In cases where a customer is able to show that statements a salesman made are fraudulent, salespeople accused of fraud regularly invoke various legal rules and contract clauses to shield themselves from liability. Franchisors often use these rules and contract clauses to defend themselves when franchisees claim the franchisor misrepresented the terms of a deal. First, many businesses, including franchisors, put terms in their written agreements that are called "merger" clauses or "integration" clauses.
Basically, these clauses state that the franchisee forgives the salesman for any fraudulent statements the seller may have made to the customer during the sales process. Such clauses also state that the customer agrees never to argue or claim that the seller made misleading statements. Further, a merger or integration clause states that the written agreement is the complete statement of all the agreed-upon terms. The merger or integration clause therefore keeps out of the legally binding agreement any statements or promises made in conversation (unless those statements or promises are finally written into the agreement's text). This means that in the face of merger and integration clauses in a franchise agreement, a franchisee cannot rely on any promise or statement made by the franchisor or its sales staff if that promise has not been clearly written in the franchise agreement.
Like other businesses, franchise companies regularly rely upon merger clauses and integration clauses included in franchise agreements to protect themselves from potential fraud claims. An example of a merger clause in a franchise agreement is:
"Neither [the Franchisor] nor any other person on [the Franchisor's] behalf has made any oral or written representation to Licensee not fully set forth herein on which Licensee has relied in entering into this Agreement, and Licensee releases any claims against [the Franchisor] or its agents based upon any oral or written representation not set forth herein."
An example of an integration clause in a franchise agreement is:
"This Agreement, together with all instruments, exhibits, attachments and schedules hereto, constitutes the entire agreement (superseding all prior representations, agreements, and understandings, oral or written) of the parties hereto with respect to the facility."
In addition to relying on merger and integration clauses to shield themselves from fraud claims, businesses defending themselves against fraud claims in court regularly attempt to hide behind what is known as the "parol evidence rule." Unlike merger and integration clauses, which are terms explicitly included by the seller in the written agreement, the parol evidence rule is a rule of contract law that is applied by courts. The parol evidence rule basically says that the final written agreement is the only agreement a court will enforce, not any prior negotiations nor any oral promises made by salesmen. Moreover, earlier tentative agreements, negotiations and promises cannot be introduced at trial by a franchisee to prove fraud. When a court strictly applies the parol evidence rule it prohibits a customer from testifying at trial about the false statements made to him by the seller.
Although there are legitimate reasons for recognizing merger clauses and the parol evidence rule (for example, to prevent fraud at trial, as well as to make contracts dependable for business), in the opinion of this author, such reasons should never "trump" the goal of punishing those guilty of fraud. Some courts, agreeing with this position, have created a fraud exception to the applicability of merger clauses and the parol evidence rule. Under this exception, neither a merger clause nor the parol evidence rule will be applied to keep out evidence used to show misrepresentation or fraud in forming a contract.
Other courts, however, are more eager to uphold a business's right to rely on a written agreement, regardless of whether the business made fraudulent statements to get the customer to sign the agreement. These courts refuse to recognize the fraud exception, and therefore prohibit the introduction of evidence of fraud at trial. In the following case involving a franchisee, the court unfortunately refused to recognize the fraud exception and applied the parol evidence rule and the franchise agreement's merger clause to dismiss.
As the above discussion makes clear, regardless of how skilled a negotiator you may be, you should never execute a written agreement of any significance without having an experienced litigator review the final written document. And remember, based on the many inconsistent rulings by courts on the fraud issue, you should never rely on any promises or representations made to you by a salesman that have not been specifically put in the written agreement.
