The Devil’s in the Details – Pay Close Attention to the Integration Clause

In many business negotiations, the parties and their attorneys devote a lot of time and attention on key deal terms such as the delivery of the consideration, the representations and warranties given by each party to the other, the pre-closing and post-closing covenants of the parties and the indemnification provisions. Toward the end of most commercial contracts, there are provisions (often appearing under the caption “Miscellaneous”) that are often considered mere formalities and, as a result, are not the subject of thoughtful attention. Two recent Massachusetts cases highlight that, in commercial contracts, every word counts.

An “integration” clause, often found at the end of a document, generally provides that the executed agreement “contains the entire agreement between the parties and supersedes all prior understandings, agreements or representations by or among the parties, whether written or oral, with respect to the subject matter” of the executed agreement. The integration clause is intended to provide the parties with certainty that, in the event of a dispute arising out of the agreement, only the written terms of the final, executed agreement will be admissible as evidence and that prior statements and discussions (including agreements) relating to the same subject are not to be considered.

In Christopher Rottner et al v. AVG Technologies USA, Inc.; AVG Technologies CZ, S.R.O.; and Auslogics Software Pty Ltd (found here), the dispute arose after Mr. Rottner purchased and downloaded certain software advertised and offered over the Internet by AVG Technologies CZ, S.R.O.  When the software failed to perform as advertised, Mr. Rottner asserted a variety of claims including breach of warranty.  On a motion to dismiss for failure to state a claim, the U.S. District Court for the District of Massachusetts, applying California law, considered, among other things, a claim for breach of an express warranty contained in the software’s End User License Agreement (EULA) that the software product “will perform substantially in accordance with applicable specifications.”  Rottner argued that because the representation was vague, he had no recourse other than to look to AVG CZ’s advertising materials to understand the “applicable specifications.”

AVG CZ’s EULA included a typical integration clause that states that the EULA “constitutes the complete Agreement between the parties and supersedes all previous communications and representations or agreements, either oral or written, with respect to the subject matter hereof.”  AVG CZ’s counsel pointed out that the EULA was a “fully integrated document” and argued that Rottner did not allege facts that would establish that the “applicable specifications” had not been met.  The court determined that the phrase “applicable specification” was vague and undefined, stated that Rottner’s argument had force and expressed confidence that the Delaware courts “would consider [AVG CZ’s] claimed functionality as an express warranty separate and apart from the EULA’s content-less warranty provisions.”

The court also noted that the software “trumpets announcements about its functionality (that track the Internet advertising claims) each and every time it is run,” and found that these claims constituted an additional express warranty as to the product’s functionality.  In its opinion, the court noted that the EULA included an integration clause but did not discuss the implications of this provision in reaching its conclusions.

A recent dispute argued before the Appeals Court of Massachusetts concerned the interaction of two agreements:  The first was a 1981 agreement in which a corporation agreed to repurchase all of the shares of one of its shareholders upon the occurrence of a specified event and contemplated that the purchase price would be determined by negotiation or binding arbitration following the occurrence of that event.  The second was a 2008 agreement that authorized the conduct of an audit of the corporation’s books and records that would then be used to obtain a valuation of the corporation and a sale of the shares to the corporation and/or certain of its affiliates.

The integration clause of the 2008 agreement stated, in pertinent part, that the agreement “constitutes the entire agreement between the Parties and supersedes all prior and contemporaneous oral and written agreements, understandings or discussions.”  However, in deciding that the 1981 agreement continued in effect, the court focused on certain facts including that (i) there was not an identity of parties to the two agreements, (ii) there was separate consideration contemplated by each agreement and (iii) the 1981 agreement related to the circumstances under which certain parties would sell their shares to the corporation but the 2008 agreement addressed issues relating to the valuation of the shares so the parties could complete a negotiated sale of those shares.  This led the court to determine that the 1981 agreement had been superseded by the 2008 agreement only to the extent that the 1981 agreement was inconsistent with the 2008 agreement. As a result, certain provisions of the 1981 agreement survived and remained effective.

In each of these cases, the contract at issue included an integration clause that was not specifically tailored to the transaction.  It is arguable that greater attention to, and more precise drafting of, the integration clause could have influenced the outcome of subsequent litigation.  As a result, these cases serve as a reminder that every contractual provision has a role and that it is impossible to predict which provisions – even those often considered mere boilerplate – will eventually prove significant.

If you have any questions, please contact Bob Maloney, chair of Prince Lobel’s Corporate Practice Group. You can reach Bob at 617 456 8007 or rmaloney@PrinceLobel.com.