Negotiations can be lengthy and laborious (just ask Theresa May), but they are an important part of any legal transaction. However, it is unlikely that everything said in those negotiations will form part of the final agreement. An entire agreement clause is aimed, primarily, at preventing parties to a contract from claiming that statements made during negotiations form additional terms of the final agreement.
Entire agreement clauses have been the subject of extensive analysis in the courts and so ensuring they are well drafted will make them more likely to achieve their purpose. A properly constructed entire agreement clause is effective in preventing any additional terms forming part of the agreement or from having contractual effect.
One judge summed it up well: “The purpose of an entire agreement clause is to preclude a party to a written agreement threshing the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim… for such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere”.
What’s in a clause?
An entire agreement clause will generally include a statement that the terms of the contract (or contracts) create the entire agreement between the parties relating to their subject matter. And it may end at that. In many contracts, such as those relating to corporate acquisitions, they usually include more detail, and it is common to see entire agreement clauses with elements that address misrepresentation – for example, that the parties are not relying on any representations made before the agreement was entered into and, in turn, that no party is liable for any misrepresentation.
Entire agreement clauses in finance documents
In finance documents, the lender is generally the party most likely to be relying on statements made before a document is created and so it will be less likely to want an entire agreement clause included, although there have been cases brought by borrowers relating to alleged pre-contractual statements and assurances made by bank managers so it’s not all one-sided. However, this may be why there is not a general entire agreement clause in the LMA leveraged or real estate finance loan agreements.
The LMA does however use an entire agreement clause to ensure that the confidentiality provisions trump any previous confidentiality agreement between the parties. Ensuring that the only confidentiality arrangements are those drafted in an LMA based loan agreement is important to lenders as market standard permitted disclosures are necessary and expected on syndication and transfer. To review on a deal by deal basis what can and cannot be disclosed would be impractical.
Where a general entire agreement clause is included in a facility agreement it should refer to the entire agreement being contained in all of the finance documents and not just the facility agreement. It is important that key documents are defined as finance documents to prevent them being excluded from the scope of the clause. For example, if you have an entire agreement clause and inadvertently exclude the fee letter then you have a problem.
Entire agreement provisions are often seen in mandate letters where they generally make clear, as they should, that fee letters and heads of terms form part of the entire agreement.
Although not in the LMA intercreditor agreements, it is not uncommon to see an entire agreement clause in priority agreements between creditors. Generally this should be treated with caution as it is not uncommon for junior creditors to wish to enter into additional priority arrangements between themselves.
Case law provides a host of examples of entire agreement clauses being examined and often results in consequences that at least one of the parties may not have intended or expected. The guidance we can take from that is that the clearer the clause is then the more likely it is that it will have the intended result. So these clauses should not be treated as simple ‘boilerplate’ provisions not to be reviewed or negotiated. They should be looked at in the context of the transaction, the documents involved and the statements being relied on to ensure they reflect the understanding of all the parties.