Contract Tip: What is a Merger Clause?

In General, it’s Not Enforceable Unless it’s in the Contract

A merger clause, also known as an integration clause, is a common contract provision. The clause provides that the written contract is the final and complete agreement and any prior or contemporaneous agreements between the parties is superseded by the written contract. Simply put, the whole agreement between the parties can be found within the four corners of the contract and any other previous agreements made by the parties have no effect on the contract.

Merger clauses are found in many different types of contracts, including: sales of goods contracts, employment contracts, lease agreements, escrow agreements, and asset purchase agreements, just to name a few. A merger clause can usually be identified by language such as “entire agreement,” “whole agreement,” “complete and only agreement,” “full and final expression of the parties’ agreement.”

Here are a few examples of a merger clause:

• This agreement contains the entire understanding among the parties and supersedes any prior understandings and/or written or oral agreements among them respecting the within subject matter. There are no representations, agreements, arrangements, or understandings, oral or written, between or among the parties hereto relating to the subject matter hereof that are not fully expressed herein.
• This contract is intended by the parties to be the full and final expression of their agreement and shall not be contradicted by any prior written or oral agreement.

Informed parties might actively choose to incorporate a merger clause into their contract. Parties might choose to have a merger clause because they want the terms and conditions of their agreement to be in one readily identifiable place. Also, parties might choose to have a merger clause to avoid later introduction or attempted enforcement of issues raised during negotiations. These are some examples of where both parties are aware of the merger clause and its implications, so they negotiate it into the contract.

Don’t Rely on Verbal Clarifications not Contained in the Contract

It is more often the case where one party to the contract, usually the non-drafting party, is unaware of the merger clause and its effects. The merger clause might be presented as a standard contract provision, which suggests there is nothing to worry about, or not mentioned at all. There is no problem for the unaware party where pre-contract agreements are actually identified in the contract. However, serious consequence can result when an unaware party is relying on pre-contract agreements which are absent from the contract and a merger clause is included. The merger clause will supersede all agreements made before the contract was formed.

Stop to think about that for a moment.

A merger clause in a contract can make it impossible to rely on promises made during the original negotiations. We see this problem time and again. One past client, a dentist, purchased a new practice and hired a marketing firm to help her grow practice. The marketing firm’s fast-talking and very knowledgeable sales director made many verbal promises for many very specific services, including lead generation, new clients and significant growth in revenues. She was eventually convinced to sign a contract for $15,000 per month for a term of three years. And why not? They were promising a significant increase in revenues that would more than pay for their services. The contract she was given was simple and written in a friendly tone that put her at ease. Unfortunately, that contract didn’t contain all the specific promises made to her verbally by the sales director. It did contain, however, the dentist’s duty to pay and a merger clause. As a result, the dentist will be limited to the services identified in the contract and the verbal promises will not be enforced.

Again, think about that.

The contract says “marketing services” without specifying what that means. All the promises made before signing the contract are simply not enforceable. However, the dentists obligation to pay is certainly enforceable.

It is important to make sure all key promises and obligations are contained within the contract, especially where there is a merger clause. Otherwise, parties may not be obligated to perform previous agreements, promises, arrangements, and representations that are not identified in the contract.

Merger clauses are a good example, of why it’s important to have a good business attorney review your contracts before you sign them. Even simple contracts can get you into trouble, if you’re not careful. The dentist didn’t think she needed to hire an attorney for such a simple contract involving marketing services. We offer a very cost-effective, flat-rate contract review for business leaders for precisely this reason. Learn more.

Law 4 Small Business. A little law now can save a lot later. A Slingshot company.