How Vendors Can Use the Entire Agreement Clause to Stop You Cutting Costs – and what to do about it

By Richard Kerr on

Most organisations, whether in the public or private sector, are under extreme pressure to cut service costs – and quickly. But they also remain under pressure to keep service levels as high as they possibly can. And minimise complaints from their customers and citizens.

There are many parts to successful strategic provider relationships and the written contract terms that govern them that can impact upon whether you can achieve these outcomes. In this article we will look at one such element of a contract that is widely underestimated; the Entire Agreement Clause.

Firstly, let me briefly describe what triggered this article and its importance.

During a visit to a splendid historic house the other weekend, I was entranced by the glorious gardens, Gothic architecture and overall grandeur. I then started to notice the inscriptions over doors, on door-posts, even on walls. One in particular piqued my interest; “Litera scripta manent, verba locuta volant”. This is a Latin proverb literally translated that means “spoken words fly away, written words remain forever”.

I started reflecting on the business world and how this principle remains as valid today as it did in Roman times. Written words have the contractual power to make and break; spoken words can easily be forgotten. So much the case when it comes to the importance of a formal agreement between two parties – to avoid misunderstandings and keep memories fresh, you should try to put everything material in writing – as practically difficult as this may be in your everyday working life.

If you can avoid relying on a verbal agreement, ideally by putting together some form of written confirmation soon after the event, so much the better. As Sam Goldwyn-Mayer (the famous studio owner) was once misreported to have said “a verbal contract isn’t worth the paper it’s written on”. Whilst in contractual terms, the principle behind this statement isn’t quite true, it prevents a lot of misunderstanding (unexpected costs and relationship breakdowns) if agreements are written down…

What information do you want to rely upon?

Before entering into an outsourced, managed or commissioned service there can often be years of negotiations resulting in hundreds of requirements documents – often including hundreds of emails. These electronic discussions, coupled with sales brochures, informal and formal meetings all put together an overall picture of what outcomes the client thinks it is going to achieve through the services provided of its strategic vendor.

When it comes to establishing the parameters of what should and should not be relied upon, and faced with a potential mountain of hard-copy and electronic paperwork, there has to be a way of limiting what should and should not be taken into account in the written contract.

The elephant in the room

Enter the Entire Agreement Clause. Often, the vendor’s ‘best friend’. The vendor’s lawyers often promote this clause in the interests of ‘adding clarity’ in the contract. You will usually be told that it helps to make it clear as to what their client (the vendor) should be accountable for in terms of what information you have relied upon in selecting the vendor to provide services to you. It is often further suggested that such clarity will assist you, as the client, to achieve your business outcomes at the agreed cost and time scale.

In our experience however, its real purpose from the vendor’s perspective is to help prevent you, as the client, from being able to rely on certain key elements of the vendor’s expertise and the outcomes/objectives the vendor said it would help you achieve during the bidding process. This clause typically includes the following elements:

1. Entire Agreement:

  • This agreement constitutes the entire agreement between the parties and supersedes all previous agreements (written or oral) between the parties in relation to its subject-matter.
  • Each party acknowledges that in entering into this agreement it has not relied on, and shall have no right or remedy in respect of any statement, representation, assurance or warranty (whether made negligently or innocently) other than as expressly set out in this agreement.

In fairness, if the documentation (business outcomes, objectives, requirements, scoping, due diligence, implementation plans and so forth) in the contract are structured in the right way, such clauses can help the parties limit, or even avoid, the costs of dispute resolution or perhaps even litigation in the event of perceived misunderstandings and lack of delivery. The clause can help provide an anchor for a degree of certainty.

How the Entire Agreement Clause can stop you cutting costs; what to do about it

The upside. Providing your other project documentation is structured appropriately and attached to the contract correctly in such a way that you have clearly understood and documented confirmation that your business outcomes will be achieved by your vendor, the benefit of an Entire Agreement Clause is that it will help to provide certainty that the vendor and yourselves have clarity that what is in the documentation is, (a) aligned to the business outcomes you are trying to achieve, and (b) it is bolted securely into the written contract terms.

Providing these documents reflect your business outcomes correctly, they help to provide a platform to drive the right behaviours from both your vendor and yourselves to achieve those business outcomes.

The downside. You can be prevented from achieving your business outcomes and cutting costs quite inadvertently if the structure of the other documentation is not correct. Why? Because this documentation is all you can rely on due to the Entire Agreement Clause.

The problems come from the fact that there are two extreme end points that can happen with a clause such as this:

1) First extreme; having gone through a long negotiation, the real ‘meat’ of the business outcomes you have in your mind are not articulated well enough in the documentation to be clearly understood; key elements are still buried in the too-ing and fro-ing of meeting minutes, verbal dialogues and emails.

Furthermore, key aspects of this documentation are inadvertently not annexed to the contract. The result is that you have gone into a clean contract (the Entire Agreement Clause can often stop you being able to rely on anything not attached to the contract) with a lack of clarity over how your business outcomes will be achieved.

In addition, you have a lot of exclusions in the general contract terms relating to the fact that you will be unable to rely on the services being fit for their intended purpose, the quality doesn’t have to stack up, timelines no longer have to be achieved and you’ll still have to pay your vendor. And as for any compensation if you don’t get what you want? You have a problem.

2) Alternatively, and at the other extreme, you can find yourself with written contract terms and schedules thousands of pages deep as people are scared of missing anything – but still not being clear, in practical terms, as to how your business outcomes will be achieved, by when and at what cost.

So, on the one hand, if your other documentation and due diligence process is structured correctly, the Entire Agreement Clause can give you good protection and certainty as it allows both parties to properly establish the risks, cost position and true scope of deliverables and business outcomes to be achieved.

On the other hand, however, if your other documentation is not structured correctly – and in our experience we don’t often see the other contractual documentation correctly aligned to business outcomes – then it is likely you will have a painful and very challenging vendor relationship and service delivery process ahead of you.

Innovation; helping to cut costs and maintain or improve service levels

In today’s era of rapid digital and economic change, if things are too set in stone, in certain types of business relationships, then the written contract terms may not have the flexibility that your organisation needs. Indeed both parties may want to go in the same direction, however they are constrained by the written contract terms from doing so.

To prevent this from happening there needs to be strategically designed contracts that allow both parties to be clear on what is in the contract, and equally clear that it is flexible enough to encourage innovation and business and technological advancement. What is written can set out simple and workable routes to allow this to happen to prevent people from drowning in legalities and bureaucracy. If this is done correctly, and your Entire Agreement Clause anchors this information to the written contract terms, you end up in a win-win with your vendor and your cost cutting regime – rather than an adversarial relationship where each side positions itself for the next round of battles.

How the written word can help (or not) manage disputes

When things go badly wrong with a strategic vendor relationship and its heading towards a dispute or litigation, the written word, correctly structured and aligned to your expectations, can be really helpful.

Entire Agreement Clauses have often come before the courts for consideration as to whether the parties can rely upon them or not. This is why it is important that with regard to your ‘other documentation’ that the clause encapsulates within the contract is structured correctly, and that the Entire Agreement Clause itself is carefully drafted to effectively protect the parties who rely on it. It is particularly important, as witnessed in a recent legal case, that the drafting encapsulates correctly the exclusion of liability for misrepresentations.

So, in summary, the precise wording used in an Entire Agreement Clause can make or break the flexibility you have in terms of the documentation and expectations you can rely upon to cut costs and achieve your business outcomes.

Image courtesy of iStockphoto