Long Read: Pre-contract Representation and Contract Formation
Pre-contract statements can unwittingly form part of a legally binding contract, which is why it is important to understand what can form part of the whole agreement.
This article will firstly look at the whole agreement clause, what it is and why you should use it. It will then distinguish a representation from a term and determine what can be an enforceable promise. It will conclude with the formation of a contract with reference to the representations made during the pre-contract discussions.
The “whole agreement” clause
The whole agreement clause (or entire agreement clause) is worth careful consideration even though it is often overlooked as one of the standard (or boilerplate) type clauses of most legal agreements. This clause has had plenty of analysis from the courts and is a frequent subject of litigation. The most recent case discussing the clause is Al-Hasawi v Nottingham Forest Football Club Ltd & Ors  EWHC 2882 (Ch).
This case concerned party A relying on a representation made by party B in relation to the existing debt of the football club which was not an express term of the written contract and turned out to be false. It was considered whether an entire agreement clause would defeat such a claim for misrepresentation. This case highlights the need for a well drafted whole agreement clause that includes statements of non-reliance on any representations if you are to defeat a claim for misrepresentation.
The essence of a whole agreement clause is to prevent the parties to a written agreement from raising a claim regarding statements made during the negotiation process that have not been included in the written agreement.
Why do you need a whole agreement clause?
There is a presumption that where a written agreement exists all terms of the contract are contained in the written agreement. The whole agreement clause is to prevent this presumption from being displaced and will prevent the parties from claiming that the contract contains only part of the terms and that there are other terms contained in pre-contractual statements.
It is important therefore to read the contract, particularly if there is a whole agreement clause, carefully to ensure that any statements that are made pre-contract are included. Please see the guidance in the previous article titled Contract Negotiation for information on heads of agreement and how they can be helpful here.
Representation or Term?
Pre-contractual statements can be a “term” of the contract or a representation and if it comes to litigation it will be important to determine this as it will affect the appropriate cause of action and the remedies that are available.
If a representation is made that is relied on and turns out to be false then this may entitle the party relying on the representation to rescind (unwind) the contract. The effect of which will be to put the parties into the same position in which they would have been prior to the contract being made. The party may also be able to claim other losses that were suffered as a result.
If it is a term of the contract that is breached then this will result in contractual damages and the party is unable to rescind the contract. The general principle is that the damages should be assessed to put the party in to a position which they would have been should the contract have been properly performed.
A court will look at four main factors when considering whether something amounts to a representation which is capable of being part of the contract:
- Whether the statement is repeated in writing;
- Relative expertise of the parties and ability to determine the truth of the statement;
- Importance of the statement; and
- Time between making statement and completion of contract.
Not all statements that are made in the course of negotiating a contract are intended to have contractual force. There will be representations made that are merely to induce the other party to enter the contract but these may not be capable of imposing a liability amounting to breach of contract.
Whether a statement is a representation or a term will ultimately depend on the intention with which the statement was made. When negotiating a contract the elements that you hold more important you should put the other party on the spot to try and get this as a condition of the contract.
What are enforceable promises?
A contract is an exchange of promises by the parties. Any communication by both the parties that communicates a legally enforceable promise will constitute a contract. It is therefore easy to inadvertently enter into a legally binding contract.
If one party promises to do something as part of the negotiation to the contract and the other party acts to their detriment based upon that promise then that promise can be enforced.
When communicating before the contract is written it is important that you consider carefully what promises you are making to entice the other party into entering the contract. It is also paramount that you ensure all communications are labelled “subject to contract” so it is clear that all earlier drafts and correspondence are not binding.
By using this label on all correspondence and draft documents it will rebut the presumptions of contractual intent in commercial situations and will be taken to mean that there has been no agreement reached unless and until a formal agreement is reached.
A representation can form part of a fuller contract than expected or creates a new contract (collective contracts). When thinking about the formation of a contract it is important to consider any representations made by one party to the other during the negotiation stages. It is for this reason that a well drafted whole agreement clause should be drafted for the written contract to limit the terms to that single document.
There are a few key elements that are required for the formation of a contract:
- Offer (it is at this stage that the representations are made);
- Acceptance (at this stage a party can be relying on the representations to their detriment);
- Intention to create legal relations; and
- Certainty of terms. The written contract will often be based on a template document which in most cases will not fit the circumstances 100%, although this is a good starting point, talking to lawyers regarding bespoke drafting and terms will also add value.
- The formation of the contract may go through several drafts before the final is approved by all parties and it is important to have a second review and second pair of eyes to look over the contract.
- The above elements should always be in the back of the mind of any negotiating party and they should be careful to avoid making an enforceable contract accidently when they are not ready to do so.