Heads Of Terms During Negotiations Irrelevant

Date Added 13.04.15

…  when interpreting final agreement!

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  • to the extent that they did have contractual force, the entire agreement clause meant they were superseded by the final agreement.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

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