By Elizabeth J. Goldstein
Special to the Legal
This post is part of a series on using checklists to ensure accuracy in contracts. Here is the first part.
Many critics hailed Dispatches by Michael Herr as the best nonfiction book about Vietnam. It was based upon the author’s reporting for Esquire Magazine. In Dispatches, the reader learns that the ubiquitous helicopters in that war had a key piece of hardware, one giant stainless-steel nut that held the main rotor blades to the helicopter. If the nut loosened or was hit during flight, the rotors detached from the mast and the aircraft plummeted to the earth. This hardware was known as the “Jesus nut.”
Every well-constructed contract has a provision just as pivotal as the Jesus nut: the merger provision, also known as the integration clause. Without it, the entire contract can be decimated by one party’s assertion that a promise or representation outside the agreement contradicts what exists in the contract. That promise or representation, which can be oral or written, can dramatically change the character of the agreement. A contract for 10 pairs of shoes is now for 10,000 pairs. A contract for real estate in as-is condition is now warranted by the seller to be free from pollutants. The merger clause is the only defense against these dramatic changes and the all-too-human temptation to try to rewrite the contract post-hoc after many of the risks have played themselves out. Oil prices have tripled after the seller has agreed to the price-fixed contract. The intellectual property licensed has failed to obtain FDA approval. In the next several blog entries, I will be discussing the drafting of the merger clause. Today’s post focuses on how to handle merger clauses in amendments.
Merger Clauses in Amendments
In my family, shopping is our only sport. Thus, I was disappointed to learn that a missing merger clause in an amendment to a lease may be the reason my car must ford a river and drive more than 45 minutes to get to the nearest Sam’s Club. This is a major inconvenience when I want to get a case of pretzel dogs for my carbs-fest après-Passover. A Sam’s Club was actually planned about 15 minutes from me in a shopping center that once had a Giant. I know this because the case was reported as Giant Food Stores v. THF Silver Spring Development 959 A.2d 438 (Pa. Super. 2008), appeal denied, 972 A.2d 522 (Pa. 2009).
The original lease between the Giant and the shopping center restricted the landlord from allowing a supermarket in addition to Giant from operating in the shopping center. However, the restriction lapsed if Giant no longer operated a supermarket in the shopping center. When the Giant moved out of the shopping center and found two replacement tenants to sublease its space, the shopping center and Giant entered into a first letter agreement that confirmed the parties’ intention to enter into a legally binding agreement in the future which would approve the sublease and reinstate the supermarket restriction placed on the shopping center, but without the requirement that Giant operate a supermarket in the shopping center.
This restriction would have one exception. It would not apply to Walmart Stores Inc. and its successors and assigns. The letter agreement provided that Giant would approve the expansion of the current Wal-Mart store to 200,000 square feet, some of which would contain grocery products. The parties entered a second letter agreement three months later that further dealt with the Wal-Mart Super Store carrying groceries and contained an exhibit showing where Wal-Mart would expand its store at the shopping center. This area was designated with cross-hatches. Two years later, the parties entered into a first amendment to the lease, which stated that the supermarket restriction did not apply to “Wal-Mart, its successors or assigns.”
After the lease amendment, the shopping center sought to put in a Sam’s Club. Giant sought an injunction arguing that the letter agreements and lease amendment prevented such a store, because Sam’s Club carried groceries. The trial court reviewed the applicable letter agreements, original lease agreement and lease amendment. Construing these four agreements together, the trial court found that the shopping center was only permitted to allow Walmart to operate a supermarket. The leasing to Sam’s Club violated the shopping center’s agreement with Giant. On appeal, the shopping center argued that the lower court should have disregarded the two letter agreements as parol evidence. It based this argument on the merger clause in the original lease agreement which provided (emphasis added):
“This instrument contains the entire and only agreement between the parties, and no oral statements or representations or prior written matter not contained in this instrument shall have any force or effect. This lease shall not be modified in any way except by writing executed by both parties.”
The lease amendment stated that all terms not inconsistent with the amendment would remain as part of the agreement.
The Pennsylvania Superior Court found that the lease’s merger clause could only be read to exclude written agreements made prior to the execution of the lease; thus, the trial court was permitted to consider the two letter agreements along with the lease amendment. The lesson from this case is two-fold. One, you need to think through the boilerplate in every agreement and amendment. Two, for merger clauses, you need to think through the subject of the first sentence (i.e., “This Agreement contains the entire agreement”). You need to expand the subject to reference all relevant agreements.
For instance, if an employment agreement and intellectual property agreement are going to be signed together, both documents should be referenced in each merger clause. When several related agreements will be signed contemporaneously, the merger clauses should be the same in each. If there are several documents that need to be incorporated into the merger clause, one can use a defined term such as “Deal Documents” or “Transaction Documents.” While it is questionable in this case whether the shopping center would have really excluded the two letter agreements as part of the transaction, if it had thought through this issue at the time it drafted the lease amendment, it would be preferable to make a deliberate decision concerning this issue when drafting the document rather than leaving this issue to chance down the road. In addition, it is likely that the lawyer is going to be the one blamed for not addressing this issue in the contract. At least that’s who I am blaming when I have to drive across the Susquehanna to shop at Sam’s Club.
Additions to The Checklist
q Is a merger clause needed?
q What agreements should be referenced in first sentence?
This posting is for informational purposes and should not be construed or interpreted as either legal advice on any matter or as in any way creating an attorney/client relationship.