• How Merger Clauses Protect Against Oral Agreement Claims
  • May 2, 2014 | Author: Nicole Necklas Soraruf
  • Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
  • When drafting an agreement, it is crucial to ensure that the agreement reflects all the material terms of the understanding between the parties. To help protect against the assertion of oral agreements that are alleged to alter the parties' written agreement, the parties should include a merger clause (also known as an integration clause) in the agreement. A merger clause states that the written document is a complete statement of the parties’ understanding, and that any prior matters discussed, either orally or in writing, that are not included in the written document do not form part of the agreement. The effect of a merger clause is to reduce the prior discussions and negotiations of the parties to one final document. A recent case from Texas illustrates how the inclusion of a merger clause can help protect against claims of oral agreements.

    In Vinewood Capital, LLC v. Dar Al-Maal Al-Islamic Trust, et al., the Court of Appeals affirmed the lower court’s dismissal of the suit on summary judgment. It rejected the plaintiffs’ claims that the defendant, Dar Al-Maal Al-Islami Trust (DMI) entered into an oral contract to invest “$100 million in real estate projects promoted by Vinewood”in part on the grounds that the written agreement between the parties did not contain any such investment provisions but did contain “a merger clause which stated that the written agreement contains the entire agreement between the parties and supersedes all prior agreements and understandings.”

    The principals of Vinewood, James Conrad, Laird Fairchild and Wendel Pardue, each had worked for Overland Capital Group, Inc.. Overland’s role was to locate real estate investment opportunities for DMI’s affiliates. If DMI purchased a property, Overland then would manage it. In March 2004, Overland fired Conrad, Fairchild and Pardue. In April 2004, Fairchild and Pardue sued Overland and a DMI affiliate for wrongful termination. In June of that same year, Conrad met with DMI’s officers in order to settle the wrongful termination lawsuit.

    Because of that meeting, the parties reached a preliminary settlement agreement that would include: “(i) a settlement payment to Conrad, Fairchild and Pardue and mutual releases from liability; and (ii) an agreement that an affiliate of DMI would loan a new company (which was later formed as Vinewood) $2.5 million in start-up capital.” Conrad claims that, in addition to the above agreements, DMI agreed that “DMI would start a new business relationship with Vinewood in which DMI committed to fund $100 million in real estate investments in the coming year.” The defendants asserted that DMI agreed only to consider future investment projects proposed by Vinewood.

    After the meeting, the parties and their attorneys exchanged correspondence and draft agreements with the goal of finalizing the understanding between the parties. The writings referenced the settlement payment and mutual releases, along with a loan to Vinewood. The court noted that noticeably absent from the agreements and correspondence was any reference “even obliquely, to a commitment by the defendants to invest in a specified amount of real estate projects to be generated by the plaintiff.”

    The first agreement executed by the parties was a memorandum of understanding confirming that DMI would make the $2.5 million start up loan to Vinewood. The court’s ruling notes that “it also had provisions about a future business relationship with the plaintiff. But rather than committing DMI to invest in projects brought to it by the plaintiff, the instrument secured to DMI the first right of refusal on all real estate investments Vinewood presented to it...[T]he instrument stated that DMI would ‘have no obligation whatsoever to participate or become involved in such transactions.” The court also noted that the memorandum provided that “‘any and all prior agreements, contracts and understandings between and among the parties to the Financing Agreement shall be fully and completely terminated and of no effect.’” Approximately one month later, the parties executed the final settlement agreement, which resolved the wrongful termination lawsuit.  In addition to a provision that Conrad, Pardue and Fairchild fully released the defendants “from all earlier contracts, agreements and promises,” the agreement specifically contained a merger clause that the “Settlement Agreement supersedes all previous oral and written negotiations, agreements commitments and writings in connection therewith.” A week after they executed the final settlement agreement, the parties signed the final financing agreement, which memorialized the final terms of the memorandum of understanding. This agreement also contained a similar merger clause.

    In affirming the district court’s granting of summary judgment, the appellate court noted that “the only evidence offered by Vinewood in support of the alleged oral contract between Vinewood and DMI for DMI to invest $100 million in real estate is Conrad’s deposition testimony and affidavit. In contrast...the record is replete with documentary evidence, much of it produced by principals of Vinewood, that proposes a business relationship with defendants with no mention of the alleged oral agreement...In addition, even if we assume that an oral agreement was formed, the release language...and the merger clauses...would negate that agreement...Conrad’s self-serving testimony is belied by the parties’ contemporaneous written communications and written agreements and is therefore insufficient to create an issue of fact.”

    During loan negotiations, there can be many oral conversations and e-mails, and much written correspondence leading up to an agreement, some contrary to the final written agreement. A merger clause in the agreement is one way to help ensure that conversations from the past that do not make it into the written agreement cannot later be used to thwart the terms of the written agreement.

    This case is cited as Vinewood Capital, LLC v. Dar Al-Maal Al-Islamic Trust, et al., No. 12-11103, 2013 WL 5530539 (5th Cir. 10/08/2013)