Contract LawOutsourcing & Projects

Entire agreement clause pitfalls: supplier beware

Contract entire agreement clause

An entire agreement clause, including a no-reliance provision, can protect a party where the other parties tries to rely on a pre-contractual statement that it alleges the first party made orally or which is set out in other documents.

What is a pre-contractual representation?

In IT and telecommunications deals a pre-contractual representation is generally an oral or a written statement that a supplier makes as part of the tendering process or during the contract negotiations, before the parties sign the final contract.

A pre-contractual representation can be something a supplier or its employee states on their website, says during a presentation or pitch, or writes in an email to the customer. A pre-contractual representation can even be inferred by silence.

When does a a pre-contractual representation risk occur?

A supplier will likely make a number of representations to a customer when pitching, tendering and negotiating a contract. Typical supplier representations include the extent of the supplier’s capabilities, the cost to deliver the project, projected time-frames for a project, go-live dates, service availability, and specifications of software or hardware the supplier will deliver.

In a dispute a party, often the customer, may try to rely on these pre-contractual statements that it alleges the other party made orally or which are set out in other documents.

Accordingly, a supplier and its employees need to carefully consider what they say (and equally as important, what law requires them to say) in pitches, tenders and negotiations which occur before the parties sign a contract.

Remedy for representations included in the contract

If the representation is included as term in the contract and the supplier does not meet the obligation the customer has a straightforward remedy – the customer can bring action for breach of contract against the supplier.

Representations made outside of the contract

However, if the representation is not included as a contractual term, but instead existed as a statement made prior to, and separate from, the contract itself, the legal rights arising are more complicated.

Under the laws of most common law jurisdictions like the UK, Republic of Ireland and Australia, an organisation may be liable for pre-contractual representations in a number of ways:

  • if it amounts to a fraudulent misrepresentation
  • as an estoppel
  • if it is unjustly enriched
  • under certain statutory protections in that jurisdiction (such as the Unfair Contract Terms Act (UCTA) in the UK or the Australian Consumer Law in Australia)

Supplier contractual protections

An entire agreement clause that includes a no-reliance provision are increasingly found in the majority of IT and telecommunications contracts. Suppliers use such clauses to try to contractually protect themselves in the increasingly complex and protracted process of winning work from customers that involves numerous emails, powerpoint presentations, site visits, pitches and other telephone call and documents going back and forth.

Entire agreement clause

An example of a simple entire agreement clause is:

“This Agreement constitutes the entire agreement between the parties about the Services, and supersedes any previous agreement or representation relating to the Services.”

An ‘entire agreement’ clause can operate to exclude evidence of representations as part of the terms of the written contract. An entire agreement clause aims to ensure that the contract contains all the rights and obligations of the parties. Its purpose is to provide certainty to the parties on what terms they are agreeing to by preventing a party from relying on anything outside of the contract, such as emails or alleged conversations, which may generate additional terms or create some form of side agreement.

A recent example of the restrictive and narrow approach the UK courts are taking to the interpretation of entire agreement clauses is set out in the AXA Sun Life case.

Entire agreement clauses often form part of ‘boiler plate’ provisions at the back of the contract, and often the parties and their lawyers do not pay much attention paid to them….unless there is a dispute.

Therefor it is important for the parties to carefully consider the effect of entire agreement clauses at the time they are including them in contracts and not wait until it is too late and a dispute has arisen.

No reliance clauses

An example of a simple no reliance clause is:

The Customer warrants that it has not relied on any representations or warranties (whether express or implied) made by the Supplier other than those in this Agreement.”

A ‘no reliance’ clause aims to prevent the party relying on it from being liable for statements or representations (including misrepresentations), except as expressly set out in the contract. In other words, it tries to stop a party, usually the customer, from claiming that it was induced to enter into the contract by false pre-contractual representations.

It is always better to explicitly exclude both express and implied representations and warranties.

Know your customer

If s supplier is contracting with a consumer and the supplier wishes to include a no-reliance or other limitation clause in the contract, the supplier should bring the no-reliance provision to the attention of the customer before or at the time of contract.

However, under the laws of most common law jurisdictions it is unlikely that an entire agreement or no-reliance clause will exclude liability for fraudulent misrepresentations.

Under the Irish laws, if a contract includes a clause which purports to exclude or restrict liability for misrepresentation, the Irish Sale of Goods and Supply of Services Act 1980 renders that clause unenforceable, unless the party can demonstrate that it is ‘fair and reasonable’. This generally means that a court may find that an entire agreement or no-reliance clause which is too one-sided should be struck down for being unreasonable.

On the other hand, the courts in the Republic of Ireland will generally uphold as reasonable a limitation or exclusion clause contained in a business-to-business contract between two commercial parties of equal bargaining power who have negotiated the agreement.

Supplier checklist

As an entire agreement clause and no reliance disclaimer may have limited application, a supplier should ensure the following when tendering, pitching for work or negotiating a contract:

  • Make sure that you and your employees don’t exaggerate your capabilities
  • You and your employees should not make inaccurate or broad representations. A quick test is ‘Can you support all of your statements by appropriate examples or evidence?
  • When making oral or written representations to the customer ensure that you and your employees distinguish between factual claims and expressions of opinion.
  • Don’t assume that a detailed legal disclaimer/exclusion clause will be effective to avoid liability or cap your damages
  • Remember that no one can contract out of certain statutory prohibitions

Conclusion

An entire agreement clause and a no reliance clause are both important and can be effective in certain circumstances to protect a supplier against pre-contractual representation claims. A supplier wishing to include these provisions in a contract should carefully consider the drafting to ensure it is clear, unequivocal and appropriate for the circumstances of the deal.

 

Photo credit: Pixabay

Leave a Reply