Michael Connell, lawyer and founder of Connell Associates, outlines an important change to contract law and how it could affect financial advisers.
Putting pen to paper, and signing on the dotted line, has always signified a ‘done deal’. Whether it is a meaty tied agent agreement, or just carrying out day-to-day business – such as orders and purchasing – the written contract has always been deemed as ‘king’.
In the UK, commercial contract law has been honed and developed to provide guarantees and security for any company entering into business with another.
The art of broking means that professional advisers naturally sit in the middle, facing contractual pressures and obligations from both clients and providers. As a result, the process of hammering out terms and conditions requires careful consideration to ensure that all parties are covered against potential liabilities and future claims.
How new laws affect advisers
Dethroning the contractual monarch
Any prudent intermediary will always pour over a contract to make sure that it reflects what is been agreed. ‘Down in black and white’, ‘set in stone’, ‘it’s all about the small print’ – the contractual clichés are plentiful and well worn, because every business understands the importance of the written contract. That is until now. A recent Court of Appeal case has brought into question the very meaning of contractual agreements, potentially turning 25 years of commercial contract law on its head.
In future, any ‘off-the-cuff’ remark or verbal agreement that is made many months prior to a contract being signed may now stand up in a court of law, if necessary clauses are not included within a written contract.
The omission of an ‘entire agreement clause’, as part of a properly worded contract, means that any conversations had between two parties about the terms of an agreement may now be binding – even if they are not contained within the written document – and can override terms in the contract, which are contrary to the conversations.
The landmark ruling throws serious doubt over contract law and could have far-reaching consequences in relation to commercial agreements – the kind not seen before in the UK. It could have particular implications on large companies that have a high turnover of staff – people who may have left the company, but are willing to testify in respect of conversations from many years previously.
Understanding an entire agreement clause
An entire agreement clause is a section of a contract that is included to ensure that the written terms serve as the sole conditions of that agreement and neither party can rely on anything else that has been said or done.
It is an extremely important provision that must be worded precisely to ensure that its meaning and effect cannot be called into question. In a nutshell: it ensures that the contract is self-contained and freestanding; it avoids any ambiguity over service agreements; and it nullifies any previous exchanges, including pre-contractual negotiations that may be used to alter the meaning or effect of the terms.
What this judgement demonstrates is the vital role that entire agreement clauses play; moving forward, an intermediary cannot guarantee that other representations will not come into force. Effectively, any verbal discussions could override ‘express terms’, if an entire agreement clause is not included.
While existing case law relates to conversations had between two parties, just as an agreement is ready to be signed, this case relates to a period of time beforehand – in some instances many years – where a contract is not read properly and verbal discussions suddenly become instrumental in executing that agreement.
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