Entire Agreement Clause Misses the Mark for Excluding Misrepresentation

The case of AXA Sun Life Services Plc v Campbell Martin Limited and Others [2011] EWCA Civ 133 has served as a useful reminder that an entire agreement clause must be completely unambiguous if it is to succeed in excluding liability for misrepresentation.

An entire agreement clause is a standard clause commonly found in a contract which seeks to prohibit the parties from relying on anything, such as representations or statements (and particularly those made during the course of the negotiation of the contract), apart from that which is expressly stipulated within the contract itself.

A significant number of contractual disputes concern whether an entire agreement clause has succeeded in preventing a party from being pursued for misrepresentation.

The AXA case involved insurance contracts between AXA Sun Life Services plc (the claimant) and several insurance advisers contracted on an agency basis (the defendants). Each contract contained the same entire agreement clause.

Following the termination of the agreements, the claimant brought proceedings for damages and the defendants alleged that they had been induced to enter into the agreements by negligent misrepresentations and collateral warranties given by the claimant.

On appeal, the issue in relation to the entire agreement clause was whether its true construction precluded the defendants from relying on the misrepresentations and/or breaches of collateral warranty.

The parties had agreed that the clause was effective in excluding liability for the alleged breaches of collateral warranty, but the Court of Appeal found that the clause was not capable of excluding liability for misrepresentation. The Court of Appeal found it important to differentiate between the two areas, defining representations as representations of fact, as opposed to collateral warranties that were described by the Court of Appeal as promises.

The flaw within the entire agreement clause was that it was based on a “boilerplate” precedent and was not sufficiently specific as regards misrepresentations. Whether the clause could exclude liability for misrepresentations had to depend upon the precise wording within the clause.

The clause made reference to “representations” but not specifically to “misrepresentations”. This was the first element that caused the Court of Appeal difficulty. It was loath to imply that the former could also include the latter as a matter of natural construction. Secondly, in order to effectively exclude misrepresentations, the Court of Appeal felt that the clause should have made specific reference to the word “misrepresentation” so as to give the clause unequivocal meaning. Indeed, the Court declared that such specific wording was the only way to successfully exclude liability for misrepresentations.

The Unfair Contract Terms Act 1977 (UCTA) may also be applicable to an entire agreement clause. In particular: (i) if one party is dealing as consumer and the other on its standard terms of business; and (ii) if the pre-contractual representation or promise affects the performance that is reasonably expected of the consumer party to the contract (see UCTA s.3(2)(b)(i)).

In the event that UCTA is applicable to an entire agreement clause, it must therefore also satisfy the test of reasonableness in order for it to be enforceable.

It is consequently advisable to adopt a dual approach when drafting or assessing the efficacy of an entire agreement clause. Firstly, it must be sufficiently specific, unambiguous and wide enough to successfully exclude liability for misrepresentation. Secondly, if UCTA is applicable the clause must be sufficiently “reigned-in” to satisfy the reasonableness test in order to ensure its enforceability.

The Court of Appeal in the AXA case found the entire agreement clause to satisfy the reasonableness test within UCTA. This was, however, within the context of the clause excluding liability for collateral warranties only and not excluding liability for misrepresentation. Further thought must therefore be given to the drafting that is necessary to satisfy the reasonableness test whilst successfully excluding liability for misrepresentation. This is a delicate balancing act.