Often, a contract will replace a preceding contract, a letter of intent or a mere exchange of e-mails in which the basics of a possible transaction are fine-tuned. Also, a contract is in many cases the end-result of what started with an information memorandum, a ‘binding bid’ or one or more (product or business) presentations. Furthermore, during the negotiations, the parties will likely have expressed their intentions as to how they would perform in certain specific cases or how they would generally behave in a certain context. When it comes to important or otherwise key issues of the transaction, the parties will include these in the final contract. At the same time, the parties will generally have acted in a promotional mood to get the deal done, without necessarily assuming all promises made. Eventually, they will write down in their contract the minimum of what is important or necessary and, later on, they will probably perform, formally committed or not, also in light of the other party’s behaviour.
This is why contracting parties limit their contractual obligations to what is negotiated and written in the contract itself and why they wish to exclude preceding communications and arrangements. Obviously, what will be carved out by the arrangement should be limited to what needs to be carved out (and not also cover unrelated or adjacent arrangements). If a term sheet or letter of intent needs to terminate, this should preferably be done explicitly (by identifying the term sheet or LOI and stating that it ceases to be effective). Strictly speaking, this needs to be done by the relevant party to any such letter of intent in order to achieve full certainty but in real life no one will bother if an affiliated company does so.
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 2008 between [A] and [B] is hereby terminated.
Limited legal effectiveness. The binding effect of an entire agreement clause remains somewhat uncertain and always subject to interpretation. Whether a boilerplate-type of clause must have the drakonic effect of its wording may well be questioned. The European Member State laws somehow accommodate the above considerations, given the following provision in the Draft Common Frame of Reference (DCFR), an authoritative preparatory work for a European Civil Code:
Art. II. – 4:104: Merger clause
(1) If a contract document contains an individually negotiated clause stating that the document embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements which are not embodied in the document do not form part of the contract.
(2) If the merger clause is not individually negotiated it establishes only a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted.
(3) The parties’ prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated clause.
(4) A party may by statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on such statements or conduct.
Best practice rule. If mutual trust and cooperation are important characteristics of a transaction, the contracting parties should be reluctant to insert an entire agreement clause in their contract. This may be particularly sensitive if extensive discussions between them have led to various arrangements, which have not necessarily been incorporated in the transaction agreements. Of course, if arrangements in a letter of intent have been renegotiated or were the subject of giving and taking of other benefits, the exclusion of a specific document is recommendable. A drafter should consider the impact of emails and other arrangements in the block notes of one party.