Entire agreement clauses – and implied terms…

2 JUL 2018By:

 James Carter
 Serena Eum
 Miles Magee

Contracting parties in the energy and natural resources sector will

commonly encounter so called "entire agreement" clauses, which seek to
limit the scope of an agreement to those terms expressly recorded in the
contract.

Entire agreement clauses provide considerable comfort to contracting

parties that they will only be held liable for the written words of the contract
and not, for example, any pre-contractual statements or alleged
representations. In practice, however, where a dispute arises, the
presence of an entire agreement clause in the contract will not necessarily
prevent a party from asserting a claim which goes beyond the "four walls"
of the written contract.

Moreover, entire agreement clauses themselves are increasingly giving

rise to disputes in the energy and natural resources sector, where the
financing and supply agreements are typically long term and, as such, the
implications of a dispute over the validity of an entire agreement clause
can be serious.

In this article we provide a concise overview of the interplay between

entire agreement clauses and implied terms as a matter of English law by
reference to the recent Court of Appeal case of J N Hipwell & Son v
Szurek (Hipwell),1 in which a claimant sought to persuade the Court that
a term should be implied into a commercial contract containing an entire
agreement clause. Finally, we highlight certain practical points arising
from the law in these areas which may be relevant to energy and natural
resources businesses.

J N Hipwell & Son v Szurek

Hipwell concerned a commercial lease, although that factual background

is not of significance as the principle on which it turned is of wide
application to commercial agreements. In summary, a commercial tenant
had been forced to close down her business as a result of problems
caused by unsafe electrical wiring. She sought to recover her losses from
her landlord. In the absence of any express term in the lease requiring the
landlord to maintain and repair the electrical installations within the
premises, the tenant claimed, amongst other things, that there was an
implied term to that effect. The landlord relied on an entire agreement
clause in the contract between them, arguing that it meant that no terms
could be implied.

On appeal (the tenant having succeeded at first instance, albeit on a

different basis) the Court applied the well-established principle that a term
may be implied where it is necessary to give business efficacy to the
contract in question,2 noting that "the touchstone is always necessity and
not merely reasonableness". In that regard, the judge found that the
relevant contract was "an oddly balanced document" which imposed far
more extensive obligations on one party relative to the other, and
contained a plain and obvious gap regarding electrical installation and
supply (amongst other things). That gap was inconsistent with the
intentions of the parties, objectively assessed. Accordingly, in order to
ensure that the agreement did not lack "commercial or practical
coherence, or, in other words, as a matter of business necessity", terms
were implied to fill the gap.

In the Court's view that was an appropriate outcome despite the entire
agreement clause, which did not prevent terms from being implied into the
contract where the relevant test (i.e. business efficacy / necessity) was
satisfied.

Implied terms

The basic rationale for the implication of a term "in fact" (as opposed to
on the basis of usage or custom, a previous course of dealings, common
law or statute, where separate principles apply) is to fill a gap in the
drafting of contract in such a way as to give effect to the objective
intentions of the parties at the time of contracting. The parties' objective
intentions are those that would have been understood by a reasonable
person with the background knowledge reasonably available to the parties
when entering into their agreement.

The English law of implied terms was most recently summarised (and, to
some extent, reformulated) by the Supreme Court in Marks & Spencer plc
v BNP Paribas Securities Services Trust Co (Jersey) Ltd and anr which
decided that, in broad terms, in order for a term to be implied, it must:
  Be capable of clear expression
 Satisfy one of the two traditional tests:
o The proposed term is so obvious that it goes without saying
(i.e. the "officious bystander" test)
o The proposed term is necessary to give business efficacy to
the contract (i.e. the "business efficacy" test). The business
efficacy test involves a value judgment and, as a result, it can
be difficult to predict the outcome, especially in complex
situations. It has been said in the judiciary that:
 If a contract is effective without the proposed term, the
business efficacy test will not be satisfied. However, the
test is not one of "absolute necessity"
 A better way of putting the requirement may be that it is
only satisfied where without the term the contract would
lack "commercial or practical coherence" (being the
phrase used by the Judge in Hipwell)
 Not contradict any express term of the contract
Contracting parties often seek to argue that a particular term should be
implied into the contract on the basis of its perceived importance to the
contract as a whole. In the energy and natural resources sector, sale
agreements for natural resources may, for example, provide that the
determination of a goods inspector shall be final and binding as to quality
except in cases of manifest error.3 In such a case, a party may argue that
in order to establish whether there has been a manifest error, a term
requiring the inspector to retain a representative portion of the tested
sample should be implied into the contract. Incorporating such an implied
term may make it easier for a party to establish a manifest error and it
could therefore be described as important to the operation of the contract.
However, contractors should keep in mind that the legal tests for the
implication of terms set out above are not based on importance,
convenience or reasonableness.4

Exclusion of implied terms: the entire agreement clause

Whether or not an entire agreement clause serves (unlike the clause

in Hipwell) to exclude implied terms is dependent on a number of factors.

