Educate Yourself : Integration Clauses

[Vigilante]

By now, some of you have heard my story about an integration clause in a contract. I am unapologetic about the length of this OP, but I think you should read it. This subject touches on just about all aspects of contract law, and we will all at one point or another be involved in the execution of contracts for a variety of reasons. Minnesota law requires me, as a paralegal, to tell you that this is NOT legal advice. I am not an attorney, not licensed to practice law, and I don't dispense legal opinions. If you need one, consult an attorney.

If you are not going to study this now, bookmark it and come back to it before you sign any of the larger contracts in your life. I am going to show you what to look for.

Here's a little LAW for you on the LAW regarding integration clauses :

The term "integration clause" is in turn defined as "a contractual provision stating that the contract represents the parties' complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract [Tiburzi v. DOJ, 269 F.3d 1346, 1354 (Fed. Cir. 2001)

From Wikipedia :

In contract law, an integration clause, merger clause, (sometimes, particularly in the United Kingdom, referred to as an entire agreement clause) is a clause in a written contract that declares that contract to be the complete and final agreement between the parties. It is often placed at or towards the end of the contract.

This can enter into all forms of contracts from employment agreements to business structure, partnership agreements, buyout agreements, asset purchase agreements, or any other legal agreement.

It can be a single sentence, or a paragraph. It can be a stand alone point, or buried within the subtext of another portion of the agreement. The purpose of an integration clause is to prevent one party from later claiming that what the parties actually agreed to was different from what was written in the contract.

From the most basic legal understanding (and @Esquire feel free to add a legal interpretation here) an integration limits the discussion regarding specific contract issues to the text contained within the contract itself. If someone brings a legal action regarding the contract, a carefully worded integration clause means that the law will only concentrate on the actual wording and language of the contract itself. No external evidence is generally allowed to enter as evidence to validate or negate the case for or against the lawsuit --- literally the only admissible evidence is the contract itself.

Here's how that might affect litigation :

1. You have a second contract governing other aspects of the relationship. The second contract is inadmissible as it pertains to the contract in question. The only consideration regarding interpretation of the contract in question... is the contract itself.

2. You have emails documenting pre-draft understandings of the agreement, relationships, or terms. The emails are inadmissible as it pertains to the contract in question. The only consideration regarding interpretation of the contract in question... is the contract itself.

3. The contract was merely to serve as a placeholder for future discussions, amendments, or memorialization of a developing business. Doesn't matter what other discussions or intent existed... it is inadmissible as it pertains to the contract in question. The only consideration regarding interpretation of the contract in question... is the contract itself.

In short, a carefully drafted integration clause in an agreement trumps any other anecdotal facts pertaining to the subject of the contract. Where this becomes problematic are in two different aspects:

1. If you assume good faith on behalf of the people you are doing business with. You all are working towards the same objective, and the contract doesn't cover every minutia of the discussions and intentions. You look at the contract as merely a skeleton or rough outline of the project, partnership, or acquisition. If there's an integration clause, it can be determined that the contract is the ONLY formal agreement in place. Terms, conditions, agreements, or other material aspects of your agreement, if they live outside of the contract, might not be admissible in most cases as evidence.

2. If the integration is slipped into the contract without you even being aware that it is there, only to be used later as a trigger to contain a lawsuit within the four corners of the contract itself. You sue someone later for an issue larger than the contract, but the only thing the court will consider is what is contained within the contract itself.

So... what do you do about Integration Clauses?

My initial reaction was that I was never going to sign an agreement that included one. I struck integration clauses out of several agreements because they're a limiting factor, and in the event of litigation, I want to be able to introduce full evidence in a future lawsuit. That may work in some instances, however... integration clauses are not only common, but non-negotiable by some large corporations.

In the event you are up against a non-negotiable integration clause (i.e. Wad-Mart doesn't want to take it out of their vendor agreement) you just have to ensure that every single aspect of your agreement, from performance to financial, etc... exists within the 4 corners of the agreement. Nothing can be left out. There is no reason that a contract can't fully and clearly memorialize all aspects of a financial transaction. In the event you are dealing with adversaries who create reasons that "we can revise this later..." that is your sign that something is wrong.

