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Heads of terms during negotiations irrelevant when interpreting final agreement

Obligations in heads of terms entered into during negotiations prior to signing a final agreement did not apply when they did not appear in a final agreement containing an ‘entire agreement’ clause.

A software developer claimed compensation from a supplier for breach of a software agreement made between them. The agreement was based on heads of terms agreed in writing before the final agreement was signed. The heads of terms provided that the supplier was to do certain things, which it subsequently failed to do, but these did not appear in the final agreement.

The final agreement contained an ‘entire agreement clause‘ by lawyers saying it constituted ‘the entire agreement and understanding between the parties’ and overrode ‘all proposals and prior agreements, arrangements and understandings between the parties relating to its subject matter’. The supplier therefore argued that it was not contractually bound to do the things it had failed to do, and the developer had no claim against it.

Courts interpret agreements objectively. They ask what an objective third party with all the background knowledge reasonably available at the time the agreement is entered into – what they call the ‘factual matrix’ – would understand it to mean.

In this case, the software developer argued that the heads of terms were part of the ‘factual matrix’ behind the agreement and the court should take it into account when interpreting the agreement. The High Court ruled that the heads of terms were not part of the factual matrix behind the agreement because:

• to the extent they did not have contractual force, they were simply one step in the negotiations leading up to the final agreement;
• to the extent that they did have contractual force, the entire agreement clause meant they were superseded by the final agreement.

The court noted that the agreement did have to be interpreted by reference to the factual matrix, but where a final agreement contained an entire agreement clause (the whole point of which was to make sure the parties’ rights and duties were governed by one document) previous heads of terms could not be included in that factual matrix.

Recommendation

Businesses negotiating and signing agreements containing entire agreement clauses should ensure every right or obligation they intend to apply should be expressly set out in that final agreement, and should not rely on previous heads of terms or other documents.

Case ref: Matchbet Ltd v Openbet Retail Ltd [2013] EWHC 3067

18 July 2014

Alex Cook initially trained as a Barrister (non-practicing) before cross-qualifying as a specialist commercial and property litigation solicitor. Prior to becoming joint owner of Helix Law in 2013, he was Head of Litigation and one of the youngest partners in the region in a large firm based in Eastbourne. Comfortable and experienced litigating against large international City firms, he has successfully resolved complex commercial and property disputes for clients ranging from large international businesses and property investors to individual business people. Alex is an accredited commercial mediator  and he is increasingly asked to advise on contracts, risk, dispute avoidance and exit strategies. He also continues to develop and innovate our products, services and funding arrangements with the aim of making specialist litigation services more transparent and accessible.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]