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Will Contracts with Merger Clauses Survive Attacks Based on Fraud in the Inducement of that Integrated Document?
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Will Contracts with Merger Clauses Survive Attacks Based on Fraud in the Inducement of that Integrated Document?

April 9, 2012 Professional Services Industry Legal Blog

Reading Time: 9 minutes

Most bank lending documents (and commercial contracts for that matter) contain a merger clause, which explicitly states that the agreement itself embodies the entire understanding and agreement between the parties and further supersedes any and all prior agreements, promises, negotiations, representations, understandings, or inducements, whether express or implied, oral or written, regarding the terms of the agreement between the parties. Therefore, by the express contractual terms of the parties, the integrated agreement itself, subject to limited exceptions, will embody the entire agreement between the parties. The effect of this clause is to bar parties from reaching outside the confines of the written agreement to impose additional contractual duties upon the other party. This often becomes an issue when a claim or defense of fraudulent inducement is asserted in attempt to vitiate an integrated document. This blog post will endeavor to analyze the interplay of a fraud in the inducement defense/claim with a merger clause.

In Florida, even without the existence of a written merger clause, it is well established that negotiations and conversations preceding and/or accompanying the making of  contract are presumed to have merged into the contract itself. Carlon, Inc. v. Southland Diversified Co., 381 So. 2d 291, 293 (Fla 4th DCA 1980). Florida law also holds that:

Although the existence of a merger clause in a contract does not conclusively establish that the integration of the agreement is total, it is a highly persuasive statement that the parties intended the agreement to be totally integrated and generally works to prevent a party from introducing parol evidence to vary or contradict written terms. Envtl. Servs, Inc. v. Carter, 9 So. 3d 1258, 1265 (Fla. 5th DCA 2009).

The concept of an integrated agreement is based on a presumption that the parties to a written contract intended that writing “to be the sole expositor of their agreement.” Jenkins v. Eckerd Corp., 913 So. 2d 43, 53 (Fla 1st DCA 2005); Everglade Lumber Co. v. Nettleton Lumber Co., 149 So. 736, 738 (Fla. 1933).

In turn, the parol evidence rule fosters reliance upon a written contract and “serves as a shield to  protect a valid, complete and unambiguous written instrument from any verbal assault …. ” Jenkins, 913 So. 2d at 53. Put simply, in light of the merger clause, parol evidence is inadmissible to contradict, vary, defeat, or modify a complete and unambiguous instrument, or to change, add to or subtract to such an instrument…. “ Lelnon v. Aspen Emerald Lakes Assocs., Ltd, 446 So. 2d 177, 180 (Fla 5th DCA 1984) (citing J. Montgomery Roofing Co. v. Fred Howland, Inc., 98 So. 2d 484 (Fla.1957). In fact, parol evidence can only be introduced to the extent that the terms are ambiguous and are giving meaning by extrinsic evidence. Jenkins, 913 So. 2d at 53.

Case law has held that the existence of a merger clause in loan documents is a “highly persuasive statement” that the agreement is totally integrated and generally bars any reliance on parol evidence. This typically puts a substantial burden upon Plaintiffs wishing to add common law duties to bank obligations under loan documents based on verbal promises or course of dealing.

One notable exception to merger clause and parol evidence precedent is claims founded on fraudulent inducement of the subject documents. Florida law provides that existence of a merger  clause may not be asserted to bar evidence of oral representations or agreements offered to prove that the contract containing the “merger clause” was procured by fraud. Nobles v. Citizens Mortgage Com., 479 So.2d 822 (Fla. 2d DCA 1985) citing Cas-Kay Enterprises. Inc. v. Snapper Creek Trading Center. Inc., 453 So.2d 1147 (Fla. 3d DCA 1984); Pena v. Tampa Federal Savings & Loan Assoc., 363 So.2d 815 (Fla. 2d DCA 1978). Florida has adopted the position of the Restatement of Contracts, which holds that agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish fraud, even in the face of a merger clause. Restatement (Second) of Contracts §§ 213-215 (1981); Bird Lakes Development Com., v. Meruelo, 626 So2d 234, 238 (Fla. 3rd DCA 1993)(parol evidence admissible even in the face of a merger clause to determine if a contract was induced through fraud).

As reiterated by the First District Court of Appeals in Noack v. Blue Cross and Blue Shield of Florida. Inc., 742 So.2d 433, 434-35 (Fla. 1st DCA 1999), the existence of a merger clause is not an impediment to an action for fraud in the inducement since it is an established rule that “alleged fraudulent misrepresentations may be introduced into evidence to prove fraud notwithstanding a merger clause in a related contract.” Id., citing Wilson v. Equitable Life Assurance Soc’y, 622 So.2d 25, 27 (Fla. 2nd DCA 1993). The Noack case was brought by an insurance agent against Blue Cross arising out of cancellation of Noack’s contract to sell insurance as a Blue Cross general agent. Id. The trial court dismissed a fraud in the inducement claim on the
ground that the contract contained a merger clause. Id. The court of appeal reversed holding that a merger clause is not an impediment to a cause of action for fraud in the inducement. Id.

