The Misunderstood but Critically Important Merger Clause

By: Timothy Murray, Murray Hogue & Lannis

ONE TIME IN AN ARBITRATION, THE PLAINTIFF CLAIMED that my client, the defendant, breached an alleged oral agreement that my client denied entering into. It was undisputed that after the alleged oral agreement, the parties entered into a written contract that dealt with the same subject matter but that omitted the rights and obligations of the supposed oral agreement. The written contract contained a merger clause making it the complete and exclusive statement of the terms of the agreement. The simple legal question for the arbitrators was whether the written contract discharged the alleged earlier oral agreement.

I cross-examined the plaintiff’s previous attorney, a seasoned commercial lawyer who was a witness to the supposed oral agreement. When I showed him the merger clause, I’ll never forget his reaction.

“That’s a standard clause!” he spat out with a scorn dismissing any suggestion that the clause was even remotely pertinent to the dispute. I actually thought I could hear his eyes rolling. He didn’t bother to explain why the clause was impertinent—presumably merger clauses are tacked onto contracts solely because clients are impressed by fancy legalese that few people understand.

The arbitrators found the “standard clause” to be conclusive and held that the alleged oral agreement was not binding.

For too many attorneys, these standard clauses are the epitome of boilerplate and unworthy of a second thought. The fact is, they are not only overlooked but often misunderstood, and that’s unfortunate because they can be among the most important provisions in the entire contract. Misunderstanding merger clauses can expose our clients to unnecessary and, at times, staggering risk. It’s time to demystify them.

The Dreaded Parol Evidence Rule in a Nutshell

We can’t clear away the haze surrounding merger clauses without traversing that dark and twisted alleyway of contract law known as the parol evidence rule, a subject most of us thought we’d never have to think about again after the bar exam. The fact is, the parol evidence rule hovers over every contract we enter into even if we dare not speak its name.

And even that name—parol evidence rule—is a puzzle because it’s not a rule of evidence at all but of substantive law, and that’s the least of its riddles. One of the chief reasons it is so terribly misunderstood is that it is encrusted with an arcane language all its own.

The idea behind it is simple enough. Attorneys and clients alike understand the necessity of reducing most agreements to a final writing that will embody the parties’ whole deal. The purpose behind the parol evidence rule “is to prevent parties to a written contract from seeking to vary its terms by reference to side agreements, or tentative agreements reached in preliminary negotiations.”¹

Integration: Partial or Complete?

If the parties intend their writing as a final expression of one or more terms of an agreement, the agreement is said to be integrated—a word that continues to have vitality in the parlance of contract law despite its analytical uselessness. To make matters worse, there are two kinds of integration:

• A partially integrated agreement is intended by the parties as a final expression of some, but not all, terms of their agreement. It discharges prior or contemporaneous agreements that contradict the subsequent writing. However, it does not discharge prior or contemporaneous agreements that contain consistent additional terms that do not contradict the writing.
• A completely integrated agreement is intended by the parties as a complete and exclusive statement of the terms of the agreement. Like partially integrated agreements, it discharges any prior or contemporaneous agreements that contradict the writing. Unlike partially integrated agreements, it also discharges any prior or contemporaneous agreements that are within the scope of the agreement—even consistent additional terms that don’t contradict the writing are excluded.²

If the alleged prior or contemporaneous oral agreement contradicts the terms of the subsequent written contract, the prior oral agreement is inadmissible regardless of whether the written agreement is partially or completely integrated. The difficult cases—the ones that erupt into litigation—are those where there is no contradiction between the prior oral agreement and the subsequent written contract. Determining whether the prior oral agreement is admissible hinges on whether the written contract is completely or partially integrated. But how do courts make this determination?

Courts parrot various tests to decide whether a writing is partially or completely integrated, but the dominant one is the natural omission test: would reasonable parties in this situation naturally and normally include the terms of the prior oral agreement in the written contract? If so, the written agreement is completely integrated, and the prior oral agreement is inadmissible. If not, the written agreement is partially integrated, and the prior oral agreement is admissible.³

For contracts for the sale of goods, the official comments to the Uniform Commercial Code (UCC) suggest a variation of the natural omission test: the subsequent written agreement is completely integrated if the prior oral agreement “would certainly have been included in the” subsequent writing.⁴ This is a more stringent standard than the common law test—it means that if the written contract is governed by the UCC, it is more difficult to find that it is completely integrated, and it is more likely that the prior oral agreement will be admissible. This is consistent with the UCC’s progressive Corbin-esque philosophy.

