Crafting the perfect business contract is a complex art. The inclusion or absence of a few key words could mean the difference between winning or losing a lawsuit over a contract dispute. In the interest of protecting your company, it’s a good idea for you to consider whether you should be including merger clauses in your business contracts.
What is a merger clause?
A merger clause (also sometimes called an integration clause) is a provision in a contract that specifies that the written contract contains the entire agreement of the parties.
In other words, if there is a legal dispute over the application of a contract, and that contract has a merger clause, the court will only look to the actual contents of the contract. Neither party will be able to present evidence of prior negotiations or conversations to prove something that isn’t in the contract.
What does a merger clause do?
A common example of a merger clause in action arises in the context of sub-contractor contracts. Let’s say you are considering hiring a sub-contractor to complete a job for your company.
Over the phone, you have negotiated a price that is acceptable for both of you, as well as deadlines for completion and specifications for the types of materials to be used for the job. In further email negotiations, you have also discussed matters such as whether substitutions or assignments will be allowed by either party.
If your agreement has a merger clause, then those specifications have to make it into the final contract in order to be enforceable. If you don’t write a term into the contract, then neither party will later be able to cite your phone or email negotiations as proof that you came to an agreement as to those specifications.
Whether you want your business contract to contain a merger clause really depends on the circumstances. A merger clause is a double-edged sword. On one hand, it will prevent your opponents from raising evidence of prior negotiations. On the other hand, it will also prevent you from doing so yourself, since the clause will bind both of you.
There is no surefire way to prevent litigation, unfortunately. But if you take key steps, such as including a merger clause in your contracts, you can help to protect your business from liability in case of a contract dispute.
