Entirely Inconsistent Interpretations: How an Entire Agreement Clause may hold up in Court

Introduction
The entire agreement clause is a minefield for solicitors and litigators alike. Geoff R. Hall has called the interpretation of entire agreement clauses one of the most confusing areas of contract law in Canada.[1]

An entire agreement clause typically appears near the end of a written contract and specifies that the written text agreed to by the parties constitutes the whole contract and excludes all representations made outside the document.

This clause is often an essential provision for the effective enforcement of parties’ rights under the contract. However, there is currently no overarching theory on how courts ought to approach entire agreement clauses.

This paper attempts to outline the basic principles of entire agreement clauses by defining:
  1. Their form and function;
  2. How they have been interpreted by courts; and
  3. General considerations for practitioners drafting or challenging such a clause.
Definition
An “entire agreement” or “integration” clause sets out the parameters of what falls within the four corners of the written contract. Essentially, it defines what is, and what is not, part of a written agreement.  

Purpose
The purpose of an entire agreement clause is to achieve greater certainty and clarity by limiting the terms of the agreement to those contained in the contract. The provision is intended to exclude parol evidence or other agreements from adding, varying, or contradicting the written contract.

There has been some debate whether this provision is useful or necessary. The “parol evidence rule” is a common law rule that prevents a party to a written contract from presenting extrinsic evidence in court if a dispute arises about its interpretation. Some have argued that an entire agreement clause is simply a restatement of this rule.[2]

However, in our view an entire agreement clause is beneficial because the parol evidence rule is not always enough on its own. The scope of the entire agreement clause can be broader than the parol evidence rule.[3] Therefore, an entire agreement clause fills in the gaps left by the many exceptions to the parol evidence rule.[4]

Effectiveness
Contracting parties generally want two things: to get what they bargained for and to be certain of the effectiveness of their agreement.

The presence of an entire agreement clause is a red flag for a litigator. Such a provision signals that the party claiming for damages may be prevented from relying on a breach not provided for in the agreement.[5]

However, any increased protection offered by an entire agreement clause will depend wholly on its precise wording. Therefore, an entire agreement clause must be written and reviewed judiciously before parties execute a contract.

A practitioner may wish to carefully consider what is specifically included. Generally, an entire agreement clause explicitly states that the contract does not include any written or oral terms, whether expressed, implied or statutory, other than those set out in the agreement. It may also explicitly reference prior, contemporaneous, or subsequent:
  1. Communications; or
  2. Warranties or conditions.
The reality is that parties often have numerous discussions prior to executing an agreement. In order for the contract to truly be a stand-alone document, parties generally want this clause to be as precise and encompassing as possible. However, if a contract is challenged, courts consider not only the words of the provision, but numerous other factors as well. This fact-specific analysis is what has led to inconsistent rulings on whether entire agreement clauses are upheld.

Interpretation by the Courts
Courts tend to view entire agreement clauses with a focus on fairness and common sense. Courts attempt to interpret negotiated commercial documents "to accord with sound, commercial principles and good business sense and avoid commercial absurdity.”[6] This focus on fairness requires a fact-specific analysis of the circumstances surrounding the negotiation and execution of the contract, as well as the behaviour of the parties at each stage of the process.

The Test of Enforceability: the Tercon Test
The Supreme Court held in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) that whether an exclusion clause applies requires three analytical steps:
  1. As a matter of ordinary contractual interpretation, does the exclusion clause apply to the circumstances established in the evidence?
  2. If yes, was the exclusion clause unconscionable at the time the contract was made? This is an issue of contract formation.
  3. If no, should the court decline to enforce the exclusion clause because of an overriding public policy concern which outweighs the very strong public interest in the enforcement of private contracts?[7]
The Tercon test gives effect to the parties’ words in most circumstances, while also giving the Court the power not to enforce those words in circumstances where exclusion clauses are abusive rather than legitimate, either because of defects in contract formation (unconscionability) or in the application of such provisions (public policy).[8]

Entire agreement clauses thus require the Court to examine a number of issues in a fact-specific analysis. The following are several of the key issues the Court may consider.

