ENTIRE AGREEMENT CLAUSE
CITATION: [2006] EWCA Civ 69
FACTS
Two English companies entered into a contract whereby one party, an employment agency (“the Agency”), undertook to supply labor personnel and cleaning equipment to the other party (“the Customer”) for a fixed period of time. The written contract contained a clause stating that during the period of time fixed by the contract, the Agency would have “preferred supplier status” with respect to the Customer. The contract did not define the meaning of the expression “preferred supplier status”, and contained a clause stating “This Agreement […] constitutes the entire contract between the parties and supersedes all prior representations, agreements, negotiations or understandings whether oral or in writing”.
A dispute arose when the Customer contracted with a third party for labor needs above and beyond those specified in the original contract without consulting the Agency. While according to the Customer the expression “preferred supplier status” simply meant that the Agency was to be the preferred supplier for the specific cleaning and other services set out in the agreement and did not imply any further commitments with respect to additional services the Customer might require, the Agency maintained that the expression granted it a right of first refusal as to any further needs of the Customer beyond those fixed in the original agreement.
ISSUE
The issue at stake was whether for the purpose of construing a written contract it was admissible to take account of extrinsic evidence, in particular the parties’ pre-contract negotiations and their subjective declarations of intent.
COURSE OF DECISION
The High Court applied the traditional rule of English law according to which pre-contractual negotiations are not admissible as evidence in interpreting a written contract and accepted the Customer’s motion for summary judgment in its favour. The Court of Appeal overruled this decision and, holding that pre-contractual negotiations could be used in interpreting the preferred supplier clause, dismissed the Customer’s motion for summary judgment and deferred the case to trial for further findings of fact concerning the meaning the parties intended to attach to the expression in question in the course of pre-contractual negotiations.
In the instant case, the parties had used a very unusual combination of words, namely ‘preferred supplier status’. Those words were undefined and were not introduced or accompanied by any words of explanation. In those circumstances it was reasonably arguable that on their true interpretation they bore the meaning that the parties in common had given them in their communications leading up to the signing of the agreement.
HELD
LORD JUSTICE MUMMERY: Since the expression “preferred supplier status” had no obvious natural and ordinary meaning, “its meaning could only be properly determined in the context of the agreement read as a whole and of all the surrounding circumstances”, and with respect to the “entire agreement clause” contained in the contract, after pointing out that a distinction should be made between, on the one hand, “ascertaining the contents of a written contract […] by reference to prior representations, agreements, negotiations and understandings and, on the other hand, ascertaining the meaning of a term contained in a written contract by reference to pre-contract materials”, concluded that in the case at hand it was reasonably arguable that the parties intended to exclude the former but not to inhibit the latter.
On her part LADY JUSTICE ARDEN, in supporting in substance these conclusions, went even further and openly stated that consideration should be given to the possibility of admitting in the future evidence of pre-contractual negotiations in interpretation questions on a wider basis than the law presently permits. In her view in this context “it may be appropriate to consider a number of international instruments applying to contracts”, such as the UNIDROIT Principles which “give primacy to the common intention of the parties and on questions of interpretation requires regard to be had to all the circumstances, including the pre-contractual negotiations of the parties (Article 4.3)” and CISG which “provides that a parties’ intention is in certain circumstances relevant, and in determining that intention regard is to be had to all relevant circumstances, including preliminary negotiations”.
Indian Case Law 