Some reasons adversaries may propose that the contract (which includes an integration clause) should be executed without a comprehensive memorialization of the agreement can include :

1. Our financials are audited as we're a publicly held company, so we want to do the deal now but can modify it after the close of the fiscal year
2. We don't have time to create a document that covers every single aspect of every discussion we have had, but we're all on the same page anyway, right?
3. This is the agreement we use with everybody
4. This is the only agreement our legal department will approve
5. We can change this later
6. We have a separate agreement that covers separate aspects of this
7. We can't commit in writing to everything we've agreed to do, but we will do it
8. Obviously we wouldn't be doing this deal if not for those terms. We just can't specify them in this contract
9. We're a huge company. We're not going to screw you. That's not how we do things.
10. As long as everyone does what they are supposed to do, the contract is almost immaterial
11. The contract is a formality
12. We need this executed by Friday to make this deal work (30 pages of legal text)

There's really only one thing to do here, and that is to be as methodical as you need to be with legal analysis of contract language. All of the things you may have heard (that there's bias against a contract drafter in favor of the non-drafter) etc... can be checkmated by the integration clause itself. Any previous negotiations may be superseded by the language of the agreement itself.

Here's a great sample clause from Wikipedia. This is the type of thing you are looking for to determine if an integration clause exists within your contract :

"This Agreement, along with any exhibits, appendices, addenda, schedules, and amendments hereto, encompasses the entire agreement of the parties, and supersedes all previous understandings and agreements between the parties, whether oral or written. The parties hereby acknowledge and represent, by affixing their hands and seals hereto, that said parties have not relied on any representation, assertion, guarantee, warranty, collateral contract or other assurance, except those set out in this Agreement, made by or on behalf of any other party or any other person or entity whatsoever, prior to the execution of this Agreement. The parties hereby waive all rights and remedies, at law or in equity, arising or which may arise as the result of a party’s reliance on such representation, assertion, guarantee, warranty, collateral contract or other assurance, provided that nothing herein contained shall be construed as a restriction or limitation of said party’s right to remedies associated with the gross negligence, willful misconduct or fraud of any person or party taking place prior to, or contemporaneously with, the execution of this Agreement."

You're blessed if they use something that clear and direct, because at least this would be easy to spot.

Here's a great article for authors about sneaky non-compete clauses, the sister of the integration clause, that can be slipped into a publishing agreement. It's not identical to an integration clause, but it is along the lines of the same discussion of a term being inserted into a formal agreement which may seem harmless at the time, but that governs future actions :
http://kriswrites.com/2012/02/23/the-business-rusch-competition/#sthash.0OLNnnMo.dpbs

Here are a few samples of integration clauses I culled from a quick internet search :

“This Contract contains the entire agreement of the parties with respect to the subject matter of the Contract. The contract supersedes any prior agreements, understandings, or negotiations, whether written or oral. This Contract can only be amended through a written document formally executed by all parties.”

They can simply stick a sentence like this one in somewhere :
"represent the complete agreement of the parties and supersedes any and all prior agreements."

"This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents [referred to in this Agreement and] [listed on Exhibit A]) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter."

This is a simple, unassuming and seemingly harmless sentence that could be added to any contract, but this one sentence could have wide ranging consequences in ANY agreement :
This document contains the entire agreement between the parties. This Agreement cannot be modified unless an authorized representative of the company and I agree to do so in writing.

Understand that one sentence above may preclude you from introducing ANY outside evidence... anything that doesn't exist within the contract ... as evidence in a legal proceeding about the contract. It could be successfully argued that anything that you have to say that is not within the 4 corners of the contract itself is inadmissible.

Your employer wants the language because they don't want you to claim that they promised you a big bonus two months later, or that they told you not to worry about that noncompete stuff. Their lawyers put it in so they make sure you can't come after them based on a side verbal agreement.The language is there to protect your employer, your suitor, or your adversary. Nothing they said, outside of the contract applies if you sign this. Nothing they promised, nothing they said, and nothing they even put in writing matters before or after you execute this contract.

