Another risk is that if a merger clause and the parol evidence rule are strictly applied regardless of the circumstances, one could use the rule to take advantage of another. To account for this possibility, the law has developed to recognize various exceptions to the parol evidence rule that apply in certain circumstances. For instance, application of the parol evidence rule may be overcome by a showing, via extrinsic evidence, that the agreement was rendered invalid due to fraud or mistake. 17A C.J.S. Contracts § 577 (citing Medical Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 670 S.E.2d 321 (2009)). “Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish” such exceptional circumstances. Restatement (Second) of Contracts § 214 (1981). These invalidating circumstances are unlikely to appear within the four corners of the agreement and are not affected by a merger clause. Id., cmt. C.
Perhaps the most important exception to the parol evidence rule exists to ensure the rule is not used to perpetrate a fraud. Generally, the parol evidence rule may not be used as a shield to prevent the proof of fraud, even if the evidence shows a promise directly at variance with the promise of the writing. Riverisland Cold Storage, Inc., et al. v. Fresno-Madera Production Credit Ass’n, 291 P.3d 316, 324 (Cal. 2013). California Civil Code § 1668 specifically provides that “all contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud . . . are against the policy of the law.” This exception is fully consistent with the general doctrine of fraud in the context of contracts. That is, fraud in the inducement renders voidable an entire contract, including its merger clause. Vai v. Bank of Am. Nat. Trust & Sav. Assn., 364 P.2d 247 (Cal. 1961).
There may be somewhat less here than meets the eye, though. The need for a plaintiff to show “justifiable reliance” on the allegedly fraudulent representations can mean that a clause that specifically disclaims such reliance might be effective to bar extrinsic evidence of the fraud. See, e.g., Hinesley v. Oakshade Town Ctr., 37 Cal. Rptr. 3d 364, 372 (Cal. Ct. App. 2005). The language of the clause may make a difference. For example, if the merger clause is in clear language and specifically disclaims reliance on representations outside the four corners of the contract, under the law of some jurisdictions, such a clause can preclude a plaintiff from asserting fraud claims based on extra‑contractual statements. FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842 (Del. Ch. 2016).
New York courts take this approach. There, a fraud claim will be precluded if the merger clause expressly recites that there were no representations on the specific subject matter of the claimed fraud. A general merger clause, though, will not bar a fraud claim. As the Court of Appeals observed in Dannan Realty Corp. v. Harris, 5 N.Y.2d 317, 184 N.Y.S.2d 597, 157 N.E.2d 597 (1959):
where the complaint states a cause of action for fraud, the parol evidence rule is not a bar to showing the fraud either in the inducement or in the execution despite an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made.
Here, however, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff's complaint that the agreement was executed in reliance upon these contrary oral representations.
Id., 5 N.Y.2d at 320-21, 184 N.Y.S.2d at 598-99, 157 N.E.2d at 598-99 (emphasis added; citations omitted). Accord Eklecco Newco, LLC v. Q of Palisades, LLC, 940 N.Y.S.2d 359 (N.Y. App. Div. 2012); Plaza PH2001, LLC v. Plaza Residential Owners LP, 914 N.Y.S.2d 26 (N.Y. App. Div. 2010); Laxer v. Edelman, 905 N.Y.S.2d 649 (N.Y. App. Div. 2010).
The contract at issue in Danann Realty Corp. contained the following provision:
The Purchaser has examined the premises agreed to be sold and is familiar with the physical condition thereof. The Seller has not made and does not make any representations as to the physical condition, rents, leases, expenses, operation or any other matter or thing affecting or related to the aforesaid premises, except as herein specifically set forth, and the Purchaser hereby expressly acknowledges that no such representations have been made, and the Purchaser further acknowledges that it has inspected the premises and agrees to take the premises ‘as is’ . . . It is understood and agreed that all understandings and agreements heretofore had between the parties hereto are merged in this contract, which alone fully and completely expresses their agreement, and that the same is entered into after full investigation, neither party relying upon any statement or representation, not embodied in this contract, made by the other. The Purchaser has inspected the buildings standing on said premises and is thoroughly acquainted with their condition.
The court held that the no-reliance clause in the agreement precluded a claim for fraud, finding that extrinsic evidence of fraud was not admissible because “plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded.” Danann Realty Corp., 5 N.Y.2d at 320-21, 184 N.Y.S.2d at 598-99, 157 N.E.2d at 598-99.
