Excluding misrepresentation and entire agreement clauses

The high court recently considered the interpretation of an entire agreement clause and excluding claims for misrepresentation in the recent judgement of Fawaz Al-Hasawi (“Mr Al-Hawawi”) and Nottingham Forest Football Club (the “Club”) & Others (2018).

An entire agreement clause is a standard term used in contracts to clarify and limit what has been agreed to particular contractual documents to clearly capture the “entire agreement” between the parties. This clause generally excludes any other potential agreements, understandings or promises made through other modes such as by email or verbally such as over the phone, or in person. The clause provides certainty to the parties as to what terms have been included and excluded leading up to the conclusion of negotiations, and subsequently to limit liability for any representations made before a formal contract is entered into.

THE FACTS

The Club was heavily in debt, so Mr Al-Hasawi through his company vehicle NFFC Group Holdings Ltd (the “seller”) agreed to sell the Club for a nominal consideration of £1 to Mr Evangelos Marinkis (the “buyer”). A share purchase agreement (the “SPA”) governing the sale was entered into.

As part of the due diligence of the sale, the seller provided a spreadsheet that laid out the amount of liabilities that the club owed. The spreadsheet described liabilities of just under £6.6 million when actual liabilities turned out to exceed £10 million. Additionally, the SPA provided that the seller would indemnify the new owners of the Club against any liabilities if they exceeded £6.6 million.

The buyer subsequently claimed that the information provided in the spreadsheet constituted a misrepresentation, stating reliance on the inaccurate figures when deciding whether to buy the Club or not. Additionally, the buyer claimed under the indemnity for the difference between the actual liabilities and what was represented which was approximately £3.8 million.

The seller applied to the court to strike out the misrepresentation claim on the basis of the SPA’s entire agreement clause. The seller argued that the buyer could not bring a claim of misrepresentation as this had been expressly excluded in the clause, and read as follows:

“This agreement (together with the documents referred to in it) constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter”. 

Moreover, the seller argued that the SPA contained a contractual procedure for dealing with misrepresentations of the Club’s liabilities, as the SPA included indemnities in favour of the buyer in this scenario. The seller argued that when referring to ‘representations’ in the entire agreement clause the parties had intended to exclude all liability for misrepresentation and that this combined with the indemnities given, illustrated that the parties had agreed on and intended for specific remedies for potential misrepresentations, instead of a general claim at law for misrepresentation.

THE OUTCOME

The court found that the above clause was insufficient to exclude liability for misrepresentation. This is because the clause did not expressly exclude all types of misrepresentation claims, and although the parties had provided for losses to be recovered under an indemnity clause, this did not automatically mean that they intended to exclude other remedies.

The court distinguished between two types of clauses, one that excluded prior events from being relied upon for breach of contract claims (e.g. draft and warranties) and one that excluded prior events from being relied upon for non-contractual claims (e.g. negotiations and assurances), such as claims in tort for misrepresentation. One clause may reference both types of claims but this must be clearly stated. The issue was that the entire agreement clause only provided for one type of claim, a breach of contract claim. Therefore, the clause did not by implication exclude other types of claims and as such, liability in tort for misrepresentation had not been clearly excluded.

NEXT STEPS

This case is a reminder that parties should not always rely on standard entire agreement clauses to exclude liability for all types of misrepresentation. When drafting entire agreement clauses, very clear wording is needed to exclude both contractual and non-contractual claims in misrepresentation. Parties must determine the exact scope of the agreement and expressly set out their intentions. Consider using “non-reliance” clauses to prevent a party from claiming reliance on any statement when entering into an agreement rather than just relying exclusively on an entire agreement clause.

For more information on or any guidance or advice in drafting your commercial contracts, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.

 

0 Comments

Leave a reply

Your email address will not be published. Required fields are marked *

*

CONTACT US

We're not around right now. But you can send us an email and we'll get back to you shortly.

Sending

©2019 Cleveland & Co

Log in with your credentials

Forgot your details?