Conclusion :
Entrepreneurs tend to move at lightning speed. We make fast decisions, and some times fast mistakes. We do deals, we forge agreements, and we deal with a lot of legal stuff. Some times, we think we know more than we do. Some times, we move too fast. In contracts, some times every single word selected was selected for a specific reason.

The best strategy for dealing with contracts is to find someone educated and wise in terms of contract drafting, business law, and business writing. Many contracts have language that is written in legalese, and written to bias a subject, an individual, or a company at the expense of someone else. Something that might seem simple and straightforward to you can still benefit from careful examination by someone smarter than you. It's been said on this forum many times that truth can survive scrutiny and examination.

An integration clause is not by definition evil in and of itself. It is a legal device that is deployed routinely to protect both sides of an agreement, as long as the agreement is correctly memorialized in the agreement in question. Knowing what to look for, what it means, and how to live within or outside of an integration agreement can be the difference between success or failure when it comes to performance and expectations under execution of any contract.

- Vigilante

 

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[Esquire]

From the most basic legal understanding (and @Esquire feel free to add a legal interpretation here) an integration limits the discussion regarding specific contract issues to the text contained within the contract itself. If someone brings a legal action regarding the contract, a carefully worded integration clause means that the law will only concentrate on the actual wording and language of the contract itself. No external evidence is generally allowed to enter as evidence to validate or negate the case for or against the lawsuit --- literally the only admissible evidence is the contract itself.

Well ... let me start by saying ... I think anyone who signs a contract WITHOUT an integration clause ... is nuts (nothing personal, Vig.)

Absent an integration clause ... you are just inviting all sorts of nasty "he said, she said" litigation.

And this largely defeats the one of the principle purposes of the instrument -- avoiding litigation.

If the entire agreement between the parties does not appear in the agreement ... re-write the agreement.

Then add the integration clause.

Now ... as to limiting the discussion to the four corners of the agreement ... yes and no.

Yes in the sense that the black letter of the contract defines the parties obligations and remedies.

No ... in several other respects.

First: Ambiguity.

If a term or provision is not clear in its meaning or application ... a court can look to other evidence to determine what the parties likely intended.

Second: Missing provisions

Even if an agreement claims to be the "entire agreement" ... if the contract does not provide for a certain outcome ... (again) ... the court can weigh and consider other evidence in fashioning a remedy.

Other things a court might consider are the actual conduct of the parties both before and after the contract was executed ... how the dispute would be resolved under the Uniform Commercial Code ... the absence or presence of waiver (failure to enforce) ... standard practices within a trade ... things of that nature.

So (long short) an integration clause does not preclude all prior evidence in all instances ... but where the language is clear and unambiguous ... the language of the contract controls.

As it should.

Other provisions I would strongly recommend in connection with an integration clause are:

1. Provision providing that any modification of the agreement must be made in writing in the same manner as the original document (to avoid "he said, she said" arguments over an alleged verbal modification ... which might otherwise be enforceable, particularly if evidenced by the parties future dealings).

2. Provision providing that the failure to enforce the terms of the agreement in one instance shall not be deemed a waiver of that provisions enforcement in a future instance. Otherwise ... you being a nice guy (now) might bite you in the a$$ in the future.

 

[Vigilante]

Excellent additional context. Speed++

 

[ExecutionisKing]

Good read and info, thanks for taking the time to write it all out.
A situation where any of those 12 reasons might be used to avoid laying everything out in exact terms is not at all hard to imagine for me.

I've run into about 1/2 of them between situations where there was no contract (and I wanted one), and other times where I was given lines like those when there was a written agreement in place (and felt like I was just told what I wanted to hear) in order to get my agreement.

Reminds me of the phrase from TMF .... "Trust, but verify" (that everything of substance that's been discussed IS in the contract HOW it was discussed, even if you "trust" who you're dealing with).

 

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[Vigilante]

I would go further than trust but verify (now).

I don't trust anyone. I leave absolutely nothing to chance.

It's part of that scar skin that has made me stronger.

