UK: Share Purchase Agreement: Interpretation Of Entire Agreement Clause

A recent High Court decision is a reminder of the need for care when drafting an entire agreement clause intended to exclude liability for misrepresentation as well as denying contractual force to statements other than those in the final agreement.

Background

There have been various cases in which a party, as a defence against liability for a claim for misrepresentation, has tried to rely on an entire agreement clause that denies contractual force to statements other than those in the final agreement. However, the courts have consistently rejected this argument, holding that there must be clearer words negating liability to exclude liability for misrepresentation. Liability for misrepresentation arises if

• one party makes a false statement;
• the other party relies on that statement in deciding to enter the agreement; and
• that other party suffers loss as a result.

Liability for misrepresentation contrasts with liability for breach of contract.

Facts

The buyer of shares alleged that the seller had misrepresented the size of the target company's liabilities. The alleged misrepresentation was in a spreadsheet in the virtual data room created by the seller to enable the buyer to carry out its due diligence of the target. This disclosed target liabilities of approximately £6.6 million whereas the buyer alleged that its actual liabilities were more than £10 million.

The seller argued that the entire agreement clause in the share purchase agreement, when construed in the context of the wider agreement, excluded liability for misrepresentation. The entire agreement clause provided:

"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."

The High Court found that, even though there were no words specifically excluding liability for misrepresentation in this clause, the parties had intended to exclude misrepresentation claims. In support of this conclusion, the court looked at the share purchase agreement as a whole, as well as the language of the entire agreement clause. In particular, the court relied on the following factors:

• The share purchase agreement also included an indemnity from the seller in favour of the buyer against all losses suffered or incurred by it to the extent that the target's liabilities exceeded the disclosed £6.6 million. The court decided that this showed the parties' intention to deal with claims through contractual procedures and not through misrepresentation.
• The language of the entire agreement clause was deliberately wide and included matters of a potentially contractual nature and those of a less contractual nature, including representations.

Comment

It is important to view this decision in its factual context. Although the court found that the parties intended to exclude liability for misrepresentation, the decision stressed the importance of the context to this interpretation. The same entire agreement clause in another contract might not have the same effect.

A much safer course for a party wishing to exclude liability for misrepresentation is to deal with this issue directly when drafting the entire agreement clause. In other words, the clause should not simply set out what constitutes the agreement between the parties, but should go on specifically to exclude liability for misrepresentation. Typically such a clause provides that the relevant party has no liability for, and no other party has relied on, any representation not expressly set out in the agreement. It also limits the remedy for a representation expressly set out in the agreement to damages for breach of contract.

NF Football Investments Ltd and another v. NFCC Group Holdings Ltd and another [2018] EWHC 1346 (Ch)

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