A Florida appellate court, Billington v. Ginn-la Pine Island, Ltd., LLLP, 192 So. 3d 77, 82 (Fla. App. 2016), followed this rule, observing “this appears to be the rule in the majority of jurisdictions,” and citing numerous cases: Insitu, Inc. v. Kent, 388 F. App'x 745 (9th Cir.2010) (applying Washington law, “no-reliance” clause barred claims for fraud and promissory estoppel as matter of law); Rissman v. Rissman, 213 F.3d 381, 383–84 (7th Cir. 2000) (“non-reliance” clause precluded claim for securities fraud); Bank of the West v. Valley Nat'l Bank of Ariz., 41 F.3d 471, 477–78 (9th Cir.1994) (applying California law, “plain and strong words” of no-reliance clause precluded fraud claim as matter of law); First Fin. Fed. Sav. & Loan Ass’n v. E.F. Hutton Mortg. Corp., 834 F.2d 685, 687 (8th Cir. 1987) (disclaimer of reliance on representation negated claim for fraud); Landale Enters., Inc. v. Berry, 676 F.2d 506, 507–08 (11th Cir. 1982) (applying Alabama law, non-reliance clause negated fraud claim); LeTourneau Techs. Drilling Sys., Inc. v. Nomac Drilling, LLC, 676 F. Supp. 2d 534, 543 (S.D. Tex. 2009) (applying Texas law, disclaimer of reliance on prior representations negated claim for fraud); Abry Partners V, L.P. v. F & W Acquisition, LLC, 891 A.2d 1032, 1057–58 (Del. Ch. 2006) (party could not promise not to rely on prior representations and then “shirk its own bargain” by asserting in lawsuit that it in fact relied); Weinstock v. Novare Grp., Inc., 710 S.E.2d 150, 155–56 (Ga. Ct. App. 2011) (comprehensive merger clause with no-reliance provisions negated fraud in inducement claim); Blumenstock v. Gibson, 811 A.2d 1029, 1036 (Pa. Super. Ct. 2002) (party could not sign contract denying reliance on prior representations then later claim reliance on such representations).
Delaware courts also apply this reasoning and have held that by specifying the information on which they have relied, parties “minimize[ ] the risk of erroneous litigation outcomes by reducing doubts about what was promised and said.” Abry Partners V, L.P., 891 A.2d at 1058. “[A] party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises and representations outside of the agreement and then shirk its own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement claim.” Id., at 1057. Delaware does not require that any specific formula must be followed to disclaim reliance on extraneous representations, but the intent of disclaiming reliance on outside representations must be clear. Id. Absent clear anti-reliance language, though, a merger clause will not preclude a fraud claim. Accord Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 141 (Del. Ch. 2009). On the other hand, a plaintiff can assert a claim for fraud about facts that are at the center of the contract even in the face of an anti-reliance clause. Overdrive, Inc. v. Baker & Taylor, Inc., 2011 WL 2448209, at *6 (Del. Ch. June 17, 2011) (denying defendant’s motion to dismiss plaintiff‘s fraud claim where the alleged misrepresentations and omissions were based on pre‑contractual statements, but were related to contractual provisions, went to the very core of the agreement, and, if proven, would frustrate the very purpose and nature of the agreement). See also Sequel Capital, LLC v. Pearson, 2012 WL 2597759 (N.D. Ill. 2012) (“failing to enforce the no-reliance clause would not give the parties the benefit of their bargain”).
Other jurisdictions hold that a simple merger clause precludes evidence of pre-contractual statements, even those claimed to be fraudulent. See, e.g., First Data POS v. Wills, 546 S.E.2d 781 (Ga. 2001); Legacy Academy, Inc. v. Mamilove, LLC, 771 S.E.2d 868, 872 (Ga. 2015). The logic here is that any impressions held by a party that were based upon the other party’s purported pre-contractual representations are superseded by the merger clause contained in the parties’ final agreement, which expressly puts the parties on notice that the agreement’s terms supersede any and all prior representations not contained therein. Id.
Whether and to what extent a merger clause precludes extrinsic evidence of fraud may depend on the type of fraud at issue. 11 Williston on Contracts § 33:24 (4th ed.) (The effect of a merger clause in the written contract—fraud in the inducement versus fraud in the factum). A merger clause prohibits evidence of fraudulent misrepresentations as to the terms or substance of the agreement. Id. This type of fraud is often referred to as fraud in the inducement, and is distinguishable from other types of fraud, such as fraud in omitting certain contractual provisions altogether. Id.