Public Policy
The Court must consider whether enforcing an entire agreement clause would be unconscionable, unfair, unreasonable, or otherwise contrary to public policy.[9] This involves an examination of circumstances at the time of contract formation. The onus is on the party seeking to avoid enforcement of the exclusion clause to prove the existence of “an overriding public policy” that outweighs the “very strong public interest in the enforcement of contracts.”[10]

Complete Relationship
Entire agreement provisions will not be enforced over oral agreements where the written document was not intended to encompass the parties’ complete relationship. Such an intention can be demonstrated by the parties clearly expressing elsewhere in their written agreement that the terms of the contract were not to cover the entire transaction[11] or where the parties conducted themselves in accordance with later oral agreements.[12]

The principle that an entire agreement clause should not exclude collateral agreements if the parties did not intend the written agreement to encompass their whole relationship requires courts to engage in a fact-specific analysis. This has led to inconsistent results.[13]

Future Agreements
It should also be noted that an entire agreement clause is generally interpreted only to apply to events occurring prior to contracting, but it may also seek to avoid post-contract terms from prevailing or from operating.[14]

Misrepresentation
An entire agreement provision will not be enforced where a Court determines that the agreement was induced through misrepresentation or oral representations that are inconsistent with the written agreement.[15]

Sophistication of the Parties
Generally, entire agreement clauses will be enforced against a party who understood (or ought to have understood) the effect of the clause and whose attention was specifically drawn to the provision. The sophistication of the parties and their ability to obtain legal advice may also be considered.[16]

The Ontario Court of Appeal refused to uphold an entire agreement provision when external facts were taken into consideration. This occurred when the provision was in fine print, not brought to the attention of the party challenging it prior to execution, and executed in a hurried manner.[17]

Beer v. Townsgate I Ltd. was an appeal by a condominium developer from a judgment which held that agreements of purchase and sale for condominium units between the appellant and the respondent purchasers were void. Brooke J.A. stated:
As this was a standard form contract and the clause was in fine print, in the frenzied atmosphere described above, it was not drawn to the attention of these respondents, the contract was signed in haste with no opportunity for them to read it, there can be no reasonable expectation they were assenting to the clause.[18]

Implied Terms
In certain circumstances, Courts may read implied terms into contracts despite the presence of an entire agreement clause. In 2006, the Ontario Court of Appeal held in Civiclife.com v. Canada (Attorney General) that an entire agreement clause will not preclude the implication of a duty of good faith performance.[19]
At paragraph 52 of the reasons, K.M. Weiler J.A. stated:
…an entire agreement clause will not preclude the implication of a term of the contract, such as a duty of good faith performance or the duty not to abuse a discretion, because such a term is already part of the existing agreement. The trial judge was not adding a term to the agreement that was not part of the parties' bargain; he was enforcing the reasonable expectations of the parties under the agreement. Second, neither of the entire agreement clauses here says that their agreement contains no implied terms. Indeed, it would be difficult to set out every aspect of the expectations of the parties to a contract. The wording of the entire agreement clauses does not preclude the implication of a term. Third, an agreement in writing may be varied by a subsequent oral agreement. Here, at the July 2000 meeting the parties orally agreed to vary their written arrangement and adopt a "minimal integration approach." The entire agreement clause does not affect the reasonable expectations of the parties with respect to that oral agreement. Fourth, based on the Supreme Court of Canada's decision in Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, even if the entire agreement clause did cover the conduct at issue here, the court has a discretion to refuse to enforce it where to do so would be unconscionable, unfair, unreasonable or otherwise contrary to public policy…

However, recently in Bhasin v. Hrynew, the Alberta Court of Appeal, though considering the comments of the Ontario Court of Appeal in Civiclife.com, held that parties are not under a duty of good faith where an entire agreement clause expressly excludes all terms, expressed or implied, except those stated in the agreement.[20] This case emphasises the importance of precise wording of the clause.