The parol evidence rule is sometimes mistakenly regarded as an aid to interpreting contracts. It is nothing of the kind. The parol evidence rule “only determines which terms of the agreement a court will deem to constitute ‘the contract’ between the parties. It is not a rule of interpretation. Rather, it defines the subject matter of interpretation.”⁵

Merger Clauses

How do so-called merger clauses fit into all this? Merger clauses—sometimes called integration or zipper clauses—are contractual provisions stating in all sorts of different ways “that there are no representations, promises or agreements between the parties except those found in the writing.”⁶

A merger clause can act as a sort of silver bullet that automatically transforms a partially integrated agreement into a completely integrated agreement. Including a merger clause in the contract is “likely to conclude the issue whether the agreement is completely integrated.”⁷ This means that with a merger clause, “[c]onsistent additional terms may then be excluded even though their omission [from the written agreement] would have been natural in the absence of such a clause.”⁸ As one court put it: “The purpose of a merger clause is to require the full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to alter, vary or contradict the terms of the writing . . . .”⁹

Drafting Merger Clauses

Include a Merger Clause

The most important rule about merger clauses is to have one. In the event of a dispute, failing to have a merger clause can open the door to the admission of all manner of evidence about side agreements and extra-contractual promises that your client likely intended to omit from the contract. This could give a court license to ferret through the drafting history of the contract (e.g., the emails and text messages exchanged by the parties prior to contract formation). This is something that might be difficult to explain to a client.

Courts often justify the admission of evidence about side agreements by noting that the written contract lacks a merger clause—a clear signal to the party opposing the admission of this evidence that his or her lawyer had a drafting lapse.

It is a blunder that is easily avoided. On your checklist of essential clauses, merger clauses are among the most important.

Use the Language Recognized by the Courts

If parties want the written contract to constitute a complete integration, they should just come out and say that the agreement is “completely integrated.”¹⁰ Why on earth would they not do so?

They should not characterize the writing as merely containing the entire or the final agreement of the parties.¹¹ They should use the language used by the courts. For example: “The parties intend this statement of their agreement to constitute the complete, exclusive, and fully integrated statement of their agreement. As such, it is the sole expression of their agreement, and they are not bound by any other agreements of whatsoever kind or nature.”

If that suggested language offends the style-mavens as inelegant or ham-handed overkill, tell it to the judges. This is not an English essay contest. We need to draft so that the clause is given effect by using language that tracks the precedents. Contracts are drafted not only for the parties but also for a hypothetical judge who might someday be called upon to resolve disputes over the language.

A drafter might very well get away with using language that does not track the precedents—it happens all the time. If, however, the merger clause becomes an issue in a dispute between the parties, it might be a significant problem. Why take that risk?

Drafting in Case Merger Clauses Are Not Conclusive under the Applicable Law

Merger clauses are not everywhere deemed to be conclusive on the issue of whether the writing is a completely integrated agreement. Courts in some jurisdictions hold them to be conclusive¹² or “generally conclusive,”¹³ while other courts say they are not conclusive but may be a significant factor on the question of integration depending on the facts.¹⁴ The Restatement (Second) of Contracts says that such clauses are “likely to conclude the issue whether the agreement is completely integrated.”¹⁵

Since the parol evidence is a rule of substantive law, the parties ought to be free to control whether their merger clause is given conclusive effect by designating in their choice of law provision a state that makes merger clauses conclusive (provided that the choice of that state’s law is otherwise enforceable).¹⁶ Truth be told, attorneys often insist on the law of a particular state for less practical reasons (often it’s because they claim they are comfortable with the law of a jurisdiction where their client has a presence—even if they don’t really know how that law differs from the law of other states).

But even if the contract is governed by the law of a state that does not deem merger clauses to be conclusive, the parties can enhance their chances of having their contract construed to be a completely integrated agreement by the way they draft, as explained below.

