Unpacking Entire Agreement Clauses: On the (Elusive) Search for Contractually Induced Formalism in Contractual Adjudication.

• Author: Bertolini, Daniele
• Position: Canada

Introduction I. Contract Interpretation A. Identifying Contractual Terms B. Interpreting Contractual Terms C. Subsequent Conduct II. The Collateral Contract A. Decisions Disregarding EA Cs to Give Effect to Collateral Contracts B. Decisions EnforcingEACs to Exclude Collateral Contracts III. Implied Terms A. Decisions Enforcing Implied Terms Found to Be Part of the Agreement B. Decisions Precluding Implied Terms Not Expressly Stated in the Contract C. EA Cs Cannot Exclude the Duty of Honesty in Contractual Performance D. The Institutional Dimension of the Interplay Between EACs and Implied Terms IV. Assessing the Law on EACs A. The Structure of the Normative Dilemma B. Two Hypothetical Rules 1. Unenforceability Rule 2. Default Penalty Rule C. Proposed Incremental Improvements 1. EACs in Contracts Between Sophisticated Parties 2. EACs in Contracts of Adhesion Conclusion Introduction

This article examines the extent to which entire agreement clauses (EACs) are enforceable under the Canadian common law of contracts and the extent to which these contractual provisions are effective in promoting contractual certainty. EACs are generally found in commercial agreements between legally sophisticated parties (1) and in contracts of adhesion between parties with unequal bargaining power. (2) Their purpose is to promote contractual certainty by establishing that the full terms of the contracts are to be found in the document containing the clause. By stating that the entire agreement is confined within the "four corners' of the written document, parties aim to identify the exclusive source of contractual obligations, thereby excluding any liability for claims arising from statements that are external to the written contract. Although the EACs' purpose is to promote contractual certainty, their legal significance is far from definitive and their effectiveness is subject to several limitations.

EACs operate within a complex matrix of legal issues involving both contract and tort doctrines. It is useful to distinguish between two broad types of EACs that often appear in commercial contracts. The first is the "EAC proper," (3) which typically reads along the following lines:

This writing constitutes the final and entire agreement between the parties with respect to all the matters therein referred to and there are no other agreements, understandings, promises, or conditions of any kind, oral or written, expressed or implied, which are not merged into this contract or superseded by it. The main function of an EAC proper is to prevent parties from asserting a claim in contract that goes beyond the four walls of the written contract. The second type is the non-reliance clause (NRC), whose function is to preclude claims in tort for misrepresentation. In practice, a comprehensive EAC contains both an EAC proper and an NRC, and the case law often uses the term EAC to refer to clauses containing both an EAC proper and a NRC. The legal issues associated with the EAC proper and the NRC are analytically distinct and largely independent of each other. In this article, I focus solely on the EAC proper and its impact on contractual adjudication. Specifically, I examine the interplay between the EAC proper and the doctrines of contractual interpretation, collateral contract, and implication of terms. (4) These doctrines are often employed in contractual adjudication to explain why statements external to the written contract may have legal consequences; the inclusion of an EAC in a written contract is meant to exclude or limit their scope of operation.

Canadian courts have adopted different approaches to the enforcement of EACs. On some occasions, they have given effect to EACs to prevent pre-contractual statements from being legally operative; (5) on other occasions, they have disregarded them and recognized the validity of claims based on statements external to the contract. (6) These conflicting approaches have created considerable legal uncertainty surrounding the enforceability of EACs. Contract scholars have emphasized the lack of a coherent theory underlying the nature and scope of operation of EACs. Perell (writing before his elevation to the bench) described the law relating to EACs as a "riddle inside an enigma" (7) to emphasize the difficulty of providing a coherent explanation of the law. Hall states that EACs "are one of the most confusing areas of the law of contractual interpretation in Canada" (8) and that "[t]here appears to be no overarching theory of how the courts should or do approach such provisions." (9) Elderkin and Shin Doi emphasize that caution should be exercised in drafting an EAC, as "the enforceability of these clauses is evolving," which often makes it difficult for parties to anticipate whether courts will give effect to them. (10)