Conclusion
Cases turning on entire agreement clauses are incredibly fact-specific and there is little certainty in predicting whether a Court will choose to enforce the provision. Courts have wide discretion in their interpretation. There is no all-encompassing list, but the following factors may be useful for practitioners to keep in mind when writing or reviewing an entire agreement clause:

The Entire Agreement Clause: Considerations for Practitioners
  1. Is there a disparity in sophistication between the parties?[21]
  2. Is there a disparity in leverage in negotiation between the parties?[22]
  3. Was the entire agreement provision clear and legible?[23]
  4. Was the entire agreement provision brought to the attention of the party sought to be bound?[24]
  5. Did the party sought to be bound have sufficient time to review the provision?[25]
  6. Does the entire agreement clause include implied terms?[26]
  7. Does the agreement set out specifically what is excluded?[27]
  8. Does the agreement set out which prior or ancillary agreements or representations (if any) remain effective after the final agreement was executed?[28]
  9. Does the agreement make any prior or ancillary agreements Exhibits or Schedules to the main agreement?[29]
  10. Does the agreement consider the effect of the entire agreement clause on the future dealings between the parties?[30]
  11. Considering the text, context and purpose of the entire agreement clause, what would a reasonable observer conclude the parties intended?[31]
 
 
 
[1] Geoff R. Hall, Canadian Contractual Interpretation Law. LexisNexis Canada 2012. Page 270-271. (Hall)
[2] Hayward v. Mellick, [1984] O.J. No. 3091 per Houlden J.A., dissenting.
[3] Turner v. Visscher Holdings Inc. [1996] B.C.J. No. 998 at para. 15. (Turner)
[4] Cynthia L. Elderkin & Julia S Shin Doi, Behind and Beyond Boilerplate: Drafting Commercial Agreements. 2d ed. Toronto: Thompson Carswell, 2005 at 46. (Elderkin and Doi)
[5] Elderkin and Doi at 47.
[6] Salah v. Timothy's Coffees of the World Inc., [2010] O.J. No. 4336, at para. 16.
[7] Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) [2010] S.C.C. No. 4. (Tercon)
[8] Hall supra at 280.
[9] Shelanu Inc. v. Print Three Franchising Corp. [2003] O.J. No. 1919 at paras. 30-35. (Shelanu)
[10] Tercon supra at para. 123, per Binnie J., dissenting.
[11] Zippy Print Enterprises Ltd. v. Pawliuk, [1994] B.C.J. No. 2778 (Zippy)
[12] Turner supra at para. 37.
[13] MacMillan v. Kaiser Equipment Ltd., [2004] B.C.J. No. 969.
[14] Shelanu supra at para. 50.
[15] Ibid.
[16] Hall supra at 275.
[17] Beer v. Townsgate I Ltd., [1997] O.J. No. 4276. (Beer)
[18] Beer supra at para. 29.
[19] CivicLife.com Inc. v. Canada (Attorney General), [2006] O.J. No. 2474 at para. 53.
[20] Bhasin v. Hrynew, [2013] A.J. 395 (C.A.). Please note that this decision has been appealed to the Supreme Court of Canada, and a decision is pending.
[21] The entire agreement clause should be brought to the attention of the less sophisticated party. In Weiss v. Schad, [1999] O.J. No. 4356 at paras 113 and 188., the parties executed a share purchase agreement in which the plaintiff sold certain shares to the defendant. The entire agreement provision was held to be enforceable in part because the parties were equal in their sophistication and in their leverage in negotiation the agreement.
[22] Ibid.
[23] Beer supra. The entire agreement provision should not be in fine print.
[24] Ibid. The contract should not be signed in a frenzied atmosphere without being drawn to the attention of the party who executed it.
[25] Ibid.
[26] As the Ontario Court of Appeal held in CivicLife.com Inc. v. Canada (Attorney General), [2006] O.J. No. 2474, a contract may contain implied terms, such as the duty of good faith. However, the Alberta Court of Appeal in Bhasin supra, held that the entire agreement clause can exclude implied terms if the provision expressly states that the contracting parties intended to exclude them.
[27] It may be helpful to specifically state what prior written agreements are excluded.
[28] Conversely, if any prior agreements are not covered by this clause, making sure that they are explicitly listed may also assist in clarifying the terms of the agreement.
[29]  This allows the parties to review all prior and ancillary agreements prior to executing the final agreement.
[30] Entire agreement clauses generally do not cover future contractual agreements between the same parties: Shelanu supra. Chronology of events is very important, and courts may exclude an alleged collateral agreement if it appears to have been made prior to the date of execution: Gutierrez v. Tropic International Ltd., [2002] O.J. No. 3079.
[31] Shelanu supra.