Legal Drafting Tip: "Entire agreement" provision

Tuesday, March 24, 2015

An “entire agreement” provision typically provides that, as between the parties and relating to the subject matter of the agreement, there are no terms other than those set out in that agreement and, once signed, that agreement will supersede any prior agreement or other understanding.[1]

The purpose of such a provision is to achieve greater certainty regarding contract obligations by limiting the parties’ intentions and the agreement’s scope to what is written within the “four walls” of the agreement itself. The parol evidence rule provides that, once an agreement has been reduced to writing, extrinsic evidence is generally inadmissible to add to, subtract from, contradict, or vary its terms. This precautionary provision is intended to avoid the application of any exception to that rule.[2]

Before including this provision as a matter of course, consider

  • whether the terms of any prior agreement or other understanding between the parties, the terms of which have not been incorporated into the agreement, should be specifically excluded from the provision so that those terms remain in effect (for example, a letter of intent or side letter)[3]
  • attaching any relevant prior agreement as a schedule to the main agreement to avoid ambiguity at a later stage
  • whether the parties are involved in multiple, unrelated contractual relationships and, if so, ensure that the provision references “relating to the subject matter” or words to that effect so that any other agreement between the parties is not affected

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[1] The “entire agreement” provision in our firm’s Boilerplate Agreement is as follows: “This agreement[, together with [the Transaction Agreement/each other Transaction Document][ (excluding/including l)],] (a) constitutes the entire agreement; there are no representations, covenants, or other terms other than those set out in this agreement, and (b) supersedes any previous discussions, understandings, or agreements, between the parties relating to its subject matter.

[2] These clauses are exclusion clauses and will be strictly construed (against the drafting party, if in contracts of adhesion). For example, such a provision cannot preclude the implication of a duty of good faith and may not be enforceable if it would be unjust or inequitable in the circumstances to do so (Bhasin v Hrynew) or if the result does not accord with the intention or reasonable expectations of the parties (Shelanu Inc v Print Three Franchising Corporation).

[3] One difficult issue that sometimes arises is whether this provision negates the effect of a side letter or additional agreement between some of the parties to the agreement that addresses subject matter that those parties do not want to disclose to the other parties to the agreement, and how to avoid that result. One approach might be to have the side letter expressly provide that it has paramountcy over the entire agreement provision in the agreement; if the side letter does not affect the parties to the agreement that are not party to the side letter, perhaps there would be no reason a court would not enforce it. In a situation where the other parties to the agreement might be affected by the side letter (or would not have entered into the agreement had the side letter been disclosed), it is not clear what the result would be. (Perhaps the side letter would be enforceable, but the parties to it may be subject to a claim by the other parties to the agreement, based on the entire agreement provision, for breach of contract.)



[1] The provision in the agreement read as follows:

 

or London Insurance Group. To determine equivalent value, the shares chosen by Brascan shall be valued at (a) 95% of their average trading prices on the Toronto Stock Exchange over the 30 days immediately preceding March 31, 1998, or, (b) should Labatt determine that (a) does not represent equivalent value, at a price mutually agreed.

 

The court determined that the requirement of mutual agreement on the price of the securities was "an agreement to agree," thus prima facie void. In this case, the court agreed with Labatt who submitted that clause (b) was an integral part of the securities option that could not be severed. The entire option failed and payment had to be made in cash ($135.5 million).