Commercial Litigation and Arbitration

No Reliance vs. Merger/Integration Clauses

The issue in FMC Techs., Inc. v. Edwards, 2007 U.S. Dist. LEXIS 42512 (W.D. Wash. June 12, 2007) was whether a no-reliance clause embedded in a merger/integration clause operated to foreclose a claim of fraud in the inducement. The clause in question read as follows:

Full Integration/Amendments in Writing. This Agreement is the entire agreement between the Parties relating to the subject matter discussed above, and replaces any and all prior negotiations, representations, or agreements between the Parties, whether oral, electronic, or written, regardless of subject matter, all of which are merged herein. The parties acknowledge that they have not relied on any promise, representation, or warranty, express or implied, not contained in this Agreement. No amendment, modification, or supplement to this Agreement shall be effective unless it is in writing and signed by all Parties.

The plaintiffs, attempting to void a settlement agreement containing this language, contended that the italicized "no-reliance" language did not preclude their claim because (1) it was embedded within the integration clause and was merely a continuation of the first sentence of that clause, which appears in a "Miscellaneous" section near the end of the contract, and (2) was "boilerplate" and not specific enough to bar a fraud claim.

Judge John C. Coughenour, in the course of rejecting both arguments, helpfully distinguished the purpose of the two types of clause, thereby re-emphasizing the importance of no-reliance language:

It is undisputed that there is a significant difference between integration clauses and no-reliance clauses in contracts. The general rule regarding the effect of an integration clause on subsequent fraud claims begins with the purpose of an integration clause. "[A]n integration clause prevents a party to a contract from basing a claim of breach . . . on agreements or understandings, whether oral or written" that were part of negotiations but which never were written into the contract itself. Vigortone AG Prods., Inc. v. PM AG Prods., Inc., 316 F.3d 641,644 (7th Cir. 2003). Thus, an integration clause is a function of the parol evidence rule. However, "fraud is a tort, and the parol evidence rule is not a doctrine of tort law and so an integration clause does not bar a claim of fraud based on statements not contained in the contract." Id. "[A]ll an integration clause does is limit the evidence available to the parties should a dispute arise over the meaning of the contract. It has nothing to do with whether the contract was induced . . . by fraud." Id. In contrast, "parties to contracts who do want to head off the possibility of a fraud suit will sometimes insert a 'no-reliance' clause into their contract, stating that neither party has relied on any representations made by the other." Id. An integration clause that contains no reference to reliance is nothing more than an integration clause. Id. at 645.

The decision usefully distinguishes circumstances that may give rise to another result, such as a securities claim, at least under some states’ laws, and consumer- or preprinted-form contracts. Good quote from a Third Circuit case (quoting an S.D.N.Y. decision in turn): ‛The lack of specificity in [the] waivers does not make them any less clear. . . . ‘[A] method of identification does not become unclear simply because it is terse.’“

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