Entire agreement and merger clauses

Every once in a while, I address a classic miscellaneous clause. This time, I would like to discuss entire agreement clauses (also referred to as, amongst other names, merger clause).

For examples of previous blogs click here (on severability), click here (on counterparts), click here (on language and translations) or here (some notes on best efforts).

Often, a contract will replace a preceding contract, a letter of intent or a mere exchange of e-mails in which the basics of a possible transaction are fine-tuned. Also, a contract is in many cases the end-result of what started with an information memorandum, a ‘binding bid’ or one or more (product or business) presentations. Furthermore, during the negotiations, the parties will likely have expressed their intentions as to how they would perform in certain specific cases or how they would generally behave in a certain context. When it comes to important or otherwise key issues of the transaction, the parties will include these in the final contract. At the same time, the parties will generally have acted in a promotional mood to get the deal done, without necessarily assuming all promises made. Eventually, they will write down in their contract the minimum of what is important or necessary and, later on, they will probably perform, formally committed or not, also in light of the other party’s behaviour.

This is why contracting parties limit their contractual obligations to what is negotiated and written in the contract itself and why they wish to exclude preceding communications and arrangements. Obviously, what will be carved out by the arrangement should be limited to what needs to be carved out (and not also cover unrelated or adjacent arrangements). If a term sheet or letter of intent needs to terminate, this should preferably be done explicitly by including all identifiers of a contract. Strictly speaking, this needs to be done by the relevant party to any such letter of intent in order to achieve full certainty but in real life no one will bother if an affiliated company does so.

Entire Agreement. This Agreement constitutes the entire agreement between the Parties on the subject matter of this Agreement and supersedes any preceding agreement between the Parties on the subject matter of this Agreement only. In particular, the Letter of Intent on the Acquisition of all Shares in Johnson Distribution Services Holding GmbH dated 18 May 2008 between [A] and [B] is hereby terminated.

The binding effect of an entire agreement clause remains somewhat uncertain and always subject to interpretation. The European Member State laws somehow accommodate the above considerations, given the following provision in the Draft Common Frame of Reference (DCFR), an authoritative preparatory work for a European Civil Code:

Art. II. – 4:104: Merger clause

(1)  If a contract document contains an individually negotiated clause stating that the document embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements which are not embodied in the document do not form part of the contract.

(2)  If the merger clause is not individually negotiated it establishes only a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted.

(3)  The parties’ prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated clause.

(4)  A party may by statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on such statements or conduct.

If mutual trust and cooperation are important characteristics of a transaction, the contracting parties should be reluctant to insert an entire agreement clause in their contract. This may be particularly sensitive if extensive discussions between them have led to various arrangements, which have not necessarily been incorporated in the transaction agreements. Of course, if arrangements in a letter of intent have been renegotiated or were the subject of giving and taking of other benefits, the exclusion of a specific document is recommendable. A drafter should consider the impact of emails and other arrangements in the block notes of one party but not the other.

Waiver clauses in contracts

In many contracts, a provision is inserted saying that a party may waive its rights provided it is specific and in writing. In European legal systems, such clause is unnecessary: vast case law provides that a waiver of rights must be clear and unequivocal, expressed by a person authorised to represent the waiving party. In this blog I discuss a useful way of providing for waiver provision in the miscellaneous article.

Most European member state laws provide that the failure of a party to claim or enforce its rights does not automatically qualify as a waiver of such rights. Also, if a party does ‘waive’ its rights in a certain situation, member state laws will not easily presume a blanket waiver. Still, despite the compulsory nature of that principle and the great reluctance of courts to assume a waiver, many contract drafters provide for wording that reflect the law, resulting in something

Franchisor and Franchisee may by written instrument unilaterally waive or reduce any obligation of the other under this Agreement.  Any waiver granted by Franchisor shall be without prejudice to any other rights Franchisor may have and shall be subject to continuing review by Franchisor.

In certain cases, a waiver provision is useful and more adapted to the way it works in real life. For example, if it is more specific as regards its scope or effects:

Waivers. A failure of a Party to enforce strictly a provision of this Agreement shall in no event be considered a waiver of any part of such provision. No waiver by a Party of any breach or default by the other Party shall operate as a waiver of any succeeding breach or other default or breach by such other Party. No waiver shall have any effect unless it is specific, irrevocable and in writing.

The above clause specifies what may or may not be the consequence of a party’s behaviour or (informal) remarks.

Further assurances – duty to cooperate

A frequently used boilerplate clause is commonly referred to as “further assurances” and addresses the parties’ duty to cooperate in certain aspects. Especially in a common law context, where the common law lawyer might not believe that contracting parties must enable each other to reap the full benefits of the contract (and a little more), such a duty to cooperate ‘beyond’ the key obligations and explicit covenants can be helpful. This blog post is about the no-need to include a further assurances provision.

The general concept of good faith, which is a core concept of EU member state laws (although not under common law jurisdictions), makes it largely superfluous to include a miscellaneous clause on ‘Further assurances‘. Nevertheless, sometimes it may be helpful to provide for such ‘duty to cooperate’. For instance, the clause may support a party’s request when it must prove its rights under an agreement versus a third party or if the enforcement of a party’s rights requires the fulfilment of any legal or practical formality. Such clause may be as follows:

Further Assurance. Each Party shall cooperate with the other and execute such instruments or documents and take such other actions as may reasonably be requested from time to time in order to carry out, evidence or confirm their rights or obligations or as may be reasonably necessary or helpful to give effect to this Agreement.

You should be aware that if you delete the clause in a mark-up on the other party’s first draft, or if the other party deletes yours, this may convey a sense of unwillingness to cooperate.