India: Entire Agreement Clause: Founders Be Aware!

Last Updated: 23 May 2019
Article by Krishan Singhania and Srishti Singhania

An entire agreement clause aims to ensure that all the terms and conditions governing the rights and obligations of the parties are set out in a single contractual document, superseding all prior negotiations and agreements. The goal of such a clause is to prevent contracting parties from relying upon statements or representations made by them during negotiations for the purposes of claiming that they had agreed to something different than what is stated in the contract at the time of a dispute. A standard entire agreement clause may read as under:

"This contract contains the final and entire agreement and understanding between the Parties and is the complete and exclusive statement of its terms. This contract supersedes all prior agreement and understandings, whether oral or written, in connection therewith."

However, entire agreement clauses have become "boilerplate" clauses which are often inserted into contracts as a matter of routine and which are neither negotiated nor considered much by the contracting parties. Contracting parties usually ignore or are unaware of the unforeseen and unintended consequences of these clauses. These clauses come into question when a dispute arises between the parties with respect to the terms of the contract.

We have seen the interpretation of the entire agreement clause coming up when the parties have entered into multiple agreements and there are contradictions in the clauses of the latest agreement and the prior agreement and the latest agreement may supersede the prior agreement by virtue of entire agreement clause even though the parties may not have foreseen/intended such a scenario. For example, in case of start-ups, the founders of a start-up enter into a founders' agreement and thereafter upon getting investments enter into a shareholders' agreement with the investor. Many a times both the shareholders' agreement and founders' agreement cover the same subject matter that is restrictions on share transfer, governance and management, exit clauses etc. and sometimes both these agreements have contradicting provisions. In such a situation , the shareholders' agreement may supersede the founders' agreement by virtue of the entire agreement clause and this sometimes affects the rights and obligations of the founders amongst each other as well. Thus, under this article we aim to analyse the effectiveness and limitations of the entire agreement clause and suggest drafting tips to safeguard the interests of the contracting parties.

Impact on admissibility of extrinsic evidence

The general rule is that the entire agreement clause excludes parties to lead any oral evidence to prove the terms of the contract1 since the parties have by the entire agreement clause expressed their intention that the document is to contain all the terms of their agreement2and this supports the rule of parol evidence as per Section 92 of the Indian Evidence Act, 1872 ("IEA")3. However, there are certain exceptions to this general rule. When the contract does not contain all the terms between the parties and the contract is silent with respect to the other terms then the parties may lead oral evidence of their negotiations to help interpret or supplement the contract4. However, these other terms must not be inconsistent with the written contract.5 Further, extrinsic evidence may be lead to explain ambiguities on the face of the contract, but not in cases when the clauses in the contract are unambiguous.6

Extrinsic evidence may also be admissible for the purpose of interpretation of terms of the contract, even though the contract may have an entire agreement clause. In the case of Proforce Recruit Ltd v. Rugby Group Ltd.7, the Court of Appeal held that by incorporating the entire agreement clause the parties intended to exclude extrinsic evidence for the purpose of ascertaining the contents of a contract or setting up a collateral or side contract, but not for the purpose of ascertaining the meaning of a contractual term by referring to prior representations, agreements, negotiations and understandings between the parties. In this case an employment agency entered into a contract with a customer for supplying labour personnel and cleaning equipment. During the fixed period of the contract, the employment agency would have "preferred supplier status" with respect to the customer. However, the contract did not define the term "preferred supplier status". A dispute arose when the customer contracted with another agency for labour needs and the Court had to determine the meaning of "preferred supplier status". In such a situation, the Court of Appeal relied upon extrinsic evidence to interpret the undefined term, even though the contract had an entire agreement clause. Even though admissibility of extrinsic evidence for interpreting the terms of a contract will depend upon the facts of the case, one cannot exclude extrinsic evidence for the purpose of interpretation just because the contract contains an entire agreement clause.

Further, extrinsic evidence is admissible when the validity of the contract is in question itself. Section 92 proviso (1) of the IEA substantiates this rule and provides that oral evidence will be admissible to show that a contract is void or voidable either by reason of fraud or duress or illegality of the subject-matter.8Oral evidence is also admissible to prove fraudulent misrepresentation.9 Thus, an entire agreement clause will not impact admissibility of extrinsic evidence when it comes to proving liability of a contracting party for misrepresentation or for proving un-enforceability of a contract.

Implied terms

The general rule is that an entire agreement cannot exclude terms implied by custom or usage. This is also supported by the principle laid down under proviso (5) of Section 92 of the IEA. A trade usage or custom is so well know and properly understood with reference to the business that the parties are presumed to have their contract with tacit reference to it and intended to be governed by it even though a party may not be actually aware of the custom or usage10. However, evidence of a custom or usage cannot be admitted to vary or contradict the contract either expressly or by implication.11

Furthermore, the courts have also, in certain exceptional cases, held that the entire agreement clause can exclude terms implied by custom or usage.12 However, it is important to carefully read the wordings of the entire agreement clause to ensure that it was the intention of the parties to exclude implied terms. In the case of Exxonmobil Sales and Supply Corporation v. Texaco Limited13, the entire agreement clause expressly stated that the contract contained the entire agreement between the parties with respect to the subject matter and terms implied by usage were not incorporated into it.

