As seen in the New York Law Journal
Merger Clauses and
Parol Evidence Rule
by George Bundy Smith and Thomas J. Hall
In any contractual dispute, a court's primary concern is to enforce the intentions and expectations of the parties to the agreement. When the agreement has been reduced to a complete
and final integrated writing, courts will presume that that writing is the best evidence of what the
parties intended.1 Merger clauses function to strengthen this presumption by explicitly stating
that the written document is the complete and final expression of the parties' agreement.2
Regardless of whether a merger clause is
present, however, New York courts generally will strictly apply the parol evidence
rule and prevent the introduction of oral
or extrinsic evidence to contradict, modify
or vary the terms of an integrated writing.3
Where a merger clause is absent, the party
seeking to admit parol evidence still must
demonstrate that there is ambiguity in the
contract at issue.4 Likewise, even where a
contract contains a merger clause, parol
evidence will be admissible to clarify an
ambiguous term.5
But what if a party seeks to use extrinsic
evidence, not to clarify an ambiguity, but
to establish that a separate agreement
exists and must be considered in deciding
the dispute under the written contract
in question? In the absence of a merger
clause, courts may look to such evidence
to determine if the written agreement is
the sole agreement between the parties
addressing the subject matter at issue.
While the existence of a merger clause
may bar such evidence of a separate
agreement, New York courts have held
that, under certain circumstances, such
evidence may be considered despite the
presence of the merger clause.
We address below several recent Commercial Division cases reflecting the different
applications of the parol evidence rule depending on whether the written agreement
contains a merger clause.
Clarifying an Ambiguity
In New York, the existence of a merger
clause appears to have little effect on a
court's willingness to admit parol evidence
to clarify an ambiguity. With or without a
merger clause, the parol evidence rule generally will allow the introduction of oral
or extrinsic evidence to clarify an ambiguity in a contract.6 The mere absence of
a merger clause alone, however, may not
justify the relaxation of the parol evidence
rule.7 The party seeking to admit parol evidence still must demonstrate that there is
ambiguity in the contract at issue before
parol evidence can be admitted.8
In Town New Development Sales & Marketing v. Price,9 Justice Eileen Bransten of
the New York County Commercial Division dealt with a contractual dispute
involving an employment agreement.
The employment agreement contained a
merger clause which stated: “This Agreement contains the entire agreement and
understanding between the parties…respecting the subject matter hereof,” namely
the defendant’s employment and compensation. The defendant moved to amend his
answer to assert new counterclaims based
on an email between the parties found
during discovery. The defendant argued
that this email demonstrated that he was
owed commissions for “new development
business” even though not listed in the employment agreement.
The plaintiff opposed the motion to amend,
arguing that the employment agreement
unambiguously covered the terms of his
compensation, and the extrinsic email
could not modify those written terms. The
court held that the employment agreement
was an unambiguous and fully integrated
writing that detailed all the compensation
that the defendant was entitled to receive.
As no ambiguity was present, applying the
parol evidence rule, the court held that evidence of the email could not be admitted
to alter the express terms of the contract.
In Zucker v. Waldman,10 Justice Carolyn
Demarest of the Kings County Commercial Division dealt with a written contract
that did not contain a merger clause and
the plaintiff’s attempt to rely on an alleged
oral agreement that disputes thereunder
would be litigated in New York. The plaintiff brought suit in New York against the
Reprinted with permission from the February 2015 edition of the New York Law Journal © 2015 ALM Media Properties, LLC. All rights reserved.
Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or www.almrepints.com
This material may constitute Attorney Advertising in some jurisdictions. Prior results do not guarantee a similar outcome.
foreign defendant for claims relating to an
overseas property development in the Republic of Georgia. The foreign defendant
moved to dismiss on several grounds, including lack of personal jurisdiction.
The plaintiff argued that New York had
jurisdiction over the case because the
parties had orally agreed to litigate any
claim in the New York courts. In granting dismissal, the court explained that,
because there was no forum selection
clause written contract, and the contract appeared to be an integrated document, plaintiff’s effort to add terms to the
written agreement regarding the parties’
prior conversation agreeing to New York
jurisdiction was barred by the parol evidence rule.
Upon motion to reargue,11 the plaintiff
made the novel argument that lack of the
contract’s merger clause in and of itself
meant that parol evidence was admissible.
