contractual interpretation

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Mind Your Words: Entire Agreement Clause Fails to Act as Bar to Misrepresentation Claim Article

Mind Your Words: Entire Agreement Clause Fails to Act as Bar to Misrepresentation Claim

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Entire Agreement Clause and Misrepresentation Claims

On appeal to the High Court, it was held that an entire agreement clause that did not expressly exclude liability for misrepresentation was not effective in excluding misrepresentation claims. [1]

Background

Pursuant to a share purchase agreement, NG Football Investments Limited (the “Buyer”) purchased the whole of the issued share capital in Nottingham Forest Football Club Ltd (the “Club”). The Club was heavily indebted, and as a result the seller, NFFC Group Holdings Limited (ultimately owned by Mr Fawaz Al-Hasawi) (the “Seller”), inter alia agreed to indemnify the Buyer against any liabilities of the Club outstanding to the extent they exceeded £6.6 million.  While the transaction was under negotiation, the Seller provided various documents to the Buyer including a spreadsheet setting out what was said to be the liabilities of the Club, totalling £6,566,213.

The Buyer, however, asserted that the liabilities were in excess of £10 million and pursued a claim both under the contractual indemnity and for misrepresentation on the basis that the spreadsheet contained a representation as to the liabilities of the Club which was false and which was relied upon by the buyer.

First Instance Decision

At first instance, Master Bowles interpreted an entire agreement clause within the share purchase agreement as prohibiting the misrepresentation claim, thus striking that claim out.

Distinguishing from previous precedent [2], Master Bowles gave considerable weight to the contractual context of the agreement, namely, explicit provisions which provided for specific claims which may be brought, including claims under the indemnities referred to, which were subject to differing regimes for notice and time limits. He viewed these extensive provisions as forming ‘an important part of the contractual matrix[3] and believed that the entire agreement clause, read in light of other provisions of the agreement, demonstrated the parties’ intent to exclude claims arising outside of this contractual framework (including the claim in misrepresentation in the present dispute).

The High Court Decision

Whereas Master Bowles agreed in principle that the court is entitled to have regard to all the provisions of an agreement in construing any of them, he did not agree that contractual language providing for one type of claim carries an implication that all other types of claim are intended to be excluded. Ultimately, what must be shown is clear wording establishing an intention to go beyond defining the scope of the contractual agreement and exclude other claims; the mere possibility that the words used might extend to matters that could found such other claims would not be sufficient. Although creating a framework for claims may be sensible, the court must take care to avoid construing a contract to provide a better bargain for one party than the one that had actually been made.

Conclusion

The decision restates the prevailing view that: ‘what must be shown is clear wording establishing an intention to go beyond defining the scope of the contractual agreement and exclude other claims, the mere possibility that … words used might extend to matters that could found such other claims is not sufficient.’ [4] Further, the case implicitly recognises the increasingly literal approach the courts will take to contractual interpretation, refusing to interpret clauses in accordance with what makes the most commercial sense and instead seeking to adopt a ‘unitary’ approach which neither punishes astute parties nor rewards foolish parties.

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