 

[Vigilante]

Further, every time I draft a contract, I draft it benefiting me, and then I have the other party modify it. I start on offense.

And I think that everyone in the world does the same thing. There are very few truly neutral contract drafts, and very few drafters that wouldn't take bias when possible.

In fact, retail vendor agreements are notoriously and ridiculously one sided, and if you don't like it... you either sign it or walk. There is very little red lining them, and they just tell you that it's their "standard" agreement. Which it is.

 

[Vigilante]

Rule #48 I learned from my rich Iranian Jewish clients... avoid the legal process and litigation at nearly any cost, as the outcome is often unpredictable

 

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[Esquire]

I guess one more thing I would add is this:

An integration clause does not mean that every provision need be spelled out to an absolute certainty.

So (for example) ... a contract could provide that the goods will be delivered "within a commercially reasonable time" ... or provisions of that sort.

Depends on the circumstances.

Another thing I like to do with my contracts is include a preamble that expresses the intentions of the parties and the purposes of the agreement.

While these may not of themselves be "enforceable provisions" ... they CAN be very helpful when a court is asked to supplement a missing term or resolve a question relating to ambiguity.

These provisions resonate with judges and should also be included.

 

[Esquire]

Further, every time I draft a contract, I draft it benefiting me, and then I have the other party modify it. I start on offense.

And I think that everyone in the world does the same thing. There are very few truly neutral contract drafts, and very few drafters that wouldn't take bias when possible.

Not necessarily.

Sure ... you want an agreement that covers your a$$ ... but you also want an agreement.

Draft an agreement that is disproportionately one-sided and you just may blow the deal.

(which brings up something else ... contracts are typically construed against the drafting party. So if you ARE the one drafting it ... you had best include a provision that states that any ambiguity shall not be construed for or against a party on account of its author)

The other problem with a disproportionately one sided document is breach.

The other side may get buyers remorse after the fact ... resent the one sided nature of the deal ... and say "F*ck You!"

Now you gotta go to court to try to enforce it. No fun. And no guarantees.

When I draft an agreement ... I prefer that the agreement be a "fair" agreement to both sides.

This not only engenders trust ... but also reduces the likelihood of breach.

If the terms are fair reasonable ... the odds of the deal going south are greatly reduced.

 

[Vigilante]

I am not sure I have ever seen a contract that didn't originally slant towards the drafter.

Further, I bet in your business, when your clients pay you to gain the most favorable outcome for them, there is certainly some tricks of the trade deployed that produce the best possible outcome for your clients.

And I see nothing wrong with that. I think it's part of and inherent to the legal system.

Which is why when ever possible, I avoid going legal.

 

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[Vigilante]

As a side bar for forum creepers... do you know how awesome it is to have the collection of posters that we have at the forum, like @Esquire ?

Throw him some forum currency.

 

[Esquire]

I am not sure I have ever seen a contract that didn't originally slant towards the drafter.

Well ... you know the expression: "Pigs get fat. Hogs get slaughtered."

Same here.

The best legal advice is the simplest.

Know the character of the person you are dealing with.

Deal with good people ... and odds are ... you'll never need the contract ... regardless.

Deal with crooks ... and ya might as well wipe your a$$ with it.

There are very few "winners" in litigation.

But plenty of losers.

You don't want to go to court unless you absolutely have to.

(which brings up another provision: mandatory arbitration. Something I tend to smile upon)

 

[Vigilante]

I will never again submit myself to the authority, secrecy and finality of mandatory arbitration.

Now that I fully understand how arbitration works.

In the corporate arena, arbitration has an inherent bias towards the people who pay the salaries of the arbiters. In nearly all cases, that is not the little guy nor the employee. Arbitration companies have a financial interest in keeping happy the companies that refer arbitrations to arbiters.

Again, there is a reason people put arbitration clauses into contracts.

 

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[ExecutionisKing]

I would go further than trust but verify (now).

I don't trust anyone. I leave absolutely nothing to chance.

It's part of that scar skin that has made me stronger.