The plaintiff relied on an Eastern District
of New York case, Canusa Corp. v. A &
R Lobosco, and argued that it stood for
the proposition that where an agreement
does not contain a merger clause, “extrinsic evidence is admissible as an aid to
interpretation.”12
The court disagreed, explaining that
Canusa was distinguishable because it involved an ambiguous contract term, and
the court in that case permitted extrinsic
evidence to clarify that ambiguity. In contrast, there was no forum selection clause
in the written agreement at issue, and the
plaintiff failed to present any evidence that
the contractual terms were ambiguous
or susceptible to multiple interpretations.
Further, the court noted that, because
the case involved property in the Republic of Georgia, the selection of a New York
forum was a significant material term that
would have been included in the written
agreement and could not be established
through parol evidence.
In Seaport Loan Prods. v. Lower Brule Community Dev. Enter.,13 Justice Bransten dealt
with a breach of contract case involving
the sale of a guaranteed loan. The plaintiff
alleged that the defendant had breached
the sales contract after it backed out of the
deal before the parties could close, and sold
the loan to another buyer. The defendant
moved to dismiss, arguing that a provision
in the contract requiring the parties to use
their “best efforts to settle in 5-10 business
days after Jan. 26, 2012” imposed a hard
10-day deadline for the parties to close the
deal. The defendant argued that, because
that deadline had expired, it was free to sell
to another buyer, which it did. The plaintiff
countered that the “best efforts” clause was
a standard and legally enforceable loan industry requirement, and merely set forth
the parties’ intent to close the transaction
quickly.
The court found that the contract’s “best
efforts” clause was ambiguous because
it was equally susceptible to both parties’
interpretations. As such, parol evidence of
the parties’ intentions and conduct as well
as industry custom was required to determine whether the “best efforts” clause
imposed a strict deadline. Whether the
contract contained a merger clause was not
a factor in the court’s analysis.
Evidence of Separate Contract
While a merger clause will not bar parol
evidence to clarify ambiguous terms of
a written contract, it may bar parol evidence of the existence of a separate, contemporaneous contract.14 In the absence
of a merger clause, New York courts have
held that parol evidence may be admitted
where the “surrounding circumstances
strongly suggest that the contract was not
an integrated one.”15 Even where a merger
clause exists, however, the Commercial
Division has recognized that, in certain
circumstances, evidence of a separate contract may be admissible.
Justice Elizabeth Hazlitt Emerson of the
Suffolk County Commercial Division
dealt with this issue in a dispute involving a distribution contract containing a
merger clause and an alleged contemporaneous oral agreement. In Theatrical Servs.
& Supplies v. GAM Prods.,16 the plaintiff
alleged that the defendant had breached
both the written distribution contract
and a separate oral distribution agreement. The defendant moved to dismiss
the oral breach of contract claim arguing
that evidence of the oral agreement was
barred, pointing to the written distribution contract’s merger clause which stated
that “[a]ll understandings and agreements
between the parties are contained in this
agreement which supersedes and terminates all other agreements between the
parties.” The plaintiff argued that evidence
of the oral distribution agreement was not
barred by the merger clause because the
parol evidence rule does not bar evidence
of a separate oral agreement.
The court agreed that the distribution
contract’s merger clause and the parol evidence rule generally would bar evidence of
an oral agreement separate from and independent of the written contract provided. The court stated, however, that, even
in the face of a merger clause, evidence
of the oral agreement would be admissible if three conditions were satisfied: (1)
the oral agreement had to be collateral in
form, (2) it could not contradict express or
implied provisions of the written contract,
and (3) it had to be an agreement that the
parties would not ordinarily be expected
to embody in the writing.
Applying this three-factor test, which the
court acknowledged is rarely satisfied, the
court found that evidence of the oral agreement was barred because its subject matter
was not separate from and independent
of that of the written contract. The court
noted that the oral agreement contradicted
the terms of the written distribution agreement by giving the plaintiff an exclusive
distributorship over the entire eastern seaboard. Further, the subject matter of the
oral agreement, being the plaintiff’s sale
and distribution of the defendant’s products, would ordinarily be expected to be
embodied in the writing and, indeed, was
covered by the parties’ written contract.