Furthermore, several recent developments in the Canadian common law of contracts have exacerbated the uncertainty surrounding EACs by directly or indirectly expanding the legal significance of the circumstances surrounding the written agreement. In Sattva Capital Corp. v. Creston Moly Corp. ('Sattva"), the Supreme Court of Canada formally recognized the importance to contractual interpretation of evidence of the surrounding circumstances in which a contract is formed. (11) This holding raises the question of whether an EAC may succeed in limiting the use of extrinsic evidence in ascertaining the parties' contractual intent. In Bhasin v. Hrynew ("Bhasin"), the Supreme Court established the duty of honesty in contractual performance and stated that such a duty cannot be fully displaced by an EAC. (12) This holding has been recently confirmed in C.M. Callow Inc. v. Zollinger ("Callow"). (13) Furthermore, in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District ("Wastech") the Supreme Court has clarified that parties to a contract cannot exclude the duty to exercise discretion in good faith by drafting EACs. (14) Taken together, these decisions have made clear that parties will often be able to point outside the four corners of the written contract document. For that reason, they cast further doubt on the possibility of EACs being fully effective.

This paper aims to examine the relevant case law relating to the enforcement of EACs and to assess the overall effectiveness of such clauses as a device for promoting contractual certainty. This article's central thesis is twofold. First, it is argued that inherent limitations impede the effectiveness of EACs in promoting legal certainty, and these limitations ultimately originate from the underlying tension between such clauses and the principles of contextualism in contractual interpretation. Second, it is suggested that courts could incrementally improve legal certainty by more markedly differentiating between EACs found in contracts between sophisticated parties and those found in contracts of adhesion, as well as between specifically and generically worded EACs. Although these distinctions are present in the relevant case law, marginal improvements in EACs' effectiveness could be obtained through sharper differentiation of the legal effects associated with these distinctions. More specifically, it is suggested that in fully negotiated contracts between sophisticated parties, courts should regard the existence of a specifically worded EAC as establishing a conclusive presumption that the written document represents the final and exclusive record of the parties' agreement. This presumption would preclude: 1) the admission of evidence that the written document does not represent the final and exclusive record of the parties' agreement, 2) claims for breach of collateral contracts, and 3) claims based on implied terms that are not already part of the agreement. On the other hand, in standard form contracts, courts could improve legal certainty by applying the following two rules: 1) the existence of a generically worded EAC does not preclude the establishment of a collateral contract that is grounded in a specific statement external to the contract that is inconsistent with a general clause found in the written agreement; and 2) the existence of an EAC does not preclude the ability of a court to imply terms in a contract that do not conflict with its express language.

The proposed improvements to the legal regime governing the enforcement of EACs are rooted in the recognition that the normative needs underlying the enforcement of such clauses change when clauses are found in fully negotiated contracts between sophisticated parties and in contracts of adhesion. In fully negotiated contracts between sophisticated parties, the main objective of contractual adjudication is to promote the parties' common goals. By contrast, in standard from contracts, the focus of contractual adjudication shifts to the protection of the weaker party. Moreover, the proposed differentiation in the legal treatment of EACs is consistent with the recent trend that has emerged in the Supreme Court's case law, which has explored whether different principles should apply to specifically negotiated contracts and standard form contracts. The Supreme Court's decisions in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. ("Ledcor"), (15) Douez v. Facebook, Inc. ("Facebook"), (16) and Uber Technologies Inc. v. Heller (" Uber") (17) emphasize that different principles--albeit not directly relating to the enforcement of EACs--should apply to specifically negotiated and standard form contracts. Finally, a growing strand of contract law scholarship emphasizes the distinctive issues involved in standard-form agreements as compared to specifically negotiated contracts. (18)

The remaining discussion is organized as follows. Part I analyzes the impact of EACs on the identification and interpretation of contract terms in light of the relevant context. Part II examines the issue of whether an EAC is binding and conclusive at common...