Can Entire Agreement And Exclusion Clauses Cure Misrepresentations?

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1 Can Entire Agreement And Exclusion Clauses Cure Misrepresentations? Introduction The case of BSkyB v HP Enterprise Services UK Ltd [2010] QBD 267 (TCC) involved an invitation to tender by the Plaintiff company. The Defendant eventually won the bid, but it did so through a number of misrepresentations, both fraudulent and negligent, regarding its ability to meet the Plaintiff s timescales. The Defendant was finally unable to complete the project on time, causing great losses to the Plaintiff. The English High Court had to determine whether the Entire Agreement Clause and the Exclusion Clause in the contract between the Plaintiff and the Defendant had the effect of releasing the Defendant from its liability for the misrepresentations. It was agreed that neither clause excluded liability for fraudulent misrepresentation. While the Entire Agreement Clause also failed to prevent the Defendant from being liable for negligent misrepresentation, the Exclusion Clause successfully excluded certain heads of loss and limited the Defendant s liability for negligent misrepresentation. This case demonstrates the dangers of blindly promising what a potential client wants done just so as to secure a contract. The bidder is likely to be held accountable for all representations made, and depending on the level of dishonesty or deceit behind such representations, entire agreement and exclusion clauses may only afford the bidder a very limited protection. Brief Facts (1) The Plaintiff company wished to procure a new customer relationship management system, and initiated an invitation to tender process. It was expressed that the project should go live within 9 months, and be completed within 18 months. (2) The Defendant, representing that the specified timescales were achievable, managed to win the bid. However, the relationship was not successful, and the contract had to be renegotiated numerous times. Eventually, the Defendant failed to meet the timescale, and full implementation of the management system was only achieved around 5 years later. (3) The Plaintiff claimed against the Defendant for both fraudulent and negligent misrepresentations, including the representations: 1 Rajah & Tann LLP

2 a. That the Defendant had carried out a proper analysis in relation to time, and had reasonable grounds for an opinion that the timescales were achievable; and b. That the Defendant had developed an achievable plan, which was the product of proper analysis and re-planning, during renegotiation. (4) The Defendant in turn relied on a number of terms in its contract with the Plaintiff. a. The Entire Agreement Clause: this Agreement and the schedules together represent the entire understanding and constitute the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement This clause does not exclude liability of either party for fraudulent misrepresentation. b. The Exclusion Clause: This clause excluded liability for any consequential or indirect loss, or loss of profits, revenue, business, goodwill and anticipated savings. It also capped liability at 30 mil. Issues In order to determine the Defendant s liability, the Court had to decide: Whether the Defendant s representations constituted fraudulent or negligent misrepresentations; Whether the Defendant s liability could be excluded under the Entire Agreement Clause; and (iii) Whether the Defendant s liability could be excluded or limited under the Exclusion Clause. Holdings Of The High Court The Court found that the Defendant did indeed make both fraudulent and negligent misrepresentations. The Defendant s liability for its fraudulent misrepresentations was unaffected by either clause. The Entire Agreement Clause did not have the effect of withdrawing any of the Defendant s representations, leaving the Defendant liable for its negligent misrepresentations as well. (iii) However, the Exclusion Clause served to exclude certain heads of loss and cap the Defendant s liability for its negligent misrepresentations. 2 Rajah & Tann LLP

3 Misrepresentations It was found that the Defendant had indeed represented that it had conducted a proper analysis of the amount of time needed to complete the project, and that it could achieve the requested timescales. However, the Defendant accepted that there was no proper analysis or reasonable grounds for the timescales; it did not undertake a proper exercise to work out what work was required, nor did it undertake any proper planning, sequencing or resourcing to establish that the project could go live in 9 months. This amounted to fraudulent misrepresentation on the part of the Defendant. In addition, the Court found that the Defendant had negligently misrepresented that it had developed an achievable plan which had been the product of proper analysis and re-planning prior to renegotiation. Entire Agreement Clause The Entire Agreement Clause clearly stated that it did not exclude liability for fraudulent misrepresentation. However, the Defendant argued that the Entire Agreement Clause prevented claims for non-fraudulent misrepresentation by rendering them withdrawn, overridden or of no legal effect. The Court accepted that a representor could modify or withdraw a prior representation at any time before it was relied upon. However, in this case, the words of the Entire Agreement Clause were insufficient to do so. The Entire Agreement Clause only provided that prior representations were superseded and would not have contractual effect unless included in the terms of the agreement; it did not withdraw representations for all purposes, such as for claims in misrepresentation. To exclude claims for all misrepresentations, the language of the clause would have to go much further. Therefore, the Entire Agreement Clause did not exclude liability for either fraudulent or negligent misrepresentation. Exclusion Clause It was accepted that the Exclusion Clause did not limit losses or cap liability for claims based on fraud and deceit. Therefore, the Defendant was liable up to the full extent of losses arising from its fraudulent misrepresentations. However, it was held for claims of negligent misrepresentation that the Exclusion Clause did have the effect of excluding liability for indirect losses and for loss of profits, revenue, business, goodwill and/or unanticipated savings, and also capped liability at 30 mil. The Defendant s liability under this part of the claim was thus successfully limited by the Exclusion Clause. 3 Rajah & Tann LLP

4 Duty Of Care In addition, the Defendant managed to exclude the liability of its parent company (which was also a party to the action) for any negligent misrepresentations. Contractual provisions can affect the existence of a duty of care if the parties have structured their relationship such that it is incoherent with the assumption of responsibility or with it being fair, just and reasonable to impose liability. Here, the parent company could have been made a party to the agreement, but the parties chose not to do so. (iii) The Court held that the parent company did not owe the Plaintiff a duty of care as such duty would circumvent the contractual exclusion or limitation of liability which the parties put in place. Concluding Words In bidding for a project, it is often tempting to promise all that the potential client is asking for without having a secure basis for such assurances, adopting an act now, ask later approach. However, the bidder should realize that he can be held accountable for every representation made, which can have vast consequences when the promises made cannot be kept. In the case of fraudulent misrepresentations, it is unlikely that any exclusion or limitation clause can protect the representor. In the case of negligent representations, the representor s liability may be successfully limited. However, liability for negligent misrepresentations is unlikely to be completely excluded, even by entire agreement provisions, unless such exclusion is clearly and specifically worded. Bidders should thus think twice before making any assurances, as their liability can be great, and the protection afforded by contractual provisions may be limited. 4 Rajah & Tann LLP

5 Contacts K. Muralidharan Pillai Partner D (65) F (65) k.murali@rajahtann.com Mark Tan Partner D (65) F (65) mark.tan@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is one of the largest law firms in Singapore and Asia, with representative offices in Shanghai and Vientiane, as well as an associate office (Kamilah & Chong) in Kuala Lumpur. As a full service regional law firm, our knowledge, resources and insight can be your business advantage. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5 Rajah & Tann LLP