In Volpe v. Interpublic Group of Co.,17
Justice Bransten dealt with a dispute over
an employment agreement. The plaintiff
alleged that the defendant had breached
their oral employment agreement by not
compensating him for work he had performed relating to the defendant’s profitable stock purchase. The defendant moved
to dismiss, arguing that the plaintiff’s
CHADBOURNE & PARKE LLP
written employment agreement, signed
after the alleged oral contract was made,
barred plaintiff’s claim since it governed
his compensation.
The employment contract contained the
following merger clause: “This Agreement constitutes the entire understanding
between the Corporation and Executive
concerning his employment by the Corporation or any of its parents, affiliates, or
subsidiaries and supersedes any and all
previous agreements…concerning such
employment and/or any compensation
or bonuses. This agreement may not be
changed orally.”
The court agreed with the defendant,
holding that evidence of the alleged prior
oral agreement could not be admitted to
alter the written agreement. In dismissing the complaint, the court noted that the
employment agreement was unambiguous,
and the merger clause clearly stated that
the contract was “the entire understanding” between the parties and superseded
any previous contract concerning “employment and/or any compensation or
bonuses.”
Endnotes:
1. Greenfield v. Philles Records, 98 N.Y.2d
562, 569, 750 N.Y.S.2d 565, 569 (2002).
10. Zucker v. Waldmann, 43 Misc.3d
1233(A), 993 N.Y.S.2d 647 (Kings Co. 2014).
2. Marine Midland Bank-S. v. Thurlow, 53
N.Y.2d 381, 387, 442 N.Y.S.2d 417, 419-420
(1981).
11. Zucker v. Waldmann, 2015 WL 390192,
2015 N.Y. Slip Op. 50055(U) (Kings Co.
Jan. 23, 2015).
3. Schron v. Troutman Sanders, 20 N.Y.3d
430, 436, 963 N.Y.S.2d 613, 616 (2013).
12. Canusa Corp. v. A & R Lobosco, 986
F.Supp. 723, 730 n. 5 (E.D.N.Y. 1997).
4. See W.W.W. Assoc. v. Giancontieri, 77
N.Y.2d 157, 162, 565 N.Y.S.2d 440, 442
(1990).
13. Seaport Loan Products v. Lower Brule
Cmty. Dev. Enter., 41 Misc.3d 1218(A), 981
N.Y.S.2d 638 (N.Y. Co. 2013).
5. Matthius v. Platinum Estates, 74 A.D.3d
908, 909, 903 N.Y.S.2d 477, 479 (2d Dept.
2010).
14. Mitchill v. Lath, 247 N.Y. 377, 379-380,
160 N.E. 646, 646-647 (1928).
6. Primex Intl. Corp. v. WalMart Stores,
89 N.Y.2d 594, 599, 657 N.Y.S.2d 385, 388
(1997).
7. See Milton Braten v. Bankers Trust Co.,
60 N.Y.2d 155, 162, 468 N.Y.S.2d 861, 865
(1983).
8. Id.
9. Town New Development Sales & Marketing v. Price, 2014 WL 4254123, 2014 N.Y.
Slip Op. 32307 (N.Y. Co. Aug. 28, 2014).
15. Saxon Capital Corp. v. Wilvin Associates, 195 A.D.2d 429, 430, 600 N.Y.S.2d 708,
709 (1st Dept. 1993).
16. Theatrical Servs. & Supplies v. GAM
Products, 34 Misc.3d 1224(A), 946 N.Y.S.2d
69 (Suff. Co. 2012).
17. Volpe v. The Interpublic Group of Companies, 2013 WL 3989040, 2013 N.Y. Slip
Op. 31784 (N.Y. Co. Feb. 25, 2013).
Conclusion
Merger clauses are a useful tool in any
contract drafter’s arsenal, and contracting
parties should strongly consider including
them in their agreements to help protect
their intentions and expectations. While
the absence of a merger clause does not
necessarily open the floodgates to parol
evidence, a merger clause may preclude extrinsic proof of a separate agreement. Even
where a contract contains a merger clause,
however, evidence of a separate agreement
may be admissible in limited, and relatively rare, circumstances. n
New York | Washington, DC | Los Angeles | Mexico City | São Paulo | London | Moscow | Warsaw | Istanbul | Dubai | Johannesburg | Beijing | chadbourne.com