Commercial Division Blog

Posted: May 26, 2014 / Categories Commercial, Contracts, Fraud/Misrepresentation

Merger Clause Prevents Fraud Claim Based on Alleged Pre-Contract Promises

On May 16, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Antares Real Estate Services III, LLC v. 100 WP Property--DOF II, LLC, 2014 NY Slip Op. 31312(U), dismissing claims regarding alleged pre-contract promises based on a contract's merger clause.

In Antares Real Estate Services III, the plaintiff sued the defendants for a "promote" payment in connection with the plaintiff's property management services. The defendants moved to dismiss, arguing that the oral agreement to pay the promote alleged in the complaint was unenforceable due to the merger clause in the parties' written agreement (the "PMLA").  The court agreed, explaining:

Moreover, [the plaintiff's] fraud claims are little more than an attempt to enforce the alleged oral agreements preceding the PMLA. The express terms of the PMLA do not guarantee [the plaintiff] a promote, prohibit not-for-cause termination, or guarantee the use of office space even if [the plaintiff] is terminated (terms allegedly promised orally). [The plaintiff's] attempt to enforce its prior contract or collateral agreement is barred by the merger clause that states "this Agreement continues the entire agreement between" the parties - this attempt cannot succeed when repackaged as a fraud claim. It is well settled that where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing. If [the plaintiff] has a fraud claim in this case, merger clauses would be meaningless because every merger clause could be vitiated by a claim that, as [the plaintiff] alleges here, a prior oral agreement was in place that contradicts the terms of the written contract.

It should be noted that [the plaintiff] conflates the concept of merger clauses and warranty waivers. It is well settled that broad waivers generally disclaiming reliance on all of the parties pre-contract representations do not immunize specific instances of fraud. Only specific, itemized waivers disclaiming reliance on particular representations are valid. But waivers of representations are not the same - either conceptually or under the law - as written statements declaring that the written contract is the only enforceable agreement between the parties. Warranty waivers concern facts relied upon when entering into a contract; a merger clause disclaims the existence of other agreements. The rule requiring specificity of warranty waivers does not logically apply to merger clauses since a defendant has no way of knowing what purported oral agreement a plaintiff will allege existed of in subsequent litigation. If a specificity rule applied to merger clauses, merger clauses would be worthless.

Merger clauses are an essential tool for procuring certainty in complex commercial transactions. They prevent parties from being blindsided in litigation by attempts to change the terms of the deal with fraud claims or the pleading of collateral agreements. Allowing claims based on collateral agreements or fraud notwithstanding a merger clause compromises the integrity of commercial dealings and foments intolerable uncertainty into New York's economy.

(Internal quotations and citations omitted) (emphasis added).

Merger clauses are ubiquitous in complex commercial transactions. As this decision shows, they may be boilerplate, but they nonetheless play an important role in creating certainty in a transaction.