#14990 - Interpretation - Contract Law

Having determined that the parties have reached a binding agreement, we have to consider the content of the agreement.

Where it is proved that the parties to the contract intended that all the express terms of the agreement should be as recorded in the document, evidence will be inadmissible if it is tendered only for the purpose of adding to, varying, subtracting from or contradicting the express terms of that contract. (Law Comm No. 154)

Treitel (2011) notes that this definition only applies where both parties share a common intention with regard to the term in question. In most cases in which the rule is invoked, one party alleges, while the other denies, that terms not set out in the document were intended to form part of the contract. In such cases, if it looks like a complete contract to one of the parties taking a reasonable view of it, then the rule will prevent the other party from relying on extrinsic evidence to show that the contract also contained other terms.

(ii) Exceptions

Extrinsic evidence is admissible, e.g.,

• to show that the contract is invalid because of misrepresentation, mistake, fraud, duress etc

• to show that the document should be rectified

• to prove the existence of a collateral agreement

(iii) Justifications

(1) Safeguards the primacy of the agreed text and promotes certainty

(2) Effectuates the finality intended by the parties in recording their contract in written form

(3) Eliminates great inconvenience and troublesome litigation in many cases

(iv) Competing Considerations

The rejection of evidence of extrinsic terms that were actually agreed may cause injustice to the party relying on those terms, while the reception of such evidence may cause injustice to the other party, if he reasonably believed that the apparently complete contractual document formed an exclusive record of the contract.

The question is which, on balance, is the greater injustice. Treitel (2011) argues that where the evidence is rejected because the party relying on it cannot overcome the presumption arising from the fact that the document LOOKS like a complete contract, the greater injustice would appear to lie in the exclusion of the evidence; for the presumption seem to be based on the nature and form of the document, rather than on any actual belief of the party relying on it, that it formed an exclusive record of the contract.

(vi) Current position and consequences

There has been a commercial reaction against this drift towards admissibility of extrinsic evidence, because it is said to promote uncertainty. The purpose of ‘entire agreement’ clauses is generally to exclude evidence that the parol evidence rule would probably have excluded in the past.

Entire agreement clauses are intended to prevent the parties to a written agreement from raising claims that statements made during contract negotiations which are not included in the final agreement (pre-contractual statements) constitute additional terms of the agreement or some kind of side agreement (for example, a collateral warranty).

The typical entire agreement clause consists of a number of different elements:

• Entire agreement statement: a statement that the parties have agreed that the terms of the contract between them are to be found in the document containing that statement and nowhere else.

• Exclusion of liability for misrepresentation. Most entire agreement clauses include one or more of the following:

  • Non-reliance statement. An acknowledgement by the parties that they have not relied on any representation which is not set out in the agreement. This statement is intended to prevent claims in misrepresentation from arising in respect of pre-contractual statements.

  • Express exclusion of liability. A statement excluding liability for misrepresentation. The limitation may relate to liability for pre-contractual statements, statements that are set out in the agreement, or both.

  • Restriction of remedies. A statement limiting remedies for misrepresentation to those available for breach of contract. This excludes the remedy of rescission. It also changes the measure of damages available.

• Express carve-out in respect of fraud. A confirmation that the clause is not intended to exclude liability for fraudulent misrepresentation. This wording is intended to prevent the courts from finding that the restriction of liability for misrepresentation is unreasonable.

Parties sometimes argue that an entire agreement statement excludes terms that would otherwise be implied into the agreement. However, there is an issue over whether implied terms can sensibly be seen as separate from the contract in the same way as a collateral warranty or a pre-contractual representation, or whether they should be regarded as an unexpressed part of the contract itself.

From the case law, it seems that:

• Implied terms are not excluded where an entire agreement statement is silent on their inclusion/exclusion (Axa v Campbell Martin [2011).

• If an entire agreement statement uses clear words to exclude implied terms, this will probably exclude terms which would otherwise be implied into the contract as a result of matters that are "extrinsic" to the written agreement. The phrase "extrinsic implied terms" was used by Stanley Burnton LJ in Axa; he did not expand on what the term meant, but the ordinary reading of the phrase suggests that it means terms which require extrinsic facts to be proved, such as trade custom or usage.

• Terms which would otherwise be implied into the contract to give it business efficacy (intrinsic implied terms) are not affected by a general exclusion of implied terms (Axa).

• With regard to the various statutory implied terms, clear express wording is required to exclude those terms (e.g. s55 of the Sale of Goods Act 1979).

If the entire agreement refers expressly to intrinsic implied terms being excluded, this might, according to Stanley Burnton LJ in Axa, be effective. However, it is not clear how a term that is necessary to make the express terms of the contract work can be excluded in practice.

An entire agreement clause will not prevent a party from bringing a claim for rectification on the basis that the document does not reflect what was actually agreed (Surgicraft v Paradigm [2010])

Although a statement is not part of the main contract, the court may hold that it is a term of a collateral contract. The collateral contract will add to or even contradict the terms of the main contract.

• The court will only give contractual effect to a separate oral/written promise if the court thinks that it qualified as a term, as opposed to a mere representation, based on what the parties intended, judged objectively.

The effect of an entire agreement clause in the main written contract is to rule out arguments about collateral contracts (Inntrepreneur Pub v East Crown [2000]). If the contract is caught by UCTA, the clause may be subject to a requirement of reasonableness under s3(2)(b).

Incorporation by Signature

(i) Rule

If one party has signed a contractual document, he is bound by the terms contained in that document (L’Estrange v Graucob [1934]).

(ii) Exceptions

1. Non est factum: a party may be able to deny that the document which he has signed is his deed if he is unable, through no fault of his own, to understand the document without explanation

2. Inducement to sign by fraud or misrepresentation

(3) Signed document does not purport to have contractual effect. It was held in Grogan v Robin[1996] that you will not be bound by a document that you have signed if the type of document is not one that ‘a reasonable man would expect to contain, relevant contractual conditions’

• Ie signing of a timesheet in this case was not viewed as a reasonable man expecting to contain relevant contractual information, as a timesheet is an administrative document

(iii) Assessment

1. Artificiality of the rule

Lord Devlin in McCutcheon v David [1964] regarded the elevation of the party’s signature to crucial status as artificial. It should make no difference that the document has been signed. Certain documents are not meant to be read, and signature is merely a formality akin to a handshake.

Lord Denning did not regard the commercial certainty justification for the L’Estrange principle as compelling. In some cases it may be unreasonable to expect the ordinary consumer to read and understand the terms of a complex contract before signing it to purchase a product.

2. Analysis on the basis of the objective theory of contract

Spencer (1973) argues that the L’Estrange rule is inconsistent with orthodox offer and acceptance principles. Signing a document is just one way of accepting an offer and the principle of objective interpretation dictates that if it does not reasonably appear to the offeror that you are accepting a particular term by signing a contract, then you should not be taken to accept the term, so the rule in L’Estrange seems too absolute.

• The Ontario CA in ...