Mark E. Abraham
GR Review

In every commercial transaction, each party to the deal has an expectation that he/she will benefit from the contract in some substantive way.  Unfortunately, due to market conditions, miscalculations, or simply bad luck, not every participant will ultimately be satisfied, leading to what we can call, "the disgruntled party."  The "disgruntled party" has lost time and money, is angry, and will look for the most obvious scapegoat: you or your company!  The disgruntled party's mind may suddenly be filled with all sorts of false "memories" of the transaction and the negotiations leading up to the consummation of the deal, including alleged pre-contractual fraudulent misrepresentations on your part, potentially culminating in a lawsuit based on common law fraud.  If this unfortunate situation should arise, there is no substitute for competent litigation counsel.  The harder question is:  How can you protect yourself as best as possible against frivolous fraud claims before entering into the contract in the first place?  While there can, of course, be no guarantee that you will not end up with a disgruntled party irrespective of your actions, there are some key things to consider that should help increase your ultimate chances of success against the disgruntled party should he/she file a common law fraud claim.

The Traditional Use of Integration or "Merger" Clauses

Under Illinois law, to assert a cause of action based on common law fraud, a party must establish (1) that the defendant made a false statement of a material nature, (2) which was known or believed by the person making it to be untrue or made in culpable ignorance of its truth or falsity, (3) which was relied on by the victim to his detriment, (4) which was made for the purpose of inducing said reliance, and (5) which led to the party's injury.  General Electric Credit Auto Lease, Inc. v. Jankuski, 177 Ill. App. 3d 380, 383 (1^st Dist. 1988). Typically, an integration clause is inserted as standard language into contracts to prevent a party to a contract from relying on earlier promises, representations, or earlier versions of the contract.  Black's Law Dictionary (6^th Edition) defines an integrated contract as a "[c]ontract which contains within its four corners the entire agreement of the parties and parol evidence tending to contradict, amend, etc., is inadmissible; the parties having made the contract the final expression of their agreement."  Wikipedia's definition of an "integration clause" is similar: 

[An integration clause]… is a term in the language of the contract that declares it to be the complete and final agreement between the parties. The existence of such a term is conclusive proof that no varied or additional conditions exist with respect to the performance of the contract beyond those that are in the writing. A contract that has such a clause is deemed an integrated contract, and any previous negotiations in which the parties to the contract had considered different terms will be deemed superseded by the final writing.

http://en.wikipedia.org/w/index.php?title=Integration_clause&oldid=154653145 (last visited January 8, 2008). 

An integration clause might state, for example: 

Entire Agreement.  This Agreement constitutes the entire agreement and understanding of the Parties hereto in respect of the subject matter contained herein and fully supersedes any and all prior or contemporaneous written or oral agreements or understanding between them pertaining to the subject matter thereof.  The Parties further agree that this Agreement may not be altered, amended, modified, superseded, cancelled or terminated except by an express written agreement duly executed by all the Parties or their attorneys on their behalf, which makes specific reference to this Agreement.

Integration Clauses Alone May Not Preclude A Cause of Action for
Common Law Fraud Based on Pre-Contractual Misrepresentation

At least one relatively recent Illinois decision, Barille v. Sears Roebuck and Co., 289 Ill. App. 3d 171, 177 (1^st Dist. 1997) is still cited by Illinois litigants for the blanket proposition that an unambiguous integration clause may preclude a cause of action for fraud based on pre-contractual misrepresentations.  However, the Barille decision has been heavily criticized by subsequent Illinois courts and federal courts for its failure to contain any supporting rationale for the above conclusion.  For example, in W.W. Vincent and Company v. First Colony Life Ins. Co., 351 Ill. App. 3d 752 (1^st Dist. 2004), the 1^st District Appellate Court later reached the opposite conclusion and followed a contrary 2^nd District opinion, Salked v. V.R. Business Brokers, 192 Ill. App. 3d 663 (2^nd Dist. 1989), which held that the parol evidence rule "will not be permitted to be used for the accomplishment of fraud, or of injustice and wrong to others."  

The W.W. Vincent court adopted the conclusion and reasoning of Judge Posner in Vigortone AG Products, Inc. v. PM AG Products, Inc., 316 F.3d 641, 644 (7^th Cir. 2002)¹ which held that, as a general rule, an integration clause will not preclude a plaintiff from relying upon extrinsic evidence in order to establish a cause of action for fraud.  W.W. Vincent and Company v. First Colony Life Ins. Co., 351 Ill. App. 3d 752, 760 (1^st Dist. 2004) ("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.  Doctrine aside, all 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.") (quoting Judge Posner in Vigortone and adopting the 7^th Circuit's reasoning); BCWC LLC v. Reading Rock, Inc., 2007 WL 2955573 (N.D. Ill., October 10, 2007) (following W.W. Vincent & Co. and holding that an integration clause does not bar evidence of misrepresentations in fraud claims); see also General Electric Credit Auto Lease, Inc. v. Jankuski, 177 Ill. App. 3d 380, 386-387 (1^st Dist. 1988) (holding that parol evidence on the allegation of fraud in the inducement is admissible to prove fraud). 

Therefore, the lesson to be learned is that, in Illinois and a majority of states, an integration clause alone is not likely to be sufficient to prevent a disgruntled party from successfully asserting a common law fraud claim based on pre-contractual fraudulent misrepresentations and omission, even if the alleged misrepresentations contradict the express terms of the contract.

The Preemptive Power of the "Non-Reliance Clause"

Although integration clauses cannot be relied upon exclusively to preempt frivolous fraud claims, they can serve as a powerful tool when combined with a "non-reliance" clause (in the context of an otherwise carefully drawn out contract coupled with good faith dealing between sophisticated parties) to defeat a fraudulent misrepresentation claim that is contradictory to the express terms of the contract.  To be most effective, a "non-reliance" clause should provide that the parties have explicitly not relied on any earlier or outside representations other than the ones in the contract.  See e.g., Deluxe Media Services, LLC v. Direct Disc Network, 2007 WL 707544 (N.D. Ill. March 2, 2007); Adler v. William Blair & Co., 271 Ill. App. 3d 117 (1^st Dist. 1996).  The "non-reliance" clause should also clearly indicate that the parties are not to rely on any information from any source, unless the information was included in the final contract.  See e.g., Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 456 (1^st Dist. 2004).  Of course, care must be taken in drafting the contract as a whole, including a determination of which representations (if any) should be included in the final contract.  Again, there is no substitute for competent legal counsel. 

In conclusion, the proper use of an integration clause and a "non-reliance clause" in a commercial contract between two sophisticated parties should be helpful in getting a frivolous or weak fraud claim dismissed, where the fraud claim is based on oral misrepresentations that contradict the express terms of the contract.  However, the use of these clauses will not serve as a panacea to protect a party from liability for itself engaging in blatant fraud.  Even with a contract that contains an integration clause and a "non-reliance" clause, courts will likely look (and should look) beyond the four corners of the contract if one of the parties is clearly attempting to perpetrate a fraud on the other party.  Nonetheless, a properly worded commercial contract between sophisticated parties should take the wind out of the disgruntled party's sails.

Mark Abraham is an Associate in Gould & Ratner's Litigation Group.  He may be reached via telephone at 312.899.1601 or via email at mabraham@gouldratner.com

¹Judge Posner predicted that the Illinois Supreme Court would line up with the majority of states that an integration clause (alone) does not bar a fraud claim.  Vigortone AG Products, Inc. v. PM AG Products, Inc., 316 F.3d 641, 644 (7^th Cir. 2002).