Another circumstance under which parol evidence may be admissible where an agreement is integrated arises pursuant to the doctrine of mistake. “The law permits reformation of instruments to reflect the true intention of the parties when (a) the erroneous part of the contract is shown to have occurred by a mutual mistake, i.e., the party seeking relief is able to establish to the court’s satisfaction that both parties intended something other than what is reflected in the instrument in question, or (b) the error has arisen by the unilateral mistake of one party and that mistake is accompanied by evidence of some sort of fraud, deception, or other bad faith activity by the other party that prevented or hindered the mistaken party in the timely discovery of the mistake.” Brown v. Chapman, 809 So. 2d 772, 774 (Miss. Ct. App. 2002).
Absent some element of fraud, a mistake must be mutual; that is, the mistake must be common to both parties. 27 Williston on Contracts § 70:9 (4th ed.) (Mistake must be mutual) (citing In re New Commonwealth Pub. Co., Inc., 118 B.R. 155 (Bankr. D. Mass. 1990); French v. Construction Laborers Pension Trust, 44 Cal. App. 3d 479, 118 Cal. Rptr. 731 (2d Dist. 1975); Kern v. NCD Industries, Inc., 316 A.2d 576 (Del. Ch. 1973); LaFleur v. C.C. Pierce Co., Inc., 398 Mass. 254, 496 N.E.2d 827 (1986). “A ‘mutual mistake’ is one common to both contracting parties, wherein each labors under the same misconception. Thus when there is a mutual mistake the parties are in actual agreement, but the agreement in its written form does not express the parties’ real intent.” Bank of Naperville v. Holz, 86 Ill. App. 3d 533, 538, 407 N.E.2d 1102, 1106 (1980). If the mistake is not mutual, the contract is not voidable. 27 Williston on Contracts, § 70:9. Ignorance does not amount to a mistake. A mistake by one party, where the other party is ignorant, is not a mutual mistake and parol evidence is not admissible to correct it. Id. However, the mistake of one party with regard to the meaning of a material contractual provision may be treated as the equivalent of a mutual mistake if it is accompanied by both the other party’s knowledge and the other party’s silence. Id. In such cases, the agreement may be reformed pursuant to principles of equity. Id.
Extrinsic evidence is generally not barred for the purpose of establishing that the parties were mistaken. Indeed, in determining whether reformation is appropriate, a court should consider evidence of the parties' negotiations leading up to a final contract, including industry practices. However, “where mutual mistake or fraud is alleged, parol evidence is admissible to show the true intent and understanding of the parties.” Ballard v. Granby, 90 Ill. App. 3d 13, 16, 412 N.E.2d 1067, 1070 (1980).
Contracts of Adhesion
Like any other contract, contracts of adhesion often contain merger clauses. While not unenforceable as a matter of law, adhesion contracts are generally construed against the drafter. What impact does this have on the contract’s merger clause?
The classic example of a contract of adhesion is an insurance policy. In C&C Family Tr. 04/04/05 v. AXA Equitable Life Ins. Co., 654 F. App’x 429, 434–35 (11th Cir. 2016), the Eleventh Circuit squarely addressed the issue of whether merger clauses in contracts of adhesion are enforceable. In that case, the plaintiff sought relief for, among other things, fraud and negligent misrepresentation. The defendants contended that the fraud and negligent misrepresentation claims, which were based on alleged oral and written misrepresentations by the defendants, were barred by a comprehensive merger clause in the life insurance policy. The merger clause in the contract at issue provided:
This policy, any riders or endorsements, and the attached copy of the initial application and all subsequent applications to change this policy, and all additional Policy Information sections added to this policy, make up the entire contract. . . . Only our Chairman of the Board, our President or one of our Vice Presidents can modify this contract or waive any of our rights or requirements under it.
The plaintiff argued this was not a “comprehensive” merger clause that barred its claims because the clause did not disclaim reliance on prior agreements not contained in the contract itself. The court disagreed, holding that because the disputed provision stated that certain specified documents “make up the entire contract” and that only certain executives could modify the policy, the clause operated as a disclaimer against reliance on any alleged misrepresentations.
The court went on to hold, more broadly, that the merger clause doctrine does in fact apply to adhesion contracts such as the insurance policy at issue. The court rejected the plaintiff’s argument that the merger-clause doctrine applies only in situations where a contract was negotiated by parties with equal bargaining power, such as “sophisticated business parties or persons represented by counsel.” Id. The court reasoned that while adhesion contracts are construed against the drafter, they are nonetheless enforceable, including their merger clauses.
A party seeking to avoid a merger clause in an adhesion contract will have to craft an argument beyond merely citing the fact the contract is one of adhesion. Standard principles surrounding the enforcement of merger clauses apply equally to adhesion contracts.
Jason R. Scheiderer is a partner with Dentons US LLP, in Kansas City, Missouri. Michael Malone is an associate with Polsinelli in Nashville, Tennessee.