Heads of agreement excluded by entire agreement clause

Contract disputes are relatively common and, when a case comes to court, one of the first things the court has to do is to try to work out what the parties to the contract presumed they were agreeing given the background to it (the ‘factual matrix’).

In a recently reported dispute, the High Court was called upon to rule on the meaning of a contract between two IT companies which were developing products for the gambling industry. They had agreed heads of agreement and those were followed by a contract which contained an ‘entire agreement’ clause. This stipulated that nothing outside the body of the contract was part of it.

One of the companies – a software developer – claimed that the other company – a technology supplier – had breached the contract by failing to do some of the things it had agreed it would. These were specified in the heads of agreement but not in the final contract.

The question which then arose was whether the heads of agreement formed part of the factual matrix applying to the contract and thus could be regarded as being contractual obligations of the technology supplier.

The High Court concluded that they were not. The heads of agreement were excluded by the entire agreement clause, which rendered them non-binding.

Says Rodney Hylton-Potts “The creation of heads of agreement is a common preliminary step in the negotiation of a contract. It is crucial that the undertakings agreed to at this stage are carried over into the contract.”

If you are negotiating a contract with another business, we can help you ensure that the contract terms protect your position.
We offer fixed fees and give excellent value.

We operate a free and confidential 24 hour email service. Just click on [email protected] or, during office hours there is a free and confidential legal helpline 020 7381 8111.