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Integration Clauses As A Backstop Against Claims Based On Fraud: Insist On The Specifics.

For any business owner, a specially-crafted integration clause can significantly limit exposure to suits brought by a dissatisfied party on the other side of the negotiating table. An integration clause (sometimes referred to as a merger clause) states that the contract is the final expression of the parties’ agreement. The general purpose of an integration clause is to prevent one party from later claiming that the parties had agreed to terms other than what is expressly set forth in the contract. While most contracts contain general integration clauses as a matter of form, the mere inclusion of an integration clause will not automatically insulate the parties from claims that the parties allegedly agreed to terms not set forth in the contract. However, a carefully crafted integration clause that is specific to the transaction at issue could resolve a legal dispute early on and avoid suffering through the vagaries of protracted litigation.

The case of LaFazia v. Howe, 575 A.2d 82 (R.I. 1990) demonstrates the value of such an integration clause. In LaFazia, the purchasers of a business sued the seller of the business for deceit, claiming that the sellers made specific representations regarding the profitability of the business to induce the purchasers to purchase the failing business. The sales contract contained a specific “as-is” disclaimer; the contract also included an integration clause that disclaimed any representations regarding the profitability of the business and designated the sales contract as the entire agreement between the parties.

The Rhode Island Supreme Court ruled in favor of the seller, finding that the disclaimer and the integration clause barred the buyers from asserting that the sellers had made material misrepresentations regarding the profitability of the business. In other words, the clauses prevented the buyers from claiming reliance on the seller’s prior representations regarding profitability. The Court distinguished the specially-worded integration clause – which contemplated a dispute concerning the profitability of the business – from cases involving “general, nonspecific” and ambiguous merger clauses, which the defending party could not use to defeat a claim for fraudulent misrepresentation.

LaFazia instructs on a number of points. First, contracting parties should take a closer look at the disclaimer and integration clauses contained in their contracts and insist on clear, unambiguous language that is specific to the transaction at hand. In lawsuits alleging fraud, the parties’ intention at the time of contracting is an important consideration. Although it is impossible to craft an all-encompassing integration clause that anticipates every possible dispute that may arise, a specific provision that expressly addresses the subject matter of potential disputes (e.g., representations concerning profitability) would be considerably more useful for litigation purposes than a general, non-specific clause that runs the risk of being deemed too ambiguous to enforce. Finally, it should be noted that an integration clause does not preclude a party from suing on the basis that the integration clause itself was procured by fraud, so exercise caution in making any representations regarding the validity or enforceability of an integration clause.

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Adler Pollock & Sheehan P.C.

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