Rectification

The entire agreement clause does not have any impact on rectification and allows parties to lead extrinsic evidence to show that a clause was missed out and that the contract ought to be rectified.14This is in consonance with the law laid down under Section 92 proviso (1) of the IEA as well. Oral evidence can be admitted for correcting typographical errors, genuine and accidental mistakes such as incorrect description of properties15 but it cannot be admitted for changing the entire contract.16However, it is open to the Court to allow oral evidence of mutual mistake of fact to vary the terms of a contract.17Further, oral evidence is also admissible in case the mistake is due to innocent misrepresentation.18

Prior Agreements

The entire agreement clause indicates that the agreement records all rights and obligations of the parties in toto. If any other terms and conditions were agreed between the parties prior to entering into the present contract then the parties were free to record such prior terms and conditions in the present agreement19. Thus, the entire agreement clause, as a general rule, supersedes all prior agreements which have not been expressly incorporated in the present agreement. In the case of Neelkanth Mansions and Infrastructutes Private Limited and Ors. v. Urban Infrastructure Ventures Capital Limited and Ors.20, the Bombay High Court did not admit oral evidence and held that as the shareholders' agreement did not refer to any terms of the supplemental agreement by virtue of the entire agreement clause the entire subject matter agreed between the parties was contained only in the shareholders' agreement.

However in certain cases, prior agreements may prevail even though the present agreement contains an entire agreement clause due to the doctrine of estoppel by convention.21The doctrine of estoppel by convention means that a party is "estopped" from arguing that a contract is not altered by the conduct of the parties, even though the contract contains an "entire agreement" clause.

In the case of Mears Ltd. v. Shoreline Housing Partnership Ltd.22, Mears entered into a contract for repair and maintenance of the several thousand properties operated by Shoreline. However, it was only six months after Mears started working for Shoreline that the repair and maintenance contact was finalized. For the six-month period before signing of the final contract, Mears was paid on the basis of composite rates. However, the final contract had a clause, which stated that, a schedule of rates (which was different from the composite rates) would operate retrospectively even for the said six-month period. Towards the end of the six-month period, Shoreline withheld some £300,000 from Mears and claimed that Shoreline had to pay Mears on the basis of the schedule of rates and not the composite rates and had been overpaying Mears for the six-month period. While Shoreline took the defense of the entire agreement clause in the final contract, Mears alleged estoppel by convention. The Court held that the entire agreement clause did not exclude the doctrine of estoppel of convention, either by its express wording or by way of interpretation. As the parties shared an assumed state of facts and acted upon the same for the six-month period before the contract was finalized, it was wrong to allow Shoreline to enforce the terms of the final contract and avoid its pre-contractual obligations.

Conclusion: Drafting tips!

Some drafting tips to ensure that the interest of the contracting parties is safeguarded are as follows:

  • Expressly mention what the parties want to include and exclude from the contract. For example, in case the contracting parties want to rely upon the pre-contractual statements or representations then they should specifically include it in the contract itself.
  • In case the contracting parties want to exclude any implied terms of custom or usage from governing their legal relationship under the contract, they should explicitly mention the same.
  • In case the parties intend to rely upon any prior agreements they should incorporate these prior agreements in the latest contract so that the prior agreements are not excluded by the entire agreement clause.
  • It is also important to incorporate business practices, which differ from the terms of a long-term contract, when restating or amending such long-term contracts which contain an entire agreement clause. For example, if the parties have accepted the practice of issuing an invoice after 30 days even though the contract states 15 days then when amending the contract the parties should change the terms of the contract else it can be argued that the parties do not want to rely upon their business practice of 30 days by virtue of the entire agreement clause.

In conclusion, it is important not to consider the entire agreement clause as a boilerplate clause, but to consider the wording of this clause carefully. Drafting such a clause with clarity and precision and with appropriate professional help will avoid frivolous and counter-productive litigation and also protect the founders or promoters from any hardships.

Footnotes

1. Martin D. Fern, WARREN'S FORMS OF AGREEMENTS – BUSINESS FORMS, Vol. 5, 1997, Mathew Bender & Co., S. 101.1.01.

2. CHITTY ON CONTRACTS, Vol. 1, 27th ed., 1994, Sweet & Maxwell, 1994, p. 606.

3. Tamil Nadu Electricity Board v. N. RajuReddiar AIR 1996 SC 2025.

4. Chimanram V. Divanchand v. Diwanchand ILR 56 Bom 108.

5. Id.

6. Bellefonte Re-Ins. Co. v. Argonaut Ins. Co. 581 F. Supp. 241 (S.D.N.Y. 1984).

7. [2006] WL 2794075, paras. 41 and 59 (Court of Appeal).

8. Cutts v. Brown, ILR (1880) 6 Cal 328, 338.; Harmesh Kumar v. Maya Bai, AIR 2006 P&H 1, 8, para 23.

9. Balaramireddigari v. ThippaReddi AIR 1949 Mad 301.

10. ManaVikram v. Rama Pathar ILR 20 Mad 275; Ram Deo v. Firm Birdhichand Sumermal ILR (1970) 20 Raj 427.

11. Mahindra and Mahindra v. Union of India AIR 1979 SC 798.

12. Exxonmobil Sales and Supply Corporation v. Texaco Limited [2003] EWHC 1964 (Comm).

13. Id.

14. JJ Huber (Investments) Ltd. v. Private DIY Co. Ltd. [1995] E.G.C.S 112.

15. RikhiramPyarelal v. Ghasiram AIR 1978 MP 189.

16. Gujurat Electricity Board v. S.A. Jais& Co. AIR 1972 Guj 192.

17. Supra note 4.

18. Id.

19. Neelkanth Mansions and Infrastructutes Private Limited and Ors. v. Urban Infrastructure Ventures Capital Limited and Ors., Commercial Arbitration Petition No. 13 of 2017, Bombay High Court, decided on 7th December 2018.

20. Id.

21. Mears Ltd. v. Shoreline Housing Partnership Ltd. [2015] EWHC 1396 (TCC).

22. Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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