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California Business Contracts: What is the Merger Doctrine?
San Diego and California businesses largely operate on the basis of contract law. Often, the contracts are simple and pre-printed; other times the contracts are lengthy and complicated. Likely, the longer contracts went through several versions and had many revisions. If drafted correctly by a proven and trusted business attorney, the final version of the contract will contain what is called a “merger clause.” This clause has the legal effect of merging all the previous drafts of the contract into the final draft. With some exceptions, a merger clause has the legal effect of preventing the prior drafts being used in court if the contract becomes the subject of litigation.
California Business Contracts: What is a Merger Clause?
As noted, a merger clause integrates all the previous drafts. The clause itself is short and seemingly unremarkable. A typical example is this: “This Agreement shall constitute the entire agreement between the parties hereto.” Another — longer — example is this: “This instrument constitutes the entire agreement between these parties hereto and exclusively determines the rights and obligations of these parties hereunder, notwithstanding any oral statements, prior drafts of this instrument, previous contracts between these parties, any course of dealings, custom or usage of trade.”
Despite the brevity of such provisions, legally, these types of clauses have large implications in the event that such contracts come under the review of judges and juries. Where a contract contains a merger or integration clause, California courts will enforce it. See Malmstrom v. Kaiser Aluminum & Chem. Corp., 187 Cal.App.3d 299 (1986).
California Business Contracts: Legal Principles
For California courts, the presence of a merger clause creates the presumption that the written contract presented to the court is the final integrated version of the contract agreed to by the parties. Where the contract is a pre-printed consumer-type contract, like a cellphone service contract, California courts look more closely at the merger clauses. However, where the parties truly have equal negotiating power and where drafts of the contracts are exchanged and negotiated, generally, a merger clause will prevent earlier drafts of the contract from being introduced as evidence. In the end, the courts look to the intent of the contracting parties. If the evidence makes it clear that the parties intended this to be the final draft of the contract, then the courts will honor that intent.
Indeed, this is incorporated into California statutory law. California law presumes a written contract supersedes all prior or contemporaneous agreements, oral or written. See Cal. Civ. Code, § 1625; Cal. Code Civ. Proc., § 1856.
California Business Contracts: California Case Example
The legal principles set forth above are exemplified by Malmstrom v. Kaiser Aluminum & Chemical Corp., 187 Cal. App. 3d 299 (Cal. App. 1st Dist. 1986). In that case, an employee sued for breach of contract. He alleged that he had an oral agreement that bound his employer to certain obligations. His employer countered by arguing that the employee’s written employment agreement did not bind it to those certain obligations. The court agreed for several reasons including the fact that the written agreement contained a merger clause. The contract stated: this agreement “shall supersede all previous agreements by and between Employer and Employee.” The alleged oral agreement occurred before the signing of the written contract. The court held that the merger clause was clear and, on its face, precluded any claim that the employer had agreed to anything other than what was written in the contract.
California Business Contracts: Contact San Diego Corporate Law Today
As can be seen, merger clauses are very important. Such clauses ensure that your business has the bargain that was intended and that no court will later change the contract based on testimony about oral statement or previous drafts. If you would like more information about merger clauses in 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.
