Don't Bet the Business

I talk a lot about lease drafting, directing much of my thoughts to partners and associates that actually create leases. As a litigator, I am always leery of boilerplate clauses typically found throughout commercial leases. 

Don’t get me wrong, I am not suggesting that commercial leases should be created from scratch in each instance. Within the category of the “don’t recreate the wheel” legal principle of efficient and economic client service, tried and true contract boilerplate has its place. 

Equally true is a fairly fundamental litigation principle that states that “just because it worked once does not mean it will work the same way every time.” So, let’s talk a bit about one of the contract lawyer’s favorite tools – the integration clause.

Integration clauses, also sometimes referred to as “merger” clauses, typically state that all of the parties agreements are included within the terms of the contract, so neither party can later claim their agreement included some unstated terms. This is a basic but important concept. 

One of the goals of contract drafting is clarity when expressing the parties’ intentions.  What better way to clearly express intent than for both sides to agree that the entirety of their contact is contained in the writing? I doubt anyone will take issue with the usefulness of a well written integration clause. Indeed, they are found in nearly all commercial contracts, including leases. Unfortunately, while commonly included as part contract boilerplate, the scope and purpose of an integration clause can sometimes be misconstrued.

When an unhappy commercial tenant wants to break a lease, one of the claims sometimes raised is that “I was lied to by the landlord to get me to sign the lease.” Integration clauses are often used to defend these types of claims when a contracting party accuses the other of some improper inducement that is not part of the written contract. 

The defense runs – it is unreasonable to rely upon alleged parol (undocumented) representations when the written agreement expressly states that it includes the totality of the parties’ agreement. At first blush, this would seem to make perfect sense. After all, isn’t that why integration clauses exist, to prevent allegations based on claims that fall outside of the four corners of the contract?

Not so fast, the Michigan Court of Appeals recently reminded us. While it is true that common-law fraud claims typically must be based on a statement relating to a past or an existing fact, an exception exists for fraud in the inducement. Fraud in the inducement occurs when “a party materially misrepresents future conduct under circumstances in which the assertions may reasonably be expected to be relied upon and are relied upon.”

To establish a claim of fraudulent misrepresentation or fraud in the inducement, the plaintiff must prove by clear and convincing evidence that:  (1) the defendant made a material representation; (2) it was false; (3) defendant either knew it was false or made it recklessly without knowledge of its truth; (4) the representation was made with the intent that plaintiff would act upon it; and (5) the plaintiff did act, which caused the plaintiff to suffer damages. Significantly, and this is where we sometimes see the integration clause raised in defense, the plaintiff must have reasonably relied on the false representation.

So why doesn’t the integration clause bar such a claim. That is because under Michigan law, parol or extrinsic evidence is typically admissible to prove fraud.  In other words, extrinsic evidence, even within the framework of an integrated contract, is admissible to attack the validity of that contract as a whole on the ground that it was procured by fraud.  Simply, when a contract has an integration clause, the complaining party cannot introduce extrinsic evidence to contradict or change the contract terms.  However, that same integration clause will not block evidence of pre-contractual misrepresentations of material facts relied upon when deciding to enter into the contract in the first place. Accordingly, the Michigan Supreme Court has ruled that, “where the inducements for the execution of a contract are fraudulent representations as to existing facts, testimony as to such representations is not within the parol evidence rule. They do not vary, change, or alter the terms of the written contract and are admissible in evidence, as bearing upon the question of whether the contract, fair on its face, was procured by fraud.”

For example, if, as part of a lease negotiation, statements are made regarding the availability of certain retail space or the level of pedestrian traffic through the common areas, unless these points are expressly covered by the final lease, and typically they would not be, an integration clause in the executed contract likely will not make it unreasonable for the complaining tenant to rely on such pre-contractual representations and, thereby, state an actionable claim of fraud if those statements turned out to be false.

So, once again, boilerplate clauses, such as the commonly used integration clause, have their place and use. It is important, however, to understand what an integration clause is and does, and what it does not do. In the example described above, the integration clause would not shield a landlord from claims of fraud in the inducement – nor should it. Court’s do not like liars, and it doesn’t matter how well the contract is written.