Don’t Rely Solely on Merger Clauses to Make Your Writing Fully Integrated

In many instances, the parties should not solely rely on a merger clause—they can draft the contract in other ways to enhance the likelihood that a writing will be construed as a complete integration.

Courts seek to fulfill the parties’ intentions. If those intentions are spelled out with clarity, a court will have little room to find an agreement that does not comport with them. For example, if the parties have other dealings that are related to or arguably within the scope of the agreement at issue, if possible, the parties should expressly refer to those other dealings in the agreement and explicitly state that the agreement does not alter any rights or obligations except to the extent expressly stated in the agreement. This should preclude the admission of any evidence of alleged side agreements relating to those other dealings.

Make it clear that any agreements creating obligations between the parties—without exception—either are set forth in the present writing or are not being altered by the present writing. Don’t rely on a cookie cutter merger clause. This requires a little more work in the drafting phase, but it is a prudent investment of your time.¹⁷

Drafting Merger Clauses to Exclude Trade Usage and Course of Dealing

There are invisible terms that are part of every agreement: trade usage, course of dealing (a sequence of conduct between the parties in previous transactions), and course of performance (a sequence of conduct between the parties in the present transaction). People often confuse the latter two. For contracts for the sale of goods governed by the UCC, and even for common law contracts in some jurisdictions, evidence of trade usage and course of dealing may be admitted despite the parol evidence rule, even for completely integrated agreements.¹⁸ Evidence of course of performance, as discussed below, should not be barred by the parol evidence rule under any law.

Under the UCC, parties are permitted to carefully negate trade usage and course of dealing.¹⁹ This requires words in addition to a garden-variety merger clause.²⁰ If the parties desire to negate trade usage and course of dealing, in the contract’s merger clause the caption of the merger clause should include a clear reference to the negation of trade usage and course of dealing, and something akin to the following sentence should be added to the merger clause: “The parties also intend that this agreement may not be supplemented, explained, or interpreted by any evidence of trade usage or course of dealing.”

Note that course of performance technically cannot be negated since it involves conduct that occurs post-contract formation.²¹ This raises a simple but fundamental point about merger clauses and the parol evidence rule: they only apply to things that happen prior to or contemporaneous with contract formation.²² Even a well-drafted merger clause does not preclude a post-formation modification. Generally, “[p]arties to a contract cannot, even by an express provision in that contract, deprive themselves of the power to alter or vary or discharge it by subsequent agreement.”²³ This is not to say that no-oral-modification clauses are invariably useless—some laws make them effective, at least to some degree.²⁴ But no-oral-modification clauses are sometimes tacked onto merger clauses as if they are part and parcel of the same legal concept. They are not, and to avoid confusion, merger clauses and no-oral-modification clauses should be set forth in separate provisions.

Drafting Merger Clauses to Exclude Fraud

Generally, evidence of fraud is admissible even in the face of a completely integrated agreement containing a garden-variety merger clause. But if the contract contains an anti-reliance clause stating “that the parties to the contract did not rely upon statements or representations not contained within the document itself,”²⁵ apparently most—but not all—jurisdictions that have ruled on the issue hold that claims of fraud in the inducement are barred.²⁶

Merger and asset-purchase agreements, among other kinds of complex agreements, often contain anti-reliance clauses. The idea behind these clauses is that a party should not be permitted to rely on an alleged representation that is expressly contradicted by the plain words of the contract. Such language should be included in every merger clause.

Seeking Complete Integration in International Contracts

Most of the world’s major trading nations, including the United States, have adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG). Unless the parties have agreed to opt out of CISG (per Article 6), it applies to contracts for the sale of goods made by parties with their principal places of business in different CISG countries.

There are many important differences between the UCC and the CISG (and a lot of similarities), but perhaps the most important difference is that there is no parol evidence rule under the CISG. In addressing how a court should determine the intent or understanding of a reasonable person, Article 8 provides that “due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.” Such negotiations can include any prior promises, agreements, or understandings—so all of these could be admissible into evidence.