Point taken. It's a weak summary of this example. I guess I mean more of the act of verification in general of someone you trust, if at all.
But to that end, is the contract the only "trust" you have when making agreements with people?
Like they're not trusted at all until there's a solid comprehensive contract laid out and agreed on? I guess as long as it doesn't affect your initial treatment of them, it's a smart policy; business isn't done on handshakes any more.

I am not sure I have ever seen a contract that didn't originally slant towards the drafter.

I remember the contract attorney I shadowed in h.s. saying this... followed by:

"Pigs get fat. Hogs get slaughtered.

It was a line drawing question with multiple variables and much discretion involved, all on a per-case decision.

As a side bar for forum creepers... do you know how awesome it is to have the collection of posters that we have at the forum, like @Esquire ?

Throw him some forum currency.

Agreed, thanks for the extra details and discussion @Esquire. Rep++.

 

[Esquire]

I will never again submit myself to the authority, secrecy and finality of mandatory arbitration.

Now that I fully understand how arbitration works.

Well ... litigation can drag on for years and prove exceptionally costly. often times it is much better to get a quick decision inexpensively and move on.

Otherwise ... a cloud of uncertainty may hang over you and your business ... which may not be good.

And if you're doing business with consumers ... arbitration is a very good way to avoid costly consumer protection lawsuits.

This is not necessarily to say that you should arbitrate everything. But it is incredibly effective and smart tool when used properly.

 

[Vigilante]

Most of the old school that were able to do business on a handshake are hitting retirement age. Life doesn't work that way any more.

Trust? I don't even think it's an issue of trust any more. It's an issue of clarity of understanding, which is best memorialized in a clear written agreement.

 

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[Vigilante]

Well ... litigation can drag on for years and prove exceptionally costly. often times it is much better to get a quick decision inexpensively and move on.

Otherwise ... a cloud of uncertainty may hang over you and your business ... which may not be good.

And if you're doing business with consumers ... arbitration is a very good way to avoid costly consumer protection lawsuits.

This is not necessarily to say that you should arbitrate everything. But it is incredibly effective and smart tool when used properly.

Too easy to be dirty.

In one case I was involved in, I couldn't figure out why my opponent didn't strike one arbitrator that I was particularly interested in.

Digging deeper, found the connection. A mutual membership by opposing attorney and arbitrator in a particular legal society.

Strike.

Dirty.

 

[ddall]

Further, every time I draft a contract, I draft it benefiting me, and then I have the other party modify it. I start on offense.

And I think that everyone in the world does the same thing. There are very few truly neutral contract drafts, and very few drafters that wouldn't take bias when possible.

In fact, retail vendor agreements are notoriously and ridiculously one sided, and if you don't like it... you either sign it or walk. There is very little red lining them, and they just tell you that it's their "standard" agreement. Which it is.

Vig, great post.

Pursuant to the specific post above, it would be great to hear your insight on bringing products to retail. I recall you previously worked with bestbuy and given your amazon business I think it would be a killer post to expand upon this sometime as many on this forum I am sure would love to get some tips and pitfall avoidance strategies if and when they think it applicable to move their online business into retail. Maybe a podcast idea?

 

[Esquire]

Well ... it's not exactly foolproof.

Pick wisely.

But then again ... same can be said of judges.

And it's a lot easier to pick an arbitrator than pick a judge.

If you don't like the judge ... or the judge doesn't like you ... not much you can do other than appeal ... and the odds of reversing a judge's decision based on alleged bias is almost impossible.

at least with an arbitrator you have some modicum of control.

 

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[Vigilante]

Ironic part was that we argued the case out of Federal court and into arbitration. Then once in arbitration, realized that everything was sealed, private, and non-appealable and that the judge was the judge's final authority. At least in open court, the process has a certain degree of scrutiny.

 

[Esquire]

Ironic part was that we argued the case out of Federal court and into arbitration. Then once in arbitration, realized that everything was sealed, private, and non-appealable and that the judge was the judge's final authority. At least in open court, the process has a certain degree of scrutiny.

Well ... that's the trade off.

Do you want speed finality and mitigated cost ...?

Or do you want transparency and the right to appeal ...?

There is clearly no one size fits all answer. Context plays a big role.

