Often, a contract will replace a preceding contract, a letter of intention or an exchange of e-mails in which the basics of a possible transaction have been fine-tuned. Also, a contract is in many cases the end result of a process that began with a ‘binding bid’, letter of intent, memorandum of understanding (‘MOU’) or one or more (product or business) presentations. During the negotiations, the parties will no doubt have expressed their intentions as to how they would perform in certain specific cases or how they would generally behave in a certain context. If these preliminaries concern important or otherwise key issues of the transaction, the parties will include them in the final contract. But usually the parties will have acted in a cooperative manner to get the deal done, without necessarily assuming the performance of all promises made. Eventually, they will have boiled down what is essentially important or necessary to include in a written contract and will probably perform their respective obligations as a result (whether or not they are formally committed to do so), in light of the other party’s behaviour.
Functional approach. That is why contracting parties limit their contractual obligations to what has been negotiated and written down in the contract itself and why they may wish explicitly to exclude preceding communications and arrangements. Obviously, what will be carved out by entire agreement clauses should be limited to what is necessary (and not also cover unrelated or related arrangements). If a term sheet or letter of intent needs to be terminated, it is preferable to state this explicitly by including all identifiers of a contract. Strictly speaking, to achieve full certainty, it needs to be done by the relevant party to any such letter of intent, but in practice it is acceptable for an affiliated company to do it.
Entire Agreement. This Agreement constitutes the entire agreement between the Parties on the subject matter of this Agreement and supersedes any preceding agreement between the Parties on the subject matter of this Agreement only. In particular, the Letter of Intent on the Acquisition of all Shares in Johnson Distribution Services Holding GmbH dated 18 May 2017 between [N] and [C] is hereby terminated.
The binding effect of an entire agreement clause remains somewhat uncertain and always subject to interpretation. The Unidroit Principles are more clearly defined as seen in Article 2.1.17 (Merger Clauses) below:
Article 2.1.17 (Merger clauses)
A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.
Not in alliances or joint ventures. If mutual trust and cooperation are important characteristics of a transaction, the contracting parties should be reluctant to include an entire agreement clause in their contract. The matter may be particularly sensitive if extensive discussions between them have led to various arrangements that have not necessarily been incorporated into the transaction agreements. Of course, if arrangements in a letter of intent have been renegotiated or were the subject of give-and-take regarding other benefits, the exclusion of a specific document is recommended. A drafter should consider the impact of emails and other arrangements in the block notes of one party but not the other.