entire agreement' clause, which says that no other statements, representations or other documents can form part of the contract, which is only made up of the contract document itself.

A distribution deal between medical products maker Surgicraft and distributor Paradigm contained such a clause in contracts signed in October 2004 and March 2005.

Those contracts did not contain a clause saying that Paradigm should receive a payout if the contract was ended because the ownership of Surgicraft changed. Paradigm said that this was a mistake in the 2004 contract which was repeated in the 2005 document.

Surgicraft argued in the High Court that because of the 'entire agreement' clause, Paradigm was not entitled to say that a mistake had been made and ask the Court to 'rectify' the contract.

The 'entire agreement' clause said: "this Agreement constitutes the entire understanding between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to it".

"Surgicraft submits that this clause prevents Paradigm from seeking rectification," said the High Court's ruling. "On its proper construction, it was intended to prevent a party from asserting an 'understanding' contrary to the terms of the agreement. Prior agreements, negotiations and discussions between the parties were superseded and therefore irrelevant."

"This conclusion is supported, it is said, by [a clause of] each agreement which reads 'The signing of this Agreement implies acceptance of all clauses stated herein.' The argument is that this term would be meaningless or otiose if all it means was that the parties were bound by the terms of the agreement; it must therefore have been intended to make clear that the parties' agreement was to be found in the document, regardless of prior or other intentions," the ruling said. "The commercial objective of both clauses was therefore to prevent precisely the kind of dispute which has now been tried and thus to provide legal certainty."

The High Court rejected the argument, saying that a previous case involving a company called Inntrepeneur had defined the scope of 'entire agreement' clauses.

"The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty," that ruling said. "The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search."

Christopher Pymont QC, sitting as a deputy High Court judge, said that this definition of an entire agreement clause did not support Surgicraft's claim.

"There is nothing in the Inntrepreneur case to support the contention that an entire agreement clause in the form [of the one in the Surgicraft contract] would prevent a claim for rectification," said the ruling. "Its purpose was to limit possible contractual claims arising from dealings outside the contract."

"A claim for rectification is quite different: it proceeds on the basis that the parties have made a mistake in expressing their true agreement, a mistake which infects a clause like [this one] as much as any other aspect of the agreement," said the ruling.

"I take the point that the existence of an entire agreement clause like [this one] may affect the court's consideration of what was in fact the parties' common intention and of whether they made a mistake," said the ruling. "However, it is important in that context to identify from the evidence what, if any, effect the entire agreement clause had on the parties' actual intentions so as to determine what their common intention was. If an entire agreement clause was part of the travelling draft but there is no evidence that the parties themselves actually understood what it meant or let it affect their thinking in any way, it may be difficult to derive anything from it: its existence may simply be part of the mistake in expressing the parties' intentions."

Richard Dickman, a litigation specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, said that the case reinforced the need for companies to make sure that contracts actually say what they want them to.

"This case shows that an 'entire agreement' clause will not prevent the Court from rectifying a contract where it can be shown convincingly that the contract contained a mistake and so did not reflect the parties' intentions," said Dickman. "However, the case underlines the importance of reading a contract carefully before it is signed and making sure, so far as possible, that the contract reflects what the parties have actually agreed."