The whole deal

When parties enter into a written contract, a key consideration is to put their respective rights and obligations on a definite footing. Occasions arise, however, when the snapshot captured in a document bears scant resemblance to the image one or both parties had in mind.

Mechanisms may be available on application to the court to remedy such inconsistencies. But what is the situation where a written contract clearly states that it "constitutes the entire understanding between the parties" in relation to the subject matter of the contract and "supersedes all prior agreements, negotiations and discussions between the parties relating to it", or words to that effect? Such provisions are known as entire (or whole) agreement clauses. Does such language make a contract impervious to rectification?

Contemporary entire agreement clauses owe their genesis to s 1(3) of the Contract (Scotland) Act 1997, which implemented Scottish Law Commission Report 152 (Report on Three Bad Rules in Contract Law). An article from that time briefly considered whether rectification could be excluded by a clause in a written contract.

There, it was suggested that "it will simply not do to offer - as the Scottish Law Commission do [at para 2.29 of their report] - rectification as a means of circumventing entire agreement clauses where these are said not to be 'an accurate reflection of the agreement between the parties'. Either there is finality or there is not; to suggest otherwise would seem to undermine the certainty which the commission seek to introduce" (Kenneth Campbell, "Three bad rules of contract rectified?" 1997 SLT (News) 225 at 226).

Jurisprudence from Scotland and England suggests that this view no longer holds sway.

Lessons from England

Beginning with a recent case in the High Court in England, Surgicraft Ltd v Paradigm Biodevices Inc [2010] EWHC 1291 (Ch) was a dispute between a UK manufacturer and an American distributor, who had concluded a fairly complex commercial arrangement in a time-pressured environment.

The hotly contested issue was the distributor's entitlement to a "kicker payment", a compensation payment in the event the manufacturer's business was sold and the agreement terminated after the distributor incurred the costs of establishing a distribution chain.

Both parties knew this was a key issue. All the preliminary drafts of the contract reflected the need for a kicker payment but, owing to some toing and froing in the lead-up to a key joint product launch in Chicago, there was much confusion about which draft was being amended in the final stages of negotiation. In the early hours of the day of signing, the distributor marked up a draft with renumbered clauses, working to his lawyer's comments from the previous day on a version that did not correspond to the document in front of him, in such a way that the final draft did not adequately provide for a kicker payment.

The parties duly signed the agreement and began their formal association with a successful product launch. Continuing commercial discussions and a subsequent tidying-up of the contract seemed to point to an enforceable obligation to pay compensation. However, some four years on, the manufacturer terminated the contract in circumstances that could have kicked, yet claimed no compensation was payable.

The express terms of the contract favoured the manufacturer. Everything else seemed to favour the distributor. At clause 18 of the contract there was an entire agreement clause in the terms set out in the introduction above, but the judge felt this was no bar to ordering rectification. He drew the principles for rectification from Lord Hoffmann's swansong in the House of Lords (Chartbrook Ltd v Persimmon Homes Ltd [2009] 3 WLR 267), a case that has prompted much analysis: see, e.g. Janet O'Sullivan, "Say what you mean and mean what you say", CLJ 2009, 68(3) 510.

In the judge's view, the clause was intended to limit possible contractual claims arising from dealings outside the contract. A claim for rectification, in contrast, "proceeds on the basis that the parties have made a mistake in expressing their true agreement, a mistake which infects a clause like clause 18 as much as any other aspect of the agreement".

Drawing from an earlier case, J J Huber Ltd v The Private DIY Company Ltd (1995) 70 P & CR D33, it was observed that "a term that says 'all the terms are in the document' (which is, essentially what an entire agreement clause does) cannot be read as meaning 'all the terms are in the document when it is in the wrong form'". Nor was the judge distracted by a separate clause on the acceptance of all clauses in the agreement. The kicker payment applied.

Application in Scotland

Scots law also allows rectification of contracts, through ss 8 and 9 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. Scots authority on entire agreement clauses is not as plentiful as English: one article drew entirely on English cases when analysing the interaction of such clauses with the Unfair Contract Terms Act 1977 (Andrew Bowen, "Threshing through the undergrowth", 2004 SLT (News) 37). The lack of authority may also be linked to the relative youth of such clauses, entering as they are their troublesome teenage years.

