Contract Pitfalls–the “merger” or “integration” clause

28 07 2011

Contracts often have “boilerplate.”  People assume that boilerplate clauses are standard, necessary, and risk-free (this seems especially true in the entertainment industry where everything is claimed to be “standard”).  But there are huge pitfalls to signing a contract without carefully thinking through the effects of each clause.  One of the most common “boilerplate” clauses is the merger clause (a.k.a. an integration clause).  Like all “boilerplate,” this clause can be worded several different ways (which already says something about how “standard” any language is).  To spot this clause, look for a heading titled “entire agreement,” or “merger,” or “integration,” or something to that effect.  The language itself will state, in substance, that “this Agreement is the entire and final Agreement between the parties on this matter…”

The effect of this clause is to make the current contract the final, binding agreement between the parties.  This is very important in case there were oral communications, emails, etc. that might otherwise be considered part of the contract (but keep in mind that just because a merger clause is in a contract, that doesn’t mean evidence of discussions or emails can’t come in to help interpret the contract).  In short, it keeps things simpler and cleaner in case of a dispute.

But, sometimes the unintended consequence of this clause is to supersede another contract, which should not be superseded, and can lead to confusion.  For instance, if you contract to buy 100 widgets a month, and then want to buy another 200 a month (so the total would be 300), and the contract for another 200 a month has a merger clause, are you supposed to buy a total of 200 or 300 a month?  If the new contract contains a merger clause, then there is a strong argument that you are only buying 200 a month, not 300.  This can be a huge problem is you need 300 a month and you have now contracted yourself into a shortage!  Once this problem is recognized, you have many options on how to proceed, depending on the specific circumstances.  In this example, for instance, the new contract could just be an addendum to the older one, or you could have it be an amendment for the full 300.  Either way, to avoid confusion it should reference the old contract and clearly explain how to treat the old contract.