Effective Use of Merger Clauses: Part I

Note: This is the first part of a series of articles on integration, or merger clauses, in contracts. The next installment is about the legal effect of merger clauses.

History of the Parol Evidence Rule

Scholars trace the origins of the parol evidence rule to the “primitive formalism which attached mystical and ceremonial effectives to the carta and the seal.” Michael B. Metzger, The Parol Evidence Rule: Promissory Estoppels’ Next Conquest? 36 Vand. L. Rev. 1383, 1386 (1983) (subscription required). The term “parol” literally means “word” and comes to us from legal French. The French term was derived from ecclesiastical Latin “parabola,” meaning “speech.” Id. Despite its ancient origins, the rule continues to significantly impact the interpretation and enforcement of modern contractual obligations.

Evidentiary rule?

Much of the early scholarship concerning the parol evidence rule appears in evidence treatises, such as James Thayer’s A Preliminary Treatise on Evidence at the Common Law (1898) and John Henry Wigmore’s A Treatise on the System of Evidence in Trials at Common Law (1905). Focusing on the evidentiary aspects of the parol evidence rule, scholars have frequently noted the “Countess of Rutland’s Case” as an early foundation for the parol evidence rule.

The Countess of Rutland’s case dates from 1604, and considered multiple, apparently inconsistent transfers of land, whereby Edward Earl of Rutland willed his property to his wife in one document and to the male heirs of his father in a second document. The Countess sought to present oral testimony from the trustees to prove that Edward actually wanted his property to go to her at his death. But the Countess was prohibited from introducing such evidence by the court. The court reasoned: “if other agreement or limitation of uses be made by writing, or by other matter as high or higher, then the last agreement shall stand; for every contract or agreement ought to be dissolved by matter of as high in nature as the first deed.” The basic idea announced in the case was that oral evidence should not be introduced to contradict or vary a written contract. It was likely important to the court that the contracts at issue were written more than twenty years prior to the decision concerning the conveyances. Consequently, there was a high likelihood (and concern at the court) of faded or inconsistent memories. The rule announced in the Countess of Rutland’s case is seen as primarily an evidentiary rule.

Scholarship viewing the parol evidence rule as a rule of evidence often notes courts’ concerns about (1) the uncertainty of memory, and (2) the danger of falsehood or perjury. For these scholars and courts, the fundamental purpose of contract interpretation is to ascertain with as much certainty as possible the intent of the parties. Seeking to find that intent, they believe written evidence is more certain and more accurate than evidence that exists in the mind of the biased party. See Joseph Urquico, Parol Evidence Rule, 5 Notre Dame L. Rev 303 (1930) (subscription required).

Substantive law.

Modern scholarship and courts, however, view the parol evidence rule as a substantive rule of contract law, not merely an evidentiary rule. First National Bank in Durant v. Honey Creek Entm’t Corp., 54 P.3d. 100, 103 (Okla. 2002) (“parol evidence rule is not a rule of evidence but is instead a rule of substantive law” that fosters “the certainty and stability of contracts”). Indeed, the Federal Rules of Evidence and most state rules of evidence do not even mention the parol evidence rule as an evidentiary rule. Professor E. Allen Farnsworth succinctly summarizes why the parol evidence rule should be thought of as a rule of substantive contract law:

Admittedly, the [parol evidence] rule is exclusionary making certain kinds of evidence inadmissible. But this does not make it a rule of “evidence”, for it is not based on the idea that the evidence excluded is “for one or another reason an untrustworthy or undesirable means of evidencing some facts to be proved.” Rules of Evidence, such as the hearsay rule, bar some methods of proof to show fact but permit that fact to be shown in a different way. In contrast, the parol evidence rule bars a showing of the fact itself—the fact that the terms of the agreement are other than those in the writing.

E. Allan Farnsworth, Farnsworth on Contracts, § 7.2, at 212-213 (2d ed. 1998) (subscription or purchase required).

Understanding the parol evidence rule to be substantive contract law rather than merely an evidence rule is consistent with the precepts that lie at the heart of contract law. If we view the completion and execution of a written contract as a conclusion of a bargaining process, it is fair to expect that that written contract will contain all of the important terms of the parties’ negotiation. As Professor Marvin Chirelstein summarizes “the parol evidence rule assumes that the formal writing reflects the parties’ minds at a point of maximum resolution and, hence, that duties and restrictions that do not appear in the written document, even though apparently accepted at an earlier stage, were not intended by the parties to survive.” Marvin A. Chirelstein, Concepts and Case Analysis in the Law of Contracts, at 89 (5th ed. 2006). Said another way, if contract law seeks to ascertain and enforce the true intent of the parties, it is fair to presume that the parties’ written and signed contract is the fairest manifestation of such intent.

It is also fair to presume that when the parties to a contract choose to reduce to writing their agreement, they do so to have trustworthy evidence of the fact and the terms of their agreement. We can therefore further presume that the parties wanted to avoid reliance on uncertain memories. Farnsworth, § 7.2, at 219.