(i) Clear and express wording required

The first point to note is that an entire agreement clause will not operate
so as to exclude the implication of a term where it is silent as to implied
terms; clear words will generally be required if the clause is to exclude
implied terms.5

However, whether a particular implied term is excluded depends not only

on the drafting of the entire agreement clause but also on the nature of
the implied term and, in particular, whether it is considered to be "intrinsic"
or "extrinsic" to the written agreement.

(ii) "Intrinsic" implied terms

Terms of the sort implied in Hipwell on the basis of business efficacy have
been described as "intrinsic" to the written agreement in the sense that
they form part of the contract itself. As a result, the basic position as
regards these "intrinsic" implied terms is that they cannot be excluded by
an entire agreement clause, even where it includes wording purporting to
exclude implied terms in general.6

As an illustration, an entire agreement clause providing that "this

Agreement shall supersede any prior promises, agreements,
representations, undertakings or implications" (emphasis added) was not
held to be sufficient to exclude "intrinsic" implied terms by the Court of
Appeal in Axa Sun Life Services plc v Campbell Martin Ltd. However,
there is some ongoing uncertainty as to the effect of an entire agreement
clause which expressly and specifically purports to exclude "intrinsic"
terms implied on the basis of business efficacy. While the approach of the
Court in such a scenario remains to be seen, an aside by the Court of
Appeal in Axa Sun Life has left room for doubt as to whether such a clause
would be effective to exclude "intrinsic" terms in the future.7

(iii) "Extrinsic" implied terms

Conversely, other sorts of implied terms, such as those arising as a result

of a particular trade usage or custom or a previous course of dealings
between the contracting parties, may be regarded as "extrinsic" to the
written agreement in the sense that they do not form part of the written
agreement itself, but rather require external facts to be proved. Where an
entire agreement contains clear words to exclude implied terms of this
sort, it is likely to be effective.8 For example, a provision that "This
instrument contains the entire agreement of the parties […] and there is
no other promise, representation, warranty, usage or course of
dealing affecting it" (emphasis added) did operate to exclude any terms
which might have been implied on the basis of usage or a course of
dealing in Exxonmobil Sales and Supply Corporation v Texaco Ltd.

Further, while each particular clause will be construed separately, it is

arguable that "extrinsic" implied terms of this sort can be excluded by an
entire agreement clause which includes only a general exclusion of
implied terms.9

(iv) Terms implied by statute

Subject to the applicable statutory and common law restrictions on

limitations of liability, it will generally be possible to exclude terms which
may be implied by statute so long as the entire agreement clause contains
clear words to that effect.

Conclusions

Hipwell serves as a useful reminder that a court will not be deterred by the
presence of an entire agreement clause if it considers that there are
obvious gaps in the contract which need to be filled in order to preserve
its business efficacy. Entire agreement clauses are not the panacea which
their express wording may suggest.

However, in order to reinforce the protection provided by an entire

agreement clause, parties may wish to bear the following in mind:

 It is important to use express language which is as clear and specific

as possible in relation to the types of implied terms which the parties
are seeking to exclude
 Where the parties intend to exclude the implication of any terms on
the basis of business efficacy, express and specific wording is
especially important, although there is some doubt as to whether or
not it is possible to exclude such "intrinsic" implied terms at all
 So far as "extrinsic" terms are concerned, such as those implied on
the basis of a particular trade usage or custom or a previous course
of dealings, it remains prudent (albeit not necessarily essential) to
refer specifically to the sort of term to be excluded
The drafter's quandary is that it will often be difficult to predict whether the
implication of a particular sort of term in any future dispute will be to its
benefit or detriment.
As such, it is recommended that careful thought is given to the wording of
any entire agreement clause and that appropriate advice is taken in that
regard. Although limited in some respects, entire agreement clauses
remain valuable as a means of providing parties with additional certainty
regarding the nature and scope of the agreement being reached, as well
as a degree of protection against unwelcome arguments that statements
made during the contractual negotiations form part of the final agreement
or even a side agreement.

1
J N Hipwell & Son v Szurek [2018] EWCA Civ 674.
2
Per Marks & Spencer plc v BNP Paribas Securities Services Trust Co
(Jersey) Ltd and anr [2016] AC 742.
3
Veba Oil v Petrotrade [2002] 1 LR 295.
4
Per Exxonmobil.
5
Per Harrison and others v Shepherd Homes Ltd and others [2011]
EWHC 1811; Axa Sun Life Services plc v Campbell Martin Ltd [2011]
EWCA Civ 133.
6
Per Axa Sun Life; Exxonmobil Sales and Supply Corporation v Texaco
Ltd [2003] EWHC 1964 (Comm); Barden v Commodities Research
Unit [2013] EWHC 1633.
7
Per Axa Sun Life, [41].
8
Per Exxonmobil.
9
Per Axa Sun Life, [42].