Such coverage as has been achieved is illustrative. A recent clue as to treatment of entire agreement clauses can be found in Caledonian Environmental Services plc v Degrémont SA and AMEC Capital Projects Ltd [2010] CSOH 73. At one point counsel tentatively introduced an argument that the possibility of rectification of a contract (dealing with responsibility for connections at a sewage works) was excluded by such a clause. Lord Glennie opined (para 62) that "sensibly he did not press this point, recognising as he did the circularity of the argument".

Further Scottish analysis can be found in MacDonald Estates plc v Regenesis (2005) Dunfermline Ltd 2007 SLT 791, where, at para 178, it was observed that if a document fails to express accurately the common intention of the parties, "that fact is not altered by the presence of the entire agreement clause: a defectively expressed document cannot, as it were, haul itself up by its own bootstraps". (See also Hector MacQueen and Joe Thomson, Contract Law in Scotland (2nd ed, 2007) at 3.10.)

Limiting effect

Is this the death knell for entire agreement clauses? It would seem not. As already alluded to, they have a clear use in ensuring that any vague collateral rights ancillary to a contract are controlled. This is consistent with the dicta of Lord Reed in MacDonald Estates. The quote extracted above continues: "I would in any event interpret the clause as being intended to preclude the establishment of a collateral contract or term, rather than to preclude the rectification of any defects in expression which might be present in the document itself."

A properly drafted clause will operate to prevent a judge from referring to any pre- or post-contractual negotiations, travelling drafts of documents, oral discussions or written statements should a dispute reach court (other than, needless to say, a dispute about whether a contract is defectively expressed and requires rectification). It will limit the importation of implied terms into the contract (see Iain MacNeil, "Uncertainty in commercial law" (2009) 13 EdinLR 68 at 75).

Interestingly, both English and Scots jurisprudence has accepted (or at least not negatived) the suggestion that a carefully drafted contract containing an entire agreement provision could make it less likely that there was any separate agreement between the parties which the agreement had somehow failed to encapsulate. This should reassure lawyers that the time they spend drafting complex wording will not be automatically set aside in the event that one party seeks to deviate from a written accord.

Caledonian Environmental Services provides a perfect example of such drafting efforts. Here, the contract was the step-down of the design and construction obligations contained in a contract under the then Government's Private Finance Initiative. Lord Glennie's judgment explains that the subcontract between CES and the two defenders (who acted together in a consortium) ran to 11 clauses, followed by 43 conditions spanning 130 pages, then a schedule in 46 parts.

It seems, as a first generation PFI predating the Treasury's first Standardisation of PFI Contracts document, to have been "a carefully considered bespoke contract, not based on any standard form" (para 17).

Oversimplified, the question was whether CES or the consortium was responsible for leakage of effluent from a system that made use of certain infrastructure that had previously relied on gravity but was now being used under pressurised conditions. There was an argument over the proper construction of the document (for which Lord Glennie looked to Chartbrook for guidance); then CES, whose construction had not been preferred, sought rectification.

Clearly, a huge amount of time from a variety of professionals was expended in getting the agreed final document, and those professionals could be forgiven a sense of unease if that document could then be subject to a concerted attack on legal grounds.

Raising the bar

This is not meant as an attack on the 1985 Act provisions. Rules of rectification undoubtedly have a legitimate place in any legal system, as Lord President Dunedin noted in 1907: "there are cases in which it would be truly a disgrace to any system of jurisprudence if there was no way available of rectifying what would otherwise be a gross injustice" (Krupp v Menzies 1907 SC 903 at 908).

But the idea that, as counsel for the consortium put it, great care in drafting coupled with an entire agreement clause "raised the height of the bar" that any argument for rectification had to clear, could reassure those who put time and energy into finalising a written contract. Clients could also be reassured that the associated legal costs can be justified.

But the strongest word that can be ventured for now is "could". Lord Glennie expressly reserved his position. As such, while it is not possible to exclude rectification, it would be advisable for solicitors to flag entire agreement clauses to clients to ensure that they at least have the chance of raising the bar should a contract ever face the ultimate test of litigation.

Against this backdrop, it seems that the death knell for entire agreement clauses has not yet sounded. The clauses continue to have a role, but these decisions clearly demarcate the boundaries of their effectiveness.

While invulnerability to a rectificatory attack cannot be guaranteed, it is unlikely that style contract documents will be pruned of entire agreement boilerplate drafting just yet.

Malcolm Combe is a solicitor with Tods Murray LLP