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The In-House Advisor Published by Shepard Davidson & Renee Inomata

Be Sure That Your Integration Clause Remains Enforceable

Posted in Contracts, Pre-Litigation Considerations

It is pretty standard fare to have what is commonly known as an “integration clause” in a business contract.  Such clauses generally state things like the following:

This Agreement constitutes the entire agreement between the Parties relating to the subject matter reflected herein.  All prior negotiations, representations, agreements and understandings between the parties with respect thereto are merged into, extinguished by and superseded by the terms of this Agreement.” 

While many in-house counsel would like to think that such a clause provides bullet-proof assurance that whatever the contract says will control, that is not always the case.  Even the most well-crafted and comprehensive integration clause may not prevent a disgruntled former business partner from claiming that he or she was fraudulently induced into entering into the contract.  Further, if such a fraud claim can be established, that party then can steamroll right over the parol evidence rule and seek to introduce evidence of supposed agreements that supplement or contradict those in the written contract between the parties.  As the Massachusetts Supreme Judicial Court said over 20 years ago in McEvoy Travel Bureau, Inc., v. Norton Co., “[i]t is well established that the parol evidence rule does not apply when the complaining party alleges fraud in the inducement.”

A case decided earlier this year, Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc., drives this point home with authority.  In Greenleaf, the parties’ initial litigation ended in a settlement that later was memorialized in a formal, written agreement.  That agreement not only contained a standard integration clause, but also included express representations that, in entering into the settlement, plaintiffs (i) relied on the advice of their own legal and tax experts; and (ii) did not rely on any representations made by defendants. 

Wholly apart from the written settlement agreement, the defendants had represented to plaintiffs that some real estate involved in the settlement had a specific monetary value, and, after the settlement was implemented, that value plummeted.  This led plaintiffs to sue the defendants, claiming that because the defendants knew the real estate was worthless, they had fraudulently induced the plaintiffs into entering into the settlement agreement.  Not surprisingly, the defendants moved to dismiss plaintiffs’ claims, asserting that the exculpatory disclaimer and integration clause in the settlement agreement barred plaintiffs from pursuing such an action.  While the Massachusetts Superior Court initially agreed with the defendants and dismissed plaintiffs’ claims, the Appeals Court reversed, noting, inter alia, that “a party cannot contract against liability for his own fraud.” 

Thus, Greenleaf sends a clear warning to in-house counsel that representations by a party that conflict with or modify the written terms of an agreement can put the company at risk – even if the contract at issue employs some time-honored, exculpatory language.  Accordingly, it is important for in-house counsel to educate their internal clients that, with respect to any contract and/or potential contract, they should avoid (i) making any estimation of the value of goods or services changing hands that is different from what is actually in the contract; (ii) providing their personal interpretation as to the meaning or enforceability of any specific provisions; and/or (iii) giving any opinion as to the propriety of the deal.