Does a merger clause make a contract completely integrated under the CISG to discharge any prior or contemporaneous agreements that are within the scope of the written agreement? It is not altogether clear, but merger clauses probably are not the silver bullet that they are in many American jurisdictions. Even with a merger clause, there is authority that the extrinsic evidence should not be excluded unless the parties actually intended the merger clause to have that effect. To make that determination, evidence of all relevant facts and surrounding circumstances must be examined.²⁷

Practitioners steeped in the law of the United States, including the UCC, appreciate the utility of setting forth the parties’ entire deal in a writing. The absence of a parol evidence rule under the CISG is one legitimate reason to opt out of the CISG. But to opt out of the CISG, the parties cannot rely on an ordinary choice of law provision that states, for example, that the law of a particular state in the United States shall apply—that’s because the law in the United States includes CISG, so to opt out of CISG, it is necessary to choose the law of a jurisdiction and then expressly add that the parties also agree to opt out of the CISG.²⁸

Putting It All Together

Parties should not rely solely on a generic merger clause to ensure that their agreement is completely integrated. They should also reference the parties’ other dealings and spell out that the writing is not altering any rights or obligations except to the extent expressly stated in the writing.

To draft a merger clause, here is a start:

The parties intend this statement of their agreement to constitute the complete, exclusive, and fully integrated statement of their agreement. As such, it is the sole expression of their agreement, and they are not bound by any other agreements of whatsoever kind or nature. The parties also intend that this agreement may not be supplemented, explained, or interpreted by any evidence of trade usage or course of dealing. The parties did not rely upon statements or representations not contained within the document itself.

If the CISG might apply, and if the parties want to opt out of it because of the absence of the parol evidence rule or otherwise, in their choice of law provision they should designate a jurisdiction and add something like this: “The parties hereby agree that the United Nations Convention on Contracts for the International Sale of Goods will not apply to this contract.”

Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, writes the biannual supplements to Corbin on Contracts, is author of Volume 1, Corbin on Contracts (rev. ed. 2018), and is co-author of the Corbin on Contracts Desk Edition (2017).

