By Daniel Hunter
Commercial contracts are set to be turned on their head, following a landmark ruling at the Court of Appeal in London.
In future, any ‘off-the-cuff’ remark or verbal agreement that is made many months prior to a contract being signed, may now stand up in a court of law, if necessary clauses are not included within a written contract.
The omission of an ‘entire agreement clause’, as part of a properly worded contract, means that any conversations had between two parties, about the terms of an agreement, may now be binding — even if they are not contained within the written document — and can override terms in the contract, which are contrary to the conversations.
The recent ruling — made by Lord Justice Rix, Lord Justice Laws and Lord Justice McFarlane — throws serious doubt over 25 years of contract law and raises significant questions about the way in which businesses enter into commercial agreements with other parties. It could have particular implications on large companies that have a high turnover of staff — people who may have left the company, but are willing to testify in respect of conversations from many years previously.
Michael Connell, from award-winning law firm, Connell Associates, which acted in the aforementioned case, said the ruling could have far-reaching consequences — the kind not seen before in the UK.
“There is existing case law that relates to conversations had between two parties, just as an agreement is ready to be signed," he said.
"However, this case relates to a period of time beforehand — in some instances many years — where a contract is not read properly and verbal discussions suddenly become instrumental in executing that agreement.
“This throws contract law completely up in the air. For many years, the legal profession has insisted that entire agreement clauses are an unnecessary part of a contract, because the written agreement is King. However, what this judgement demonstrates is the vital role that the clauses play; moving forward, a company cannot guarantee that other representations will not come into play. Effectively, any verbal discussions could override ‘express terms’, if an entire agreement clause is not included.”
An entire agreement clause is a section of a contract that is included to ensure that the written terms serve as the sole conditions of that agreement and neither party can rely on anything else that has been said or done.
The case follows another recent judgement, concerning entire agreement clauses and their inability to exclude misrepresentations. It established the principles that must be followed when considering the effectiveness and enforceability of clauses in commercial contracts.
“These cases could have a fundamental impact on any contract that concerns the procurement of services or goods," Connell added.
"If you do not have a properly worded contract that contains an entire agreement clause and a non reliance clause, then that contract can now be challenged by someone claiming they said something many years before.”
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