Merger Clause: Everything You Need to Know
A merger clause is a clause identified in some contracts indicating that any other prior discussions do not form any part of the contract itself. 6 min read
2. An Exception to the Rule: Fraudulent Inducement
3. Steps to Take
4. What Is a Scenario When You Can Use a Merger Clause?
5. Merger and Integration Clauses
6. When Can You Use Contractual Merger Clauses?
A merger clause, also referred to as a merger and integration clause, is a clause identified in some contracts indicating that any other prior discussions not mentioned in the contract, whether orally or in writing, do not form any part of the contract itself.
For example, if two parties make some sort of commitment outside of the agreement — in person, via email, or over the phone — it will not be part of the final contract. Only what is stated in the contract itself is what is agreed upon.
Therefore, after both parties sign a contract that includes a merger clause, neither party can force the other to abide by any other agreements or terms that aren't identified in the contract. The clause itself serves as a reminder to both parties that, if either should want something to be part of the agreement, then it must be stated in the contract.
If any legal issues arise, a court is forced to look at the written contract under what's called the “parole evidence rule.” The parole evidence rule simply prohibits any prior negotiations or statements from being evidence as long as the contract itself appears to be clear in its terms.
An Exception to the Rule: Fraudulent Inducement
While this isn't really an exception, it's more of a claim made by an injured party to the contract alleging that the other party fraudulently induced the injured party into signing the contract.
In order to be successful in a claim of fraudulent inducement, the injured party must prove that he or she relied on a false statement by the alleged fraudulent party. The important word here to remember is reliance. This is because any merger clause has a reliance component to it, in which both parties rely on the statements and terms identified in the contract.
However, for those contracts that do not have a merger clause, the court will have additional evidence to review in order to determine whether the parties intended the written contract to be the final agreement. It is important to note that most courts tend to follow those terms identified in the contract, even if prior negotiations were made between the parties. This is because the contract itself should state all terms that the parties want to be included; if the prior negotiations were truly agreed upon by both parties, those additional negotiations would have been placed in the contract.
Particularly, for those claiming that they were fraudulently induced into signing a contract, regardless of whether or not a merger clause exists, courts generally take three approaches to interpret the contract:
- Some courts, i.e., California, enforce the contract as written if a merger clause exists. This prevents the injured party from providing evidence of prior negotiations.
- Some courts enforce merger clauses, but only if what the injured party wishes to be enforced (due to prior negotiations) is disclaimed in the contract. Therefore, if the prior representation is expressly rejected in the agreement, then the contract stands.
- Some courts enforce merger clauses, but instead of looking at the representations made, will look at the sophistication of the parties who entered into the agreement.
While such claims can be made, it depends wholly on the specific state law hearing the case. Therefore, before signing a contract with another party, make sure the merger clause is specific and detailed to prevent any legal issues down the road.
Steps to Take
First, you'll want to select a governing law that strictly enforces merger clauses. Choose a court that grants summary judgment on any fraud claims that fail to identify reliance as a component to signing the agreement.
Next, you'll want to alter the general merger clause language with a disclaimer of reliance that is both specific and detailed. Include what is and is not being promised. Also, include whether or not any prior negotiations made will apply in the contract. If not, then specify this in the merger clause.
Establishing a thorough merger clause is important, so as to prevent any legal issues in the future. Make sure that you and the other party to the agreement are aware that the contract is the final agreement. Ensure that both you and the other party input all pertinent terms in the merger clause; even if the other party has been made aware of the fact that any prior negotiations or agreements will not be part of the written agreement, it is still best to include those items in the merger clause.
What Is a Scenario When You Can Use a Merger Clause?
When you negotiate an agreement, people may make commitments that aren't in the agreement, such as by email, in person, or over the phone. These aren't in the original written contract, which causes misunderstanding and confusion about whether the commitments are really part of the deal or not. For instance, say a freelance software developer is talking about a job with a possible client and they say something to the effect of, "That won't be a problem unless I become busy." When the call is over, they send their client the contract that goes over the terms of the deal.
The contract doesn't mention product support at all. Either the client doesn't care or doesn't notice and proceeds with signing the contract without making amendments. We then get to the stage where the developer delivers their software. While the client is happy with those, they also expect that the developer will be on call for several weeks for product support. The developer says that isn't possible since she's very busy.
If this ended up going to court, the merge clause prevents both the client and developer from using outside evidence to say there were additional parts of the agreement. This means the court must look at only the written contract under what's known as the parol evidence rule. The upshot of this merger clause is it tells both parties in the contract that they need to include anything they want in the contract in the written agreement.
If the client did want and expect customer support, they needed to add that to the contract before they signed it in order for it to be legal. However, the concept of fraudulent inducement does exist. The client may try to claim the reason they signed the developer's contract originally was due to a promise to have product support. They can then claim that the developer had no intention of fulfilling the promise that was made.
This means the client can say the developer fraudulently induced them into signing the agreement. To successfully claim this, many different items need to be shown, such as proving that the injured party relied on a false representation by the party who is fraudulent.
Merger and Integration Clauses
An integration and merger clause is crucial in a contract. This is mandatory so parties can't claim they didn't understand exactly what was in the contract, isn't consistent with previous agreements, or was amended by an oral agreement that happened later. The provision states it's the final and complete agreement between the two parties. A contract that has a merger and integration clause is also known as an integrated contract. Any prior negotiations by the parties in an integrated contract are deemed superseded by the writing being final.
When Can You Use Contractual Merger Clauses?
When litigation happens due to the relationship becoming sour, most defendants will think the contractual talisman protects them from fraudulent inducement, fraud, or identical claims based on representations or promises made to the plaintiff before the contract. A majority of courts have either rejected or narrowed the use of these types of clauses dramatically to protect fraud claims. A merger clause, in theory, works together with the parol evidence rule to make sure the courts and parties are dealing with an agreement that's final and fully integrated.
According to this rule, the evidence is forbidden to be introduced when it comes to promises, negotiations, or representations that were made while the contract was being negotiated as long as the contract, in the end, is complete and clear.
A merger clause gets put into verifying that the parties want the contract to be the final and complete manifestation of every term they agreed to. Without a merger clause, a party can ask the court to look at extrinsic evidence to see if the parties had the intention of the written contract being their complete and final agreement. They can also see if there were other commitments or promises that were part of the deal.
The argument's logic is the party can't have relied on representation outside of the contract when the contract states that all representations and promises are explicitly listed in the contract. There are usually three approaches courts use to enforce and interpret merger clauses. Some courts choose to enforce contracts just as they're written so a party can't say they relied on this representation that was outside of the contract when making their decision to enter the agreement or not.
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