Commercial Division Blog
Posted: January 13, 2023 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Hillary S. Zilz / Category Contracts
Merger Clause and Express Language in Written Contract Bar Claim Based on Alleged Side Oral Agreement
On December 19, 2022, Justice Melissa A. Crane of the New York County Commercial Division issued a decision in IBT Media, Inc. v. Pragad, 2022 NYLJ LEXIS 2665, dismissing claims based on an alleged side oral agreement to reconvey an asset after that asset was sold because the asset purchase agreement expressly disclaimed a repurchase right and included a merger clause, explaining:
The problem with IBT's position is that IBT expressly disclaimed in the Purchase [*4] Agreement that it had any right to acquire any ownership interest in Newsweek [Purchase Agreement 5(a)]. If that were not enough, the Purchase Agreement contains the merger clause discussed above that supersedes all prior and contemporaneous agreements and understandings between the Parties with respect to the matters set forth herein" Therefore, the terms of the contract utterly refute the existence of a side oral understanding between the parties that IBT has a right to reacquire Newsweek (see Peacock Holdings, Inc. v. Keefe & Keefe, Inc., 232 A.D.2d 331 [1st Dep't 1996] [parol evidence offered to show that promissory notes and security agreements were fraudulent shams to defraud the Internal Revenue Service, entered into to make what was actually gift or at most conditional loan look like unconditional promise to pay, was properly rejected] see also Mackenzie v. Emigrant Mortg. Co., Inc., 164 A.D.3d 1159, 1159 [1st Dep't 2018]; UMG Recordings, Inc. v. FUBU Recs., LLC, 34 A.D.3d 293, 294 [1st Dep't 2006]).
In the face of the plain language of the Purchase Agreement, plaintiff argues that parole evidence can come in to demonstrate that an agreement is a sham, primarily citing Ehrlich v. American Moninger Greehouse Manufacturing Corp., 26 NY2d 255 (1970). The problem with this case and the other ones like it, is that they are actions under CPLR 3213, summary judgment in lieu of complaint, a truncated procedure to enforce an instrument for the payment of money only. These cases stand for the proposition [*5] that a plaintiff cannot avail itself of this truncated procedure where there is an open question about the underlying debt. Here, there is no dispute that the parties meant to transfer Newsweek to NW Medi. The supposed oral agreement to convey Newsweek back to plaintiff contradicts the very terms of the written contract, wherein plaintiff warranted it had no "options or rights to acquire any such ownership interests."
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Had the parties actually intended for the transfer of Newsweek to be temporary, they could have said so in their contract. Instead, IBT signed a contract that specifically disclaimed that it had any reversionary or other rights to retrieve Newsweek. Therefore, it cannot sue on any supposed right now (see Ashwood Capital Inc v. ORG Mgmt, Inc., 99 AD3d 1, 9 [1st Dep't 2012]).
This was not a difficult call for the court, because the language of the written contract here expressly disclaimed the right that the plaintiff sought to enforce, and because the written contract contained a merger clause. But closer calls may arise when there are two written agreements, one being a "side letter" or "side agreement," and the primary agreement includes a merger clause. Counsel drafting these types of agreements should be careful to ensure that any merger clause in one does not supersede the other. Contact the Commercial Division Blog Committee at firstname.lastname@example.org if you or a client have questions concerning merger clauses.