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. 4 min read
What is a Merger Clause?
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 interpreting 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.
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.
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