Moreover, if we view the parol evidence rule as one that attaches importance and conclusiveness to a subsequent agreement over prior negotiations or draft agreements, we can conclude that it must be a substantive rule. In modern business transactions, many drafts are exchanged, then edited and amended as the parties continue their negotiations. The parol evidence rule thus actually confirms what the path of the parties’ conduct. As each draft is formed, negotiated, and reformed, the parties are getting closer and closer to a document that reflects their mutual intent. Once the parties are satisfied that the document accurately describes the terms they intended, that document is executed. The parol evidence rule then gives the most import and weight to the single document the parties themselves believed to be most important and most accurate, while disregarding the early drafts that the parties also disregarded. As Professor Farnsworth summarizes, “it is often useful to be able to replace the negotiations of yesterday with an authoritative agreement of today. It is this purpose that the parol evidence rule ought to serve—giving legal effect to whatever intention the parties had to make their writing a complete expression of the agreement that they reached to the exclusion of all prior negotiations, whether oral or written.” Farnsworth, § 7.2.

Use of Merger Clauses

In 1920, when Williston wrote his first treatise on contract law, he noted that parties “rarely express” their intention that the contract be viewed as integrated. 4 Williston, The Law of Contracts, § 633, at 1226 (1920). Nearly 100 years later, the use of merger and integration clauses is widespread, particularly in contracts negotiated between businesses. Whether entitled a “merger clause,” an “integration clause,” or an “anti-reliance” clause, parties today often include—as a substantive written term of their contract—their intention as to the finality and conclusiveness of their overall agreement.

If the parol evidence rule exists to promote the accuracy and certainty of the parties’ agreement by enforcing what they have written as the final manifestation of their agreement, then the merger clause is used to confirm the importance of the parol evidence rule in the parties’ agreement. As a result, merger clauses appear today in contracts in every industry and nearly every context, used by parties to invoke and confirm the applicability of the parol evidence rule to their agreement.

The complexity of the clauses can vary, depending on the complexity of the contract and the sophistication of the parties. But the clauses are often characterized as providing for either total or partial integration. When a writing states that the agreement is intended to be final and complete as is—it is characterized as a total integration. Parties seeking total integration may agree to a provision such as the following:

This Agreement contains the complete, final, and entire agreement between the Parties to this Agreement, and supersedes any and all prior agreements, understandings, representations, and statements between the Parties, whether oral or written, and whether by a Party or such Party’s legal counsel. No modification, waiver, amendment, discharge, or change of this Agreement shall be valid unless the same is in writing, signed by the Parties.

When a writing is intended to be final, but possibly incomplete—it is considered to be a partial integration. An example of such a provision might be the following:

No Participant, surviving spouse, beneficiary, alternate payee, or any other person shall be entitled to or have any vested right in or claim to a benefit under the Plan, except as expressly provided herein. The Employer may from time to time issue to Participants one or more booklets or brochures or make presentations summarizing the Plan. In the event of any conflict between the terms of the Plan document or any trust agreement and the terms of any such booklets, brochures, and presentations summarizing the Plan, the terms of the Plan document and any trust agreement shall control.

Totally integrated contracts are most likely to be enforced by courts such that they cannot be contrarily supplemented by evidence of prior agreements or expressions, whether oral or written. When faced with a partially integrated contract, courts may still prohibit the parties from contradicting the existing terms through evidence of prior agreements. But courts will allow the parties to supplement the terms of their agreement through evidence of consistent additional terms. The critical finding for the court is whether the parties intended the contract to be the exclusive embodiment of their agreement.

Given the prevalence of merger clauses today, consumer advocates often urge courts not to enforce merger clauses in standard form, consumer, contracts. Businesses counter that they need to be able to control the scope of their contractual relationships, in part to prevent consumers from relying upon the representations of overzealous salespersons. Similarly, businesses often use merger clauses to catalog and limit risks associated with the company’s specifications and warranties.

An alternative approach, which may be particularly useful in consumer contracts, is to combat any presumption that the consumer was unaware of the merger clause. First, a merger clause can be made more conspicuous and prominent in the agreement. Second, the parties can build into the clauses some specific manifestations of assent. For example, the parties could be required to initial the merger clause separately. As another example, where the merger clause states that there have been no other representations or agreements made concerning the subject matter, both parties could write “none” by hand to confirm that they are not relying on any other representations. A third, but more burdensome example, would be for each party to copy in their own handwriting the key sentence of the merger clause (with such clauses written in layman’s terms). For example, “This contract contains all of the important terms of our agreement and I am not relying upon anything said to me other than what is written in this contract.”

If courts are becoming more reluctant to enforce merger clauses, particularly in the consumer context, there may be a way to provide the court with additional indicia of the parties’ intent to be bound to the terms. After all, the fundamental purpose of the merger clause was to confirm the parties’ intent to be bound only by the promises expressed in their final written agreement. Providing the courts with additional evidence of that intent ought to be persuasive to hesitant jurists.