But in most contexts I would prefer arbitration.

 

[Esquire]

for example:

Suppose your opponent has deep pockets and you dont ... and suppose also that your contract provides that the losing party must pay the other side's legal fees.

If that's the context you will be the other guys bitch in litigation because you can't afford to lose and they can. Odds are you will settle on highly unfavorable terms ... even if you have a good case. That's a scenario where you definitely want arbitration.

As a general rule I frown upon attorneys fee shifting provisions. They tend to encourage litigation.

 

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[Vigilante]

fee shifting = loser pays winners attorney fees

 

[Esquire]

When I settled my divorce I inserted a provision that said attorneys fees would be capped at 15% of actual damages.

Otherwise ... family lawyers will have a field day over the slightest alleged non-compliance and bill $1500 fighting over $100 (or something else real stupid).

If it ain't worth reaching into your own pocket over ... deal with it out of court.

 

[Esquire]

Family lawyers (btw) will never give you that advice ... and will always recommend fee shifting provisions ... because that's how they make their money.

 

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[Vigilante]

Family lawyers (btw) will never give you that advice ... and will always recommend fee shifting provisions ... because that's how they make their money.

Shit I hope people are paying attention.

In one post, on the fast lane forum, on some random Sunday night, an attorney just posted something that might save you $20k some day.

@MJ DeMarco

 

[Vigilante]

And the irony of a divorce attorney hiring a divorce attorney didn't escape me.

 

[JAJT]

The best strategy for dealing with contracts is to find someone educated and wise in terms of contract drafting, business law, and business writing.

Once I started spending money on actual professionals my personal and business life started moving much, much, much smoother.

I really can't recommend using professionals for important decisions enough. Google is great if you want to know when your favorite Greek philosopher was born but if you want to know the ins and outs of a legal/tax situation, hire a professional and stay the hell away from Google as it WILL give you a false sense of your situation (in my experience).

 

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[MJ DeMarco]

The TL;DR is to make sure everything you say at coffee, at dinner, at the cigar lounge, at the negotiation table is EXACTLY as outlined in the contract. And that might need to include superfluous language "X must act within reasonable time from which time is given notice" -- well, DEFINE reasonable? 1 week? 1 year?

I've actually had some substantial history with these clauses. The two times I sold my company, each time the spoken deal did NOT match the written deal. The most egregious I remember was not getting the sale proceeds in ALL CASH but partly in stock, and a stock of a zero revenue "pink-sheets" company. Had I not read the contract, I would have been stuck with it.

Folks, READ your contacts and have an attorney not look it over, but READ IT. And then after he's done, he needs to go over it with you PARAGRAPH by PARAGRAPH. My attorney actually went line by line and said "Now this means this". On a 50+ page document that can take hours but it's definitely worth it.

If the contract verbiage doesn't match your discussions or offering memorandum, it won't matter.

Rep+ Dave for sharing.

 

[Vigilante]

To MJ's point... we rushed through the contract phase when I encountered my free fall. A careful scrutiny of the verbiage chosen, and a more thorough analysis of the players involved... might have produced different results.

Earlier this year, a "buyout" of a different company of mine was proposed. However, the conversations that took shape ended up coming around to the same type of set-up as the last one. Screw me once, shame on you. Screw me twice, shame on me. It wasn't going to happen a second time.

I walked away this year from a suitor that would have been perfect for the expansion of my current book of business. However, having fallen off the mountain once already, I have learned a lot. To continue with the analogy, I now belay my climbs. It would be worth you looking up the term belay if you are not familiar with that climbing term, as the analogy fits my approach now perfectly. I have secured myself from any future free fall by an abundance of caution, and using the right equipment.

In the book Thick Face Black Heart, it talks specifically about a moment of decision where the person who fills the void and speaks first loses the negotiation. In my free fall, we spoke first. We spoke last, and we spoke in the middle. We were an easy target. We exposed our vulnerability. We made the free fall happen. Nobody is to blame but me.

If you deal with snakes, wear snake handling gloves and you won't get bitten. Leave your gloves off, and fate will take care of the rest. We are a product of the decisions we make.