What Constitutes a Fully Integrated Contract?
A fully integrated contract is an agreement of which the parties agreed contains all that they need and want to agree on, and therefore is a complete agreement. Nothing – other than the representations, warranties, and covenants in such an agreement – is necessary to demonstrate, establish, or prove the contract’s terms. Parties to fully integrated contracts waive any right to use any parol evidence outside the four corners of the document to add to, modify, or otherwise vary its terms. They also waive their right to use parole/evidence for this purpose unless they can prove fraud, mistake of fact, accident, or other grounds warranting reformation or an exception to the rule excluding parol or extrinsic evidence is applicable.
A fully integrated contract is not the only type of integrated contract. Other forms of integrated contracts include those that are:
In addition, there are partially integrated contracts as well as non-integrated contracts . Fully integrated contracts are the strongest type of contract within the hierarchy created by contract law because, as mentioned above, the parties have agreed that nothing outside the four corners of the document is needed. Because the agreement contains all that it needs and wants to agree on, a fully integrated contract is complete.
Since fully integrated contracts are the strongest form of contract, they may contain merger clauses. A variety of merger clauses exist, and the most common is the Joseph Land Agreements standard merger clause. A merger clause is any type of clause stating that the agreement represents the final and entire expression of the parties’ intent, and acknowledges and agrees that any prior and contemporaneous understandings, communications, and oral agreement between or among the parties is superseded by the contract.
Characteristics of Fully Integrated Contracts
To qualify as fully integrated, a contract must meet certain core characteristics. Fully integrated contracts provide comprehensive documentation that is meant to be the sole collection of the agreement and are usually preceded by thorough negotiations. Typically, the terms within the contract will explicitly exclude the application of parol evidence. When determining whether any part of the contract falls under this definition, courts consider the following: A. Completeness of Documentation Fully integrated contracts are comprehensive and detailed, containing extensive written terms. In general, the evidence that a contract is fully integrated will be the contract alone, although other evidence could include the substance of the document, how the contract was negotiated, or the circumstances surrounding the making of the contract. Excluded from evidence, however, are the circumstances that pertain to its validity. B. Clarity of Terms Contracts are generally presumed to be unambiguous, with clarity in overall execution being strongly favored. Courts will typically construe language that is not clear against the party that drafted the contract and may consider the admissibility of extrinsic evidence to determine ambiguity. C. Exclusion of Parol Evidence More important than simplistic incorporation about the exclusion of parol evidence is the substantive intent of such aspects to bar evidence of the prior and/or contemporaneous negotiations. That means the contract or its terms expressly state that parol evidence cannot be used to contradict the meaning of the contract.
Using the Parol Evidence Rule
The parol evidence rule is a key component in understanding fully integrated contracts. The rule states that an integrated agreement is a final expression of the agreement, meaning that pre-agreement negotiations and oral agreements or representations cannot be used to contradict or add to the terms of a fully integrated contract. This principle is vital for parties to remember when contracting because it protects them from the possibility that the agreement will be reinterpreted or contradicted by evidence outside of the contract itself.
For example, if two parties enter into a written agreement stating that the seller "will deliver 100 widgets and the buyer will pay $500 for them," this is considered a fully integrated contract. If the seller had previously verbally agreed to sell 10 extra widgets for an additional $50, but this was not written into the contract, the buyer would be prohibited from using that oral agreement to claim that he/she owed the seller $550 for 110 widgets. This is particularly true in disputes involving fully integrated contracts; in court, he/she would be permitted to demonstrate that the parties originally agreed to this additional offer, but he/she would not be permitted to introduce that evidence to contradict the clear terms of the agreement.
Exceptions to the rule do exist, however. The most common exception to the parol evidence rule is the partial integration exception. A partially integrated agreement is one that contains some, but not all, of the agreed-upon terms. In this case, if the terms of the agreement are disputed, a party may bring outside evidence to prove the accuracy of the term(s) in question. For example, if the buyer claims that he/she only owed $450 for 100 widgets, but the seller claims that the full terms of the agreement were $500 for 100 widgets and an extra $50 for 10 additional widgets, the buyer may present testimony from the earlier negotiations to support his/her argument.
A second common exception to the parol evidence rule exists to prevent a party from committing fraud. This rule also applies in cases where it is necessary to complete a contract. If a deal was reached between two parties on a Tuesday, and one of the parties later claimed that the other party had said the terms would be different on Sunday (i.e., deliver 90 widgets instead of 100), a party could then use past negotiations to contradict the terms of the contract, because the agreement is incomplete.
The Benefits of a Fully Integrated Contract
Fully integrated contracts provide numerous benefits for both contract parties and legal experts. By requiring all terms to be clearly written within the document itself, a fully integrated contract provides that the intent of the parties is accessible so long after the negotiating and drafting have taken place. There are essentially three main advantages of fully integrated contracts.
