Unless you’re a witch (you’re not), your contracts don’t manifest fully formed out of thin air. They're the product of a negotiation, and whether long or short, the process will consist of you and the other party generating ideas about what the deal will look like. Sometimes during the negotiation, one of you may make a promise that for whatever reason doesn’t end up in the final written agreement. But when the other party assumes it’s still part of the deal, that’s when things can get FUBAR.
“You said you’d deliver 500 red widgets on top of the 500 blue ones I ordered!”
“You said you’d pay 100% up front, not in installments!”
You end up disagreeing on something you thought was crystal clear, and conflict, confusion, and ambiguity become the order of the day. I’ve seen it happen. One of my first gigs out of college was as production assistant for an indie documentary. The producer hired a cameraman who offered to use his own camera free of charge. But that offer was never memorialized in his deal memo. Several weeks after filming ended, the producer got a $1200 gear rental invoice from the cameraguy… and, well you can imagine how pissed he was. But since it was never finalized - even though they had agreed on it over the phone - there was nothing the producer could do. Except curse. He cursed a lot.
That’s why it’s crucial to have a merger clause in every contract you sign. A merger clause* is a clear statement that the final written contract is the ENTIRE agreement, and that prior statements, promises, or commitments that don't make it in are not enforceable. Here’s a simple merger clause I put into all my agreements:
“This is the entire agreement of the parties and it supersedes all previous discussions and negotiations, whether written or orally made."
A merger clause is useful for a couple reasons. First, it puts both parties on notice that if they want the agreement to cover something, they better put it into the final contract. Second, it prevents either party from using outside evidence (in the law we call this parol evidence) to argue that the agreement should cover one of those outside promises. Parol evidence generally cannot be brought into a contract dispute unless:
- It can explain or interpret an ambiguous term (although it cannot be brought in to dispute a term or contradict the whole agreement);
- It can show that there was fraud in the creation of the contract;
- It can prove that there was a material mistake made in the drafting of the contract; or
- One of the parties substantially relied on the promise in some fashion.
If none of these exceptions are met, then a court can only look at the written contract and nothing else.
And this is how it should be. Contract negotiation is not a past-time. It’s not a hobby for weekend warriors. It’s a full contact sport because money (and the fate of your business) is almost always on the line. So if you find yourself in this position, you can’t be too careful. Make sure everything you want the contract to say is in there in writing. And make sure to put in a merger clause.
*It’s called a merger clause because you are merging all your discussions into one final document. Who said lawyers aren’t creative?