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1. Herzog Contracting Corp. v. McGowen Corp., 976 F.2d 1062, 1070 (7th Cir. 1992) (Posner, J.). 2. See, e.g., Restatement (Second) of Contracts §§ 210, 213, 215, and 216 (1981). 3. See, e.g., 1-25 Corbin on Contracts Desk Edition § 25.06[4] (2017). See also Restatement (Second) of Contracts § 216 (1981). 4. U.C.C. § 2-202, cmt. 3. See, e.g., Druckzentrum Harry Jung GmbH & Co. KG v. Motorola Mobility LLC, 774 F.3d 410 (7th Cir. 2014). 5. 1-24 Corbin on Contracts Desk Edition § 24.04 (2017). 6. Restatement (Second) of Contracts § 216 cmt. e (1981). A merger clause states “that the writing constitutes the sole and exclusive repository of the parties’ agreement and somewhat redundantly [adds that the parties] do not intend to be bound by any other agreement, understanding or negotiation of whatsoever kind or nature.” Murray on Contracts § 85 (5th ed. 2011). 7. Restatement (Second) of Contracts § 216 cmt. e (1981). 8. Id. 9. Jarecki v. Shung Moo Louie, 95 N.Y.2d 665, 669 (2001) (citation omitted). 10. “[T]he contract drafter is wise to recite that the agreement is completely integrated if it is meant to be so regarded.” David G. Epstein, Adam L. Tate, and William Yaris, Fifty: Shades of Grey - Uncertainty About Extrinsic Evidence and Parol Evidence After All These UCC Years, 45 Ariz. St. L.J. 925, 933 (2013). 11. Middletown Concrete Prods. v. Black Clawson Co., 802 F. Supp. 1135 (D. Del. 1992); Gem Corrugated Box Corp. v. Nat’l Kraft Container Corp., 427 F.2d 499, 503 (2d Cir. 1970). 12. E.g., “[T]he parties’ insertion of the merger clause into the settlement agreement is conclusive evidence of their intent to create a fully integrated contract.” Bonner v. City of New Haven, 2018 Conn. Super. LEXIS 1285, *11 (June 22, 2018). Benvenuti Oil Co. v. Foss Consultants, Inc., 64 Conn. App. 723, 781 A.2d 435 (2001) (conclusive, so long as parties are of equal bargaining power). See also Custom Pack Sols., Inc. v. Great Lakes Healthcare Purchasing Network, Inc., 2018 Mich. App. LEXIS 333 (Feb. 22, 2018); Green Acres Mall, L.L.C. v Sevenfold Enters., LLC, 936 N.Y.S.2d 58 (Dist. Ct. 2011). 13. IIG Wireless, Inc. v. Yi, 22 Cal. App. 5th 630, 640 (2018). 14. Bonfire, LLC v. Zacharia, 251 F. Supp. 3d 47 (D.D.C. 2017). Amplatz v. AGA Med. Corp., 2012 Minn. Dist. LEXIS 200 (May 21, 2012) (merger clause a “significant” factor). “[T]he force accorded to an integration clause is dependent upon the facts. Corbin § 25.8[A] at 70 (observing that an integration clause ‘should be given weight based on the circumstances under which it was adopted, including the complexity and sophistication of the contract and the parties’ . . . .” Jacobson v. Hofgard, 168 F. Supp. 3d 187, 202 (D.D.C. 2016). 15. Restatement (Second) of Contracts § 216 cmt. e (1981). 16. The choice of law provision “includes application of the parol evidence rule, which is a rule of substantive law.” Ng v. Schram, 2013 U.S. Dist. LEXIS 141046, *20 (S.D.N.Y. Sept 30, 2013). 17. Courts are naturally more skeptical of boilerplate provisions than of terms specifically drafted for the present transaction. The chief architect of the UCC, Karl Llewellyn, said that “there is no assent at all” to such terms. Karl Llewellyn, The Common Law Tradition: Deciding Appeals 370 (1960). 18. U.C.C. §§ 1-201(b)(3), 1-303; Restatement (Second) of Contracts § 209 cmt. (a) (1981); Restatement (Second) of Contracts §§ 221-224 (1981). C-Thru Container Corp. v. Midland Mfg. Co., 533 N.W.2d 542 (Iowa 1995) (UCC); TDN Money Sys. v. Everi Payments, Inc., 2017 U.S. Dist. LEXIS 183223 (D. Nev. Nov. 6, 2017) (non-UCC); Diponio Contr. v. City of Howell, 2015 Mich. App. LEXIS 706 (Apr. 14, 2015) (non-UCC). But see Hamilton Secs. Advisory Servs. v. United States, 2004 U.S. Claims LEXIS 147 (Fed. Cl. 2004) (merger clause bars evidence of such terms under common law). 19. U.C.C. § 2-202 cmt. 2. 20. Precision Fitness Equip., Inc. v. Nautilus, Inc., 2011 U.S. Dist. LEXIS 13576 (D. Colo. Feb. 2, 2011). 21. U.C.C. § 2-202 cmt. 2; K. Rowley, Contract Construction and Interpretation: From the “Four Corners” to Parol Evidence (and Everything in between), 69 Miss. L.J. 73, 331 (1999) (course of performance cannot be “carefully negated”); 1 William D. Hawkland, Uniform Commercial Code Series § 2-208:3, at 2-306 (1998) (no provision in U.C.C. to negate course of performance). 22. E.g., Beal Bank S.S.B. v. Krock, 1998 U.S. App. LEXIS 22051 (1st Cir. Sept. 3, 1998). 23. 8 Corbin on Contracts § 40.13. 24. E.g., N.Y. Gen. Oblig. Law § 15-301 and U.C.C. § 2-209. 25. Billington v. Ginn-LA Pine Island, Ltd., LLLP, 192 So. 3d 77, 80 (Fla. App. 2016). 26. Id. The Billington case contains an excellent discussion of anti-reliance clauses. 27. Cedar Petrochemicals, Inc. v. Dongbu Hannong Chem. Co., 2011 U.S. Dist. LEXIS 110716 (S.D.N.Y. Sept. 28, 2011). 28. See, e.g., 1-83 Corbin on Contracts Desk Edition § 83.02[4] (2017).