If you’ve ever been involved in negotiating a contract, whether for the provision of services or a $200 million energy transaction, you’ve likely seen a merger clause. They are typically universal in their use and, while the language may differ, they generally state the same thing: the written contract represents the entire agreement between the parties. However, using boilerplate merger clauses versus customized merger clauses can create costly problems down the road if not drafted with enough specificity, particularly in energy transactions.
Companies and individuals entering into contracts typically want to ensure that if a breach of contract occurs, the contract controls and the other party can’t rely on extrinsic negotiations and understandings outside the contract as evidence of the parties’ agreement. The purpose of the merger clause is to limit any disputes regarding the meaning of the contract to the terms contained within its four corners.
When dealing with energy transactions, it is important to use merger clauses that are clear and tailored to the transaction being negotiated, otherwise courts can, and likely will, consider parol evidence—evidence pertaining to an agreement or the parties’ intent outside the written contract—including evidence of trade usage and course of dealing when interpreting the meaning of an agreement.
A well-crafted merger clause enhances the likelihood of holding your counterparty to the four corners of the contract and not being able to use evidence such as trade usage or course of dealing to alter the parties’ agreed meaning. A key hallmark of an effective merger clause is to clearly exclude that evidence, with language such as: “The parties also intend that this agreement may not be supplemented, explained, or interpreted by any evidence of trade usage or course of dealing.” Precision Fitness Equip., Inc. v. Nautilus, Inc., 2011 WL 378761, at *8 (D. Colo. Feb. 2, 2011).
Importantly, boilerplate merger clauses typically do not shield contracting parties from collateral issues, such as fraudulent inducement. In Texas, for example, simply including a merger clause in a contract does not preclude later claims of fraudulent inducement unless the language in the merger clause provides a “clear and unequivocal intent to disclaim reliance or waive claims” of such inducement. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011) (allowing plaintiff’s fraudulent inducement cause of action to proceed since the “generic merger language” in a contract did not unequivocally preclude the claim).
Failure to include the necessary and specific language costs contracting parties both time and money on litigating disputes that could be resolved with a few simple sentences at the outset.Contracting parties therefore benefit from including a merger clause with specific language that limits potential fraudulent inducement claims.
Contracting parties should also be aware that merger clauses generally preclude the incorporation of contemporaneous, extracontractual agreements into their contract if not specifically included. For example, some state courts—like those in Alabama—will only give legal effect to the physical document containing the merger clause. See Ex parte Palm Harbor Homes, Inc., 798 So. 2d 656 (Ala. 2001) (holding that the trial court was not permitted to consider the arbitration provisions in a series of free-standing instruments even though all of them were signed contemporaneously with the document containing the merger agreement).
This is the bane that comes with the boon of clarifying the parties’ obligations in one agreement: Anything that is left out—no matter how important—will not be considered by certain courts. When drafting and negotiating contracts, if your goal is to have a completely integrated contract, your merger clause should reference any contemporaneous, extracontractual agreements that are intended to survive and still be in effect after the execution of the contract you are negotiating.
Authored by litigators from our energy team, the Not Just Boilerplate series on Power & Pipes provides real-world examples of the impact that certain contract clauses can have on energy companies. Whether in repeat form agreements, employment agreements, or heavily negotiated one-off deals or mergers, there can sometimes be a tendency to just “grab” clauses from prior agreements, with the thinking that “it has always worked before . . .”
Our energy lawyers have experience with a wide array of litigation matters that have turned on various common contract clauses, some of which may have not received much attention at the time they were included in the agreement. We thought it might be useful to pass on some real-world “lessons learned” from the litigators who have actually fought the battles. Such perspectives might help to inform your next contract—or dispute.