The first advantage is that the parties to the contract know where to look for the terms and provisions of their agreement. If they have agreed to an integrated contract, they do not need to worry that an essential term was omitted because the other party is hiding it in some unmentioned portion of their agreement. Your contractual rights and obligations are limited to the terms you agreed to in the contract you signed.
The second advantage of fully integrated contracts is that they provide enforceable evidence of the contractual terms. For this purpose, contract terms do not need to be kept secret – indeed, they should be kept public for everyone to see. A contract that is fully integrated shows that the parties agreed to everything in writing, so that the mere fact of its existence can often provide sufficient proof that the parties have entered into an enforceable agreement. (This is an oversimplification of the reality of contract law, but is true with respect to many contract disputes.)
The third advantage of fully integrated contracts is that they drastically reduce the number of issues that will give rise to dispute between the parties. With all the terms clearly laid out in writing, there is less reason for parties to argue about their respective rights and obligations.
How to Write a Fully Integrated Contract
Under Texas law, in order for a contract to be deemed fully integrated, you must explicitly state it. The party’s objective—their intent for there to be a fully integrated contract—must be an express term of the contract. If there is any ambiguity regarding whether or not the parties intended the contract to be fully integrated, a court may look to parol evidence to determine intent. To avoid potential litigation on this issue, either insert a statement in the contract making it clear that it is a fully integrated contract or include an integration clause. These sections should be near the end of the contract, after the substance of the contract. An integration clause is a simple one- or two-sentence clause stating the parties intended for the contract to include all agreements between them and that the contract is binding on both parties. For example, "This is an integrated contract and includes all agreements between the two parties." If the parties ever find themselves in litigation , this clause will support their argument that the contract is fully integrated.
Other clauses that should be included are merger or entire agreement clauses. The purpose of these clauses is similar to an integration clause, but their scope is broader. Integration and merger clauses only provide that the contract is a final expression of the parties’ intent. An entire agreement clause also provides that the contract is a final expression of the parties’ intent; however, they do not stop at that, but also declare the contract includes all prior drafts, discussions, and negotiations. Generally, when used together, these clauses provide the most protection to a party in a litigated contract dispute. These clauses can be particularly useful if there have been many drafts or negotiations between the parties—not just drafts leading up to the final agreement.
Common Issues and How to Solve Them
Understanding the language of a fully integrated contract is key to its use and applicability. However, when a contract appears unambiguous on its face, but ambiguous upon application in a particular situation, issues may arise. One possible point of confusion is whether the later conduct of the parties may be used to supplement the written contract. A party to a contract may argue that subsequent conduct or actions should serve as "supplement" to the contract; whereas the other party contends that the contract should be read on its face and cannot be supplemented. In this interpretation, the result often rests on the purpose for which the contract is ultimately used. For example, may a list of non-competition obligations signed by both parties, but agreed to years after, serve as either a supplement or modification to a contract? Or are supplements effective where the context in which the contract operated would support or allow a reasonable interpretation of an "unwritten rule"?
Another common challenge is to determine whether the contract excludes all prior negotiations. If so, then parties are forbidden from using prior negotiations to explain otherwise ambiguous terms or conditions of the contract. For example, under some circumstances, the party may use extrinsic evidence to demonstrate the way the parties understood the contract. Thus, the challenge becomes determining whether the integration clause encompasses prior conduct or actions by the parties or their predecessors, or whether the parties’ conduct may be used to show prior understanding or practices of the parties.
One response to this uncertainty is to draft a contract containing specific language allowing evidence of pre-contract negotiations, agreements, and practices in order to thwart a party’s attempt to exclude oral understandings or else default the full effect of the contract. Specifically, such contracts may state that the parties "agree that all prior agreements and negotiations leading up to the execution of the contract are expressly excluded," or some variation of "this agreement constitutes the entire contract between the parties."
Examples of Fully Integrated Contracts
Examples abound where courts have construed the intent of the parties as evidenced by the contract. Two cases are particularly instructive.
In Tulsa Indus., Inc. v. Cimarex Energy, Co., the contract at issue stated that a failure to make a timely payment would accelerate the damages provision, change the venue to the county designated in the contract, and only a party who signed could modify it. The plaintiff argued that the letter associated with the invoice created an ambiguity in the contract when it contradicted these provisions. No reasonable argument could be made that the letter inadvertently or by way of waiver changed the contract’s payment terms, and ultimately expanded the contract venue and modified its terms. Accordingly, the court concluded that there was no ambiguity .
Likewise, in Colorado Boxed Beef Co. v. Smith Sys. Mfg., Inc., the parties were found to have incorporated a price revision provision into their contract by reference to their numerous requests to revise pricing. The Court determined that the incorporation of the parties’ previous discussions into the later contractual language of "prices in effect at the time of shipment" was not ambiguous as to the price revision. The only thing that could vary were the prices, and yet the parties later agreed on those prices, after the fact, without substantially changing the terms of the new contract. A writing that clearly and unmistakable references another language and incorporates it by that reference is an incorporation in fact, according to Colorado contract law.