Get to Know the Integration Clause

Here is another geeky contract term that a lot of people don’t understand, yet it has important implications if there is ever a dispute between the parties to a contract. The geeky contract term for this week is the Integration Clause. The Integration Clause (or as it is often written “Entire Agreement” Clause is:

A piece of contract boilerplate that usually appears at the very end of the contract. The clause states that this contract is the only evidence of the contract between the parties and it includes the sole and final agreement between the parties, and that no other agreement or document is involved in this contract, unless it is specifically incorporated.

The integration clause states that the parties’ contract is the only agreement. Here’s why it’s important.

Often in disputes parties try to get in evidence of conversations or sub-agreements that happened before the contract was signed. These pieces of evidence generally aren’t going to be allowed into evidence unless they do one thing: explain what the parties mean in the contract. The only time a court is ever going to worry about what the contract means, is when the contract itself is ambiguous, meaning that the contract could be interpreted in one of two ways in a fair reading of the contract.

Believe it or not, multiple interpretations of a contract happen often (usually because lawyers get creative with arguments). When courts have a problem defining what terms mean in a contract, they usually start with the dictionary. There’s an old saying in the litigation world that “if your judge or the court has to go to a dictionary to determine what a word means, you’ve probably already lost.” Even if you haven’t lost, the words in the contract are not very well explained. They are unclear in their meaning, while the whole purpose of a contract is to have a clear understanding between the parties.

Let’s go back to the Integration Clause.

This clause says to a judge and the parties that our entire agreement is in this document and any documents that are specifically incorporated. Maybe there is a scope of work attached, or a side agreement referred to in the agreement, which is fine, but once you have a what is referred to as an integrated contract, that’s it. You want to have that contract be the final expression of what the parties are agreeing to. Something that often happens is that parties will, once they start acting and fulfilling the contract, start to see things a little fuzzy. The parties may not follow the exact letter on the contract. Not following the exact letter of the contract happens and that’s fine, so long as both parties to the contract see that that kind of behavior can work as an unintended amendment to the contract.

That’s where we get into two other geeky terms: course of performance and course of dealing. Often times, these terms get mixed up. Course of performance means:

How do the parties perform between themselves within the context of a specific contract?

For example, during the course of performance of a particular contract, the parties accept the notion of paying every 60 or 90 days even though the contract says you’re going to pay every 15 days. If both the paying party and the vendor agree to that course of performance, and they do so over a long period of time without penalty. You could end up with an unintended amendment. The paying party could make an argument in court, “we had an unintended amendment caused by the course of performance related to payment procedures.” Thus, the thoughts that the paying party is not liable for payments or interest because the other side accepted their irregular payments, but did not give them a late warning. It’s not a great argument, I’ll admit, but it is an argument that can be made. Additionally, other terms could be changed. In a scope of work, the project could be expanded and so an unintended amendment can result out of the course of performance between the parties.

Course of performance does not lend itself well to defining what a term means in a contract, but it can help determine if an amendment happened.

The other term that can help a court determine what a term means is the course of dealing. It is a very similar concept to course of performance, but has a different meaning:

How have these parties have acted over several different contractual relationships?

For example, over time company A has contracted with company B and they’ve done so in a series of contracts over the past 6 or 7 years. Now some ambiguity has come up, so the parties can present to the courts that over the course of time, this is how we’ve dealt with this issue. So although the language of the contract might be ambiguous to an outsider, this is what this term has meant as it has appeared between these two parties.

Does the course of dealing and the course of performance get somebody beyond an integration clause problem? Maybe. I know that’s not a nice way to put it, but, maybe.

We are not talking about information before the contract was signed, were talking about information in conduct of the parties after the contract was signed. The integration clause, while it does normally prohibit the stuff that happened before the contract was signed, an integration clause does not mean that information about course of performance or course of dealing might be useful for a court as explanatory information of what a contract clause means to the parties after a contract is signed.

Although the Integration Clause often appears in the contract boilerplate, it is something that you have to pay attention to, because once you sign a contract that has an integration clause, you are saying that this document has our entire agreement. Before you sign that document, you should make sure that entire agreement is stated in the contract and it is what you intended.

The integration clause has far reaching implications if there is ever a dispute between the parties about the meaning of the contract.

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