What is an Integrated or Partially-Integrated Contract? Merger Clauses Part II

When dealing with complex San Diego business contracts like business purchase agreements, it is not uncommon for there to be several drafts and re-drafts of the final contract. As we discussed previously on this blog, a well-drafted business contract will contain a “merger clause” that provides that the final draft of the contract is the final expression of the agreement. As recently discussed by the California Court of Appeals, there are two levels of merger clauses. See Kanno v. Marwit Capital, No. G052348 (Cal. App. 4th Dist. 2017). The Kanno case gives us an opportunity to present part II of our discussion of merger clauses.

San Diego Corporate Law: Two Levels of Integration

A “merger clause” is also called an “integration clause.” The purpose of an integration clause is to prevent testimony and evidence about prior versions of a contract or about the negotiations of a contract from being introduced at trial if there is litigation. The legal principles have been codified in three places in the California statutes. See Cal. Civ. Code, § 1625, Cal. C. Procedure Code, § 1856 and Cal. Comm. Code, § 2202.

The Kanno case dealt with section 1856 of the Code of Civil Procedure which states in pertinent part:

“(a) Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.”

(b) The terms set forth in a writing described in subdivision (a) may be explained or supplemented by evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement.”

Subsection (c) allows that evidence with respect to course of dealing or usage of trade or by course of performance can be used to explain or supplement a written contract. Subsection (d) requires a court to determine the intent of the contracting parties.

According to the Court of Appeals, section 1856 creates two levels of possible integration – the parties intended the writing to be the final expression of their agreement; and the parties intended the writing to be the complete and exclusive statement of the terms of their agreement. Note that there is similar “complete and exclusive” language in the Commercial Code, but not in the Civil Code.

According to the court, if the contract falls within level 1 integration, evidence of prior drafts of the contract or evidence of contemporaneous oral statements can be admitted at trial to explain or supplement the contract (but not contradict the terms of the contract). On the other hand, if the contract falls within level 2 integration, then no evidence will be allowed of prior drafts or oral statements during the negotiations.

The court further explained that when the court determines whether integration is meant to be level 1 or level 2, the court must look to various facts such as:

• Is there a merger/integration clause?
• What is written in any other contracts that are claimed to be ancillary or collateral?
• Is there an oral contract being claimed and, if so, how does it differ from the written contract?
• What is the intent of the parties (if such can be discerned)?
• Was the contract carefully and formally drafted?
• How much time was spent considering and drafting and re-drafting the terms of the contract?
• Was the bargaining over specific terms?
• Are those terms at issue?

In the Kanno case, the Court of Appeal determined there to be a level 1 integration. First, the court noted that three written agreements existed covering various aspects of the bargain. This was persuasive to the court that the parties did not intend any one of the Agreements to be the “complete and exclusive statement” — level 2 integration — of the agreement. The court also noted various facts with respect to oral statements and agreements that the court concluded were meant to be part of the agreement. As such, the prior negotiations and oral statement were properly admitted as evidence during the trial.

San Diego Corporate Law: Importance of Carefully Drafted Contracts

The Kanno case is just another example showing the importance of carefully drafted contracts. Mostly, level 1 integration is plenty sufficient. Indeed, there are possible advantages to the lower level. But, depending on the circumstances, one party or another to a contract might want the stricter level of integration. A good corporate attorney can help you decide which is better.

California Business Contracts: Contact San Diego Corporate Law Today

If you would like more information about merger clauses or other essential provisions needed for your business contracts, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email.

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