You’re selling your business. You agree the sale terms in a lengthy document which confirms that it is the “entire agreement” between the parties. So that’s it: the buyer can’t bring a claim if it’s not covered by the agreement right? Wrong! According to a recent case, an entire agreement clause did not prevent the buyer bringing a misrepresentation claim against the seller, outside the terms of the agreement.
The entire agreement clause
Following the sale and purchase of Nottingham Forest Football Club (the Club) the buyer argued that the Club’s liabilities had been misrepresented, claiming that they were closer to £10 million than the £6 million stated by the seller.
The share purchase agreement relating to the Club’s sale contained an entire agreement clause which read: “This agreement 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“.
Crucially, the clause had no express wording excluding liability for misrepresentation claims – previous case law has confirmed that these types of non-contractual claims can only be excluded by clear and express wording in a contract. So a simple statement, such as: “This agreement is the entire agreement between the parties relating to its subject matter and supersedes all previous agreements between them“, would not be enough to exclude claims for misrepresentation. This has led to the common practice of parties including a specific clause relating to liability for misrepresentation. But this didn’t happen in this case.
A specific indemnity
In this case, the agreement also contained an express indemnity from the seller to the buyer to cover the Club’s liabilities being more than £6 million. So at first instance, the court had to consider whether, where the agreement already included a remedy for any undisclosed liabilities, the entire agreement clause excluded any similar claims in misrepresentation for the same matter, despite the lack of express wording.
Another clause in the agreement stated that, except as expressly stated, the rights and remedies under the agreement are “in addition to and not exclusive of any rights and remedies provided by law“. So, unless they were excluded by the entire agreement clause, the buyer’s right to bring a contractual claim under the indemnity would be in addition to any non-contractual claim for misrepresentation.
The first decision
The buyer argued that the entire agreement clause was not wide enough to exclude claims for misrepresentation and that it only related to contractual matters. But the master disagreed and held that the parties had intended to exclude misrepresentation claims. By including the indemnity the parties had put contractual procedures in place to deal with any claim relating to the level of the Club’s liabilities. So, any claims of a non-contractual nature for the same matter, including misrepresentation claims, were excluded.
The master also said that, in this case, the scope of matters included in the entire agreement clause was very wide and included those of a contractual nature, such as ‘drafts’, ‘agreements’ and ‘warranties’, but also those of a less contractual nature, such as ‘representations’.
Overturning the decision
The first instance decision was appealed in the High Court. Here, the judge held that the master was wrong in how he construed the entire agreement clause. The word ‘representations’ was capable of referring to terms of the contract and the surrounding terms could refer to matters used to bring a collateral claim, for example under an indemnity.
The judge confirmed that clear words are needed to exclude misrepresentation claims and an entire agreement clause setting out the scope of the agreement (as in this case) is not enough. There must be clear wording which establishes an intention to go beyond the scope of the agreement.
On the indemnity point, it did not matter that the parties had provided for a contractual right to recover losses under a separate provision. By deciding that the clause effectively excluded all misrepresentation claims, the master had left the parties without a remedy for losses that were not covered by the indemnity.
The seller probably thought they’d got things covered by giving the buyer a specific indemnity for an identified issue and including an entire agreement clause so the buyer’s only remedy was under that indemnity. But this strategy would only work if the entire agreement clause properly excluded non-contractual misrepresentation claims which, in this case, the court said it didn’t.
This blog post was written by Elliot Gibson. For further information, please contact:
Sophie Brookes, partner, Corporate team
T: 0161 836 7823