Rules for Interpretation of Contracts: Pre-Contractual Documents/Draft Agreements

Antecedent Agreements

A concluded antecedent agreement may be relied upon in interpreting a later contract in pursuance of that agreement.  However, an antecedent agreement may be considered only on the basis of its particular facts and circumstances.

Pre-Contractual Documents/Draft Agreements

A concluded contract may be preceded by multiple drafts. Draft agreements may even be signed. Draft agreements may often be useful in explaining certain terms which were explained in detail in the draft agreements but are not present in such detail in the final contract. However, draft agreements which do not represent final consensus of the parties, are not taken into account for the purpose of interpreting a contract.

Parol Evidence Rule

The parol evidence rule is that where the record of a transaction is embodied in a document, extrinsic evidence is not generally admissible to vary or interpret the document or as a substitute for it. Certainty is promoted by holding that parties who have reduced a contract to writing should be bound by the writing and by the writing alone.

Evidence extrinsic to the document is admitted in a number of situations which fall outside the scope of the rule. In Jacobs v. Batavia & General Plantations Ltd. [1924] 1 Ch. 287 , Justice P.O.Lawrence observed-

“It is firmly established as a rule of law that parol evidence cannot be admitted to add to, vary or contradict a deed or other written instrument. Accordingly, it has been held that (except in cases of fraud or rectification…) parol evidence will not be admitted to prove that some particular term, which had been verbally agreed upon, had been omitted (by design or otherwise) from a written instrument constituting a valid and operative contract between the parties.”

Similarly in Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. [1979] 144 C.L.R. 596, Justice Mason observed that-

This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made.”

Important Exceptions to the Parol Evidence Rule

  1. Where the written agreement is NOT the whole contract or entire agreement on which the parties had actually agreed. (Evans vs. Andrea Merzario[1976] 2 All ER 930)
  2. When the validity of the contract is in question, for instance to establish the presence or absence of consideration or of contractual intention, or some invalidating cause such as incapacity, misrepresentation, mistake or non est factum.
  3. Where the contract is silent on a matter on which a term is normally implied by law, in order to support, or to rebut, the usual implication. (Burges vs. Wickham, (1836) 3 B & S 669)
  4. To show that the contract does not yet operate, or that it has ceased to operate. (Pym vs. Campbell, (1856) 6 E & B 370)
  5. To show in what capacities the parties contracted, e.g. where a person contracts ostensibly as principal, evidence is admissible to prove that he really acted as another’s agent so as to entitle the latter to sue (Humfrey vs. Dale, (1857) 7 E & B 266).
  6. Where the particular term/word of a contract has a special meaning by custom or is a technical term.
  7. To explain words or phrases which are ambiguous, or which, if taken literally, would make no sense at all.
  8. Where recourse to prevailing custom is required to annex incidents to written contracts in matters with respect to which they are silent. (Hutton vs. Warren, (1836) 150 ER 517, Exch., Smith vs. Wilson, 110 E.R. 226)
  9. Where an agreement completely fails to record the agreement/understanding between the parties accurately.

Entire Agreement Clause

As opposed to antecedent agreements, pre-contractual documents/draft agreements are hardly relied on for the purpose of interpretation of terms of a contract, especially when an ‘Entire Agreement’ is already incorporated in the contract. This is to avoid a messy situation, where the parties may rely on any random document created or used during the negotiation stage of the contract for the purpose of interpretation. The ‘Entire Agreement’ is incorporated in order to prevent the parties to a contract from claiming that statements made before they concluded the contract have contractual effect, even when those statements do not form part of the contract.A typical ‘Entire Agreement’ clause may be worded like this-

“This Agreement supersedes all prior discussions, memoranda of understanding, agreements and arrangements (whether written or oral, including all correspondence) if any, between the Parties with respect to the subject matter of this Agreement, and this Agreement (together with recitals, schedules and any amendments or modifications thereof) contains the sole and entire agreement between the Parties with respect to the subject matter thereof.”

In Watford Electronics Limited vs. Sanderson CFL Limited [2002] FSR 19, it was held that-

“In order to exclude a claim in misrepresentation, the clause must say that “no statement or representation made by either party has been relied upon by the other in agreeing to enter into the contract”.

In Inntrepreneur Pub Co vs. East Crown Ltd. ([2000] 2 Lloyds Rep 611), the agreement for lease contained an acknowledgement that “this agreement… constitutes the entire agreement between the parties”. The issues was whether the entire agreement clause precluded the defendant from setting up alleged collateral agreement. It was observed in this case that-

“… such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force.” 

The Court in this case, further explained that “the purpose of an entire agreement clause is to preclude a party to a written agreement from thrashing through the undergrowth and finding, in the course of negotiations, some (chance) remark or statement (often long-forgotten or difficult to recall or explain) upon which to found a claim… to… a collateral warranty“.

In another case, Proforce Recruit Ltd. vs. The Rugby Group Ltd. ([2006] EWCA Civ 69), the issue 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. In this case, it was observed that the Courts would be generally reluctant to interpret the terms of a contract in too broad a term in the absence of any clearly expressed intention of the parties. In cases of uncertainty, the Courts would prefer ordinary objective meaning within the factual context of the contract. In any case, the Courts would be very reluctant to consider any negotiations between the parties prior to the contract and will do so only in exceptional cases.

Therefore, it becomes all the more essential for the parties to a contract to ensure that all the documents and statements are adequately included or incorporated into the final contract or definitive agreement. In case there may be any oral representations made or relied on by any of the parties during the negotiation or pre-contractual stage, the same can form part of the ‘Representation and Warranties’ clause in the contract.

Limitation of Entire Agreement Clause

However, even when an entire agreement clause is used in its strictest sense, there may be exceptions, like, misrepresentation, inducement, fraud, estoppel, etc. This is possible when an ‘entire agreement clause’ is worded in a manner so as to to say-

  • The Parties shall have no liability for representations made prior to the contract unless those representations are warranties incorporated into this Agreement;
  • The Parties shall have no liability against each other for misrepresentation, fraud, estoppel, etc.’
  • All non-contractual remedies shall be excluded.

The question that comes up for consideration here is whether such a clause can constitute an exclusion of liability under the Indian Contract Act, 1872. (“ICA“), i.e. whether such clause can be hit by Section 23, 28 and other relevant provisions of the Indian Contract Act, 1872 barring such an agreement. Section 23 of ICA provides what consideration and objects are lawful, and what not. Similarly, Section 28 of ICA makes agreements in restraint of legal proceedings, void. What Section 28 read with Section 23 does, is to make it very clear that if any mutual agreement is intended to restrict or extinguish the right of a party from enforcing his/her right under or in respect of a contract, by the usual legal proceedings in the ordinary Tribunals, such an agreement would to that extent be void. In other words, parties cannot contract against a statute. (A.V.M. Sales Corporation vs. Anuradha Chemicals Pvt. Ltd., (2012) 2 SCC 315). Since, it is a settled legal position that the parties cannot contract against the statutory provisions, such an ‘entire agreement’ clause worded in such manner will have no effect if it contravenes any of the provisions of ICA. Thus, where the exclusion clause attempts to exclude liability for fraudulent misrepresentation, it will generally not be enforceable.  It is therefore advisable that when making representations as part of the contract, parties must have a genuine belief as to what they represent is true.

Author: Vivek Verma

 Next Post in this series:  Supplemental Documents and Documents forming part of the same transaction 

Earlier Posts in this Series:

  1. Rules for Interpretation of Contracts
  2. Rules for Interpretation of Contracts: Importance of Deleted Words

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