By Vinay Jain, Chief Legal Officer at Shake
When negotiating an agreement, people sometimes make commitments outside of that agreement – in person, over the phone, by email – that aren’t captured in the written contract. This can cause confusion and misunderstanding about whether those commitments are actually part of the deal. To prevent such confusion, contracts often contain boilerplate language called the “merger clause” or “integration clause,” which states that the contract itself is the final word on what the parties have agreed to. Let’s take a closer look at merger clauses.
Typically the merger clause will state that the contract that it is part of captures the “entire agreement” between the parties. In Shake’s forms, the merger clause reads as follows:
“This is the parties’ entire agreement on this matter, superseding all previous negotiations or agreements.”
An example may help show why a merger clause can be a good thing to include in a contract. Say a freelance software developer is discussing a job with a potential client. They have a phone call where they agree to the basics of the deal – the scope of work, fees, deadlines, etc. In the course of the conversation, the client asks if, after delivering the software, the developer would be willing to provide product support for two weeks. The developer says something like, “Yeah, that shouldn’t be a problem unless I’m very busy.” After the call, the developer sends the client a contract capturing the terms of the deal. The contract doesn’t say anything about product support. The client either doesn’t notice or doesn’t care, and signs the contract without making any changes.
Fast forward now to after the developer has delivered the software. The client is happy with the deliverables, but now expects the developer to be on call for two weeks of product support. The developer, however, tells the client she is very busy and will not be able to. The client objects, saying, “You promised you would do this, it was part of our deal.” The developer remembers it differently – she said she would do it only if she had time, and it turns out she doesn’t.
So that’s the dilemma – the two parties disagree about what they agreed to, and because the contract is silent on this product support issue, it’s one person’s word against the other’s. If their contract had contained a merger clause, though, it could have resolved the issue, since it would have eliminated the possibility that statements made outside contract could be considered part of it.
Legally speaking, if the dispute went to court, the merger clause would generally prevent either party from using evidence outside of the contract to claim that there were other parts to the agreement. It essentially forces a court to look at just the written contract, under a legal rule called the “parol evidence rule.”1
The practical upshot of the merger clause is that it puts both parties to a contract on notice that if they want something to be part of the agreement, they need to make sure it’s written into the agreement. In this case, if the client expected customer support, he should have added that in before signing.
There is one important wrinkle when it comes to merger clauses – the concept of “fraudulent inducement.”2 Going back to our example, the client might try to claim that the main reason he agreed to sign the contract with the developer in the first place was because of the promise of product support, and further claim that the developer never had any intention of fulfilling that promise. In other words, the client may claim the developer “fraudulently induced” him into signing the contract.
A successful fraudulent inducement claim requires showing a number of things, including that the injured party relied on a false representation by the allegedly fraudulent party.3 The existence of a merger clause in a contract, and its particular wording, goes to this element of reliance. A “general” merger clause that disclaims reliance on all statements made outside the contract may not be as protective against fraudulent inducement claims as a “specific” merger clause disclaiming reliance on the very subject a plaintiff seeks to claim as fraud.4
- A merger clause is a provision often included in contracts stating that the written agreement constitutes the entire agreement between the two parties.
- Merger clauses are useful because they reduce confusion about whether obligations supposedly made outside of the agreement are part of it, and because they push both parties to put all the important parts of the agreement in writing.
- Depending on their wording, merger clauses can be helpful in preventing claims of “fraudulent inducement,” in which one party to a contract claims that the other used deceit to induce them into entering the agreement.
- A merger clause that disclaims reliance on certain specified types of information may be more effective in preventing fraudulent inducement claims than one that’s more broadly worded.
- See Marine Midland Bank-Southern v. Thurlow, 53 N.Y.2d 381, 387 (1981) (“where the parties have reduced their agreement to an integrated writing, the parol evidence rule operates to exclude evidence of all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing); Williston on Contracts, Third Edition, § 631 (“The parol evidence rule, briefly stated, requires that in the absence of fraud, duress, or mutual mistake, all extrinsic evidence must be excluded if the parties have reduced their agreement to an integrated writing. Under this rule, all prior and contemporaneous negotiations or understandings of the contract are merged, once that contract is reduced in writing.”); But see S. Megga Telecommc’s. Ltd. v. Lucent Techs., Inc., 1997 WL 86413, No. 96-357-SLR, at *6 (D. Del. Feb. 14, 1997) (applying New Jersey law in holding that “although a contract with a merger clause is strong evidence that the parties intended the writing to be the complete and exclusive agreement between them, it is not dispositive” with respect to the parties’ intent); Corbin on Contracts § 532, 1960 ed. (arguing that a merger clause will only bar admission of extra-contractual agreements and representations, but will not bar extra-contractual evidence of a contract’s meaning itself). ↩
- See e.g., Cirillo v. Slomin’s Inc., 196 Misc. 2d 922 (N.Y. Sup. Ct. 2003) (a merger clause is “ineffectual to exclude evidence of fraudulent representations in an action to rescind a contract or to recover loss sustained as a result of fraudulent inducement”). ↩
- Under New York law, fraudulent inducement has the following elements: (1) representation, (2) falsity, (3) scienter, (4) deception and (5) injury. Sabo v. Delman, 143 N.E.2d 906, 907 (N.Y. 1957). ↩
- See e.g., Dannan Realty Corp. v. Harris, 157 N.E.2d 597 (N.Y. 1959) (stating the general rule that “a general merger clause is ineffective to exclude parol evidence (extra-contractual) to show fraud in inducing the contract …”). See Korff v. Hilton Resorts Corp., 506 Fed. Appx. 473 (6th Cir. 2012) (finding that a merger clause stating the buyer of a timeshare could not rely on the salesperson’s representations was too general to be considered a specific merger clause); Nielsen Co. (US), LLC v. Success Sys. Inc., 2013 WL 1197857, No. 11 CV 2939 LAP FM, at *6 (S.D.N.Y. Mar. 19, 2013) (finding that a general merger clause is not enough to preclude a fraudulent inducement claim); Italian Cowboy Partners, Ltd. v. Prudential Ins. Co., 341 S.W.3d 323 (Tex. 2011) (holding that if a merger clause is to prevent a fraudulent inducement claim, it must evidence “an intent to disclaim reliance.”). In Italian Cowboy Partners, Ltd., the court described examples of specific merger clauses that would protect a party from a fraudulent inducement claim. One such example stated “(N)one of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment . . . .” (citing Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 180 (Tex. 1997). But see Nielsen Co. (US), LLC, 2013 WL 1197857, at *8 (noting that under New York law a sufficiently specific merger clause “must contain explicit disclaimers of the particular representations that form the basis of the fraud-in-the-inducement claim.”). ↩