ARIZONA CONTRACT LAW: WHAT IS AN INTEGRATION CLAUSE?

In our series of articles on Arizona contract law, each article will focus on a single, commonplace contract clause, its purpose, and real world meaning.

These often-used provisions, routinely included in contracts, are referred to as “boilerplate provisions,” and are seldom negotiated between the parties. They are sometimes given little thought at signing. However, these clauses can have real force once a contract dispute comes under the scrutiny of a court.

This article, the second in our series, seeks to briefly explain one such clause, the integration clause (sometimes also called a merger or entire agreement clause).

Typical language for an integration Clause is as follows:

11. This Agreement contains the entire agreement between and among the Parties with regard to the matters set forth herein and shall be binding upon and inure to the benefit of the executors, administrators, personal representatives, heirs, successors, and assigns of each.

Partial or complete integration: Generally speaking, a contract can either be partially or completely integrated. A partially integrated contract is the final expression of one or more terms to which the parties have agreed. When a disputed contract is partially integrated, courts will generally allow the parties to submit evidence of additional terms outside the “four corners” of the contract.

In contrast, a completely integrated contract includes ALL the agreed upon terms within the document. Due to its status as a conclusively final manifestation of the parties’ intent, a fully integrated contract, ideally, nullifies any related previous verbal or written agreements.

With this in mind, the purpose of an integration clause in a contract is to reinforce the argument that the written instrument was, in fact, fully integrated. Where a contract is completely integrated and unambiguous, the parol evidence rule will generally bar a court from admitting extrinsic (parol) evidence that contradicts the writing. However, while an integration clause does have the power to affect the outcome of a contract dispute, its force is somewhat attenuated under Arizona caselaw.

The Arizona Supreme Court, which has the power to establish the rules of contract interpretation in the state, has adopted the more liberal Corbin view of the parol evidence rule. The Court has rejected what it called an “oversimplified” application of the parol evidence rule, wherein lack of integration or ambiguity are the only justifications for admitting extrinsic evidence. Instead, the Court has instructed judges to consider the extrinsic evidence first, to decide if the contract is “’reasonably susceptible’ to the interpretation asserted by its proponent.” If it is not, only then should the court reject the evidence under the parol evidence rule.

The Court adopted this approach to stop judges from succumbing to an “irresistible temptation” to “automatically interpret contract language” as they might understand it, rather than how the parties actually intended it to be understood. The evidence, the Court reasoned, has the power to provide much needed context, which in turn can reveal latent (hidden) ambiguities, as well as the parties’ intended meaning. Thus, its admittance does not violate the parol evidence rule. Taylor v. State Farm

Does the holding in Taylor render an integration clause powerless in an Arizona contract?

No. While an integration clause will not automatically prevent an Arizona court from considering extrinsic evidence in order to ascertain the parties’ intent, it will still strengthen the argument that the contract was fully integrated, which can have a significant impact in a contract dispute.

For example, in 2001, based on verbal promises of payment in full, a law firm continued to represent a county prosecutor charged with ethical violations well beyond the contractual payment limitation of $25,000.

After being denied payment, the firm sued the county. The trial court judge found ambiguity in the contract, and admitted extrinsic evidence showing county employees had repeatedly assured the firm it would be paid. Based on the evidence, the judge awarded the firm the full amount owed, $130,743.60.

On appeal, the county argued that the “extrinsic evidence” should not have been considered by the trial court. The appellate court, in part because the contract had an integration clause, explained in its Opinion that under Taylor, the clause meant such evidence could only be admitted if the contract was “susceptible” to the law firm’s interpretation, i.e. that its representation could exceed the limit of $25,000.

The appellate court said that the integration clause “put both parties on notice that they could not rely on any promise or enforce an understanding not found within the four corners of the agreement itself.” The court agreed with the county’s argument that such clauses should “establish the precise boundaries of their contractual obligations.” Finding no ambiguity, the court eliminated the extrinsic evidence, agreed with the county’s interpretation of the contract, reversed the judgment, and awarded the county its attorneys’ fees and costs. Here, the effect of an integration clause comes into sharp relief to the tune of well over $130,743.60. Waterfall v. Pima County

As the Waterfall case illustrates, an integration clause can influence how a court interprets a contract – to the degree that it changes the very outcome of a case.

Contract law is complex and ever-changing. It is always advisable to have an attorney review any contract before you sign it. Even after signing, an attorney can clarify your rights or defenses under the contract and prevailing law. Our Tucson attorneys can help you at any stage, from drafting to enforcement. For more information, call us at 520-297-4411 or click on the CONTACT US link.

December 2020. Please note: this article is not intended to, nor does it, constitute legal advice, and is for informational purposes only. To obtain legal advice, please consult a qualified attorney.

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