In Johnson Industries v. FPL Group. Inc., 161 F.3d 1290, 1309 (Fla. 11th Cir. 1998), the Eleventh Circuit explained that when there is a claim that a contemporaneous oral agreement or misrepresentation induced the execution of the written contract, a merger clause may not bar consideration of evidence of prior or contemporaneous agreements or representations, through it may vary, reform or change the written instrument. 161 F.3d at 1310.

Thus, the general rule in Florida is that ‘where there is a fraudulent inducement of a contract, the fraudulent misrepresentation vitiates every part of the contract. … ‘ D&M Jupiter. Inc. v. Friedopfer, 853 So. 2d 485, 489 (Fla. 4th DCA 2003). That includes the part of the contract that says all oral agreements not incorporated into the contract are merged and unenforceable. See Mejia v. Durich, 781 So. 2d 1175, 1178 (Fla. 3d DCA 2001 )(“The existence of a merger or integration clause, which purports to make oral agreements not incorporated into the written contract unenforceable, does not affect oral representations which are alleged to have fraudulently induced a person to enter into the agreement.”); see also Tinker v. DeMaria Porsche Audi. Inc., 459 So. 2d 487, 492 (Fla. 3d DCA 1984), (holding that even a disclaimer of all oral representations and guarantees, even when conspicuous, is ineffective to negate a party’s liability for fraud in the inducement).

Controlling precedent in the First District Court seems to be governed by the holdings in Elmore v. Vatrano, 485 So. 2d 888 (Fla. 1st DCA 1986), and Palmer v. Santa Fe Healthcare Systems. Inc., 582 So. 2d 1234 (Fla. 1st DCA 1991). In each of those cases, the appellate courts reversed summary judgments on fraud in the inducement claims where the trial court found that fraud claims could not survive the execution of a written contract when there is a merger clause.

In Elmore, an employer induced an employee to accept a job offer by stating that, “after an initial  90-day period, he would become general sales manager with a compensation package of at least  $10,000 a month.” Elmore, 485 So. 2d at 889. The First District reversed the summary judgment for the employer, significantly noting that:

Summary judgment is not a substitute for a trial; and fraud is a subtle thing requiring full explanation of the facts and circumstances of the alleged wrong to determine if they collectively constitute fraud. Since the whole context is necessary for the determination, it is seldom that one can determine the presence or absence of fraud without trial. Id. at 890.

 In Palmer, an employer induced a doctor to establish a practice in a certain area with representations, inter alia, about the number of available patients and thus the doctor’s potential revenue stream. Although the employer denied making those representations and the contract contained a clause that “cancels and supersedes all previous agreements,” the First District reversed a summary judgment for the employer and held that “there is sufficient doubt and dispute regarding the material facts so as to preclude a summary judgment in favor of the [employer] on [the doctor’s] claim of fraud.” Palmer, 582 So. 2d at 1235-36. As part of its reasoning, the First District Court of Appeals stated:

A fraudulent misrepresentation is ordinarily actionable only as to statements of past or existing facts, and a promise of future conduct generally will not serve as a predicate for a claim of fraud. See Sleight v. Sun and Surf Realty, Inc., 410 So.2d 998 (Fla. 3d DCA 1982). While the appellant’s claim is partly foundationed on promises as to future acts, he has also asserted misrepresentations relating to Santa Fe’s plans and intentions at the time of the parties’ negotiations. A promise as to future conduct may serve as a predicate for a claim of fraud if it is made without any intention of performing, or with the positive intention not to perform. See Perry v. Cosgrove, 464 So.2d 664 (Fla. 2d DCA 1985); Hamlen v. Fairchild Industries, Inc., 413 So.2d 800 (Fla. 1st DCA 1982). The appellant’s assertions, as substantiated by the depositions and other documents, raise an issue as to whether future conduct was promised with such wrongful intent. Although some of the appellees have denied making such misrepresentations, this is an issue of fact which precludes a summary judgment.

Based on these cases, it seems to be reversible error to grant summary judgment on fraud in the inducement claims based solely on a merger clause defense. Judging from the First DCA’s analysis, those fraud claims that can show the inducing party made the oral promises without ever intending on performing will have the best chance at surviving a summary judgment from a party seeking to enforce its integrated document. In sum, the mere presence of a merger clause is not a barrier to a cause of action for fraud in the inducement. Noack, 742 So.2d at 433, 434. Alleged fraudulent misrepresentations may be introduced into evidence to prove fraud notwithstanding a merger clause. Wilson, 622 So.2d at 25, 27.

Though this line of precedent can be very frustrating to the business that tries to write agreements that encompass the true and complete negotiations of the parties, it is worth noting that as long as your business does not make false promises in negotiations that do not make their way into the contract, your contracts will not be invalidated.

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