In a recent article, we discussed the importance of including “integration-plus” clauses in written contracts to insulate clients from claims of fraudulent inducement. In this article, we expand on that discussion and consider the related implications of amending a contract with an integration clause.
Consider the following fact pattern: Two parties enter into a written contract for a term of four years. The contract includes an integration-plus clause, disclaiming the parties’ reliance on any pre-contractual representations. The parties’ business relationship proves successful, and they mutually desire to continue the relationship uninterrupted. The parties prepare a short, written amendment, renewing the term for another four years and incorporating by reference all other provisions from the original contract unchanged. Does the incorporated-by-reference integration clause from the original contract apply to the amendment?
Under Pennsylvania law, a contract’s integration clause does not serve as an effective integration clause for a subsequently signed amendment. An integration clause is temporal in nature, and, therefore, the timing of its execution will limit its effect. The incorporation of an integration clause into an amendment merely preserves the original integration clause and precludes evidence of oral or written representations that occurred prior to or contemporaneous with the execution of the original contract. The mere incorporation of the original integration clause into an amendment does not cover the time period between the execution of the original contract and the amendment.
Atlantic Pier Associates v. Boardakan Restaurant Partners, 647 F. Supp. 2d 474 (E.D. Pa. 2009) illustrates this principle. Atlantic Pier involved a landlord-tenant dispute concerning commercial real estate in Atlantic City. The property, a high-end mall, was originally scheduled to open in 2006. In 2004, the landlord entered into leases with two restaurants. If the property did not open on time, each lease would automatically become null and void.
By 2005, it became evident that the property would not open on time. Both restaurants expressed concern with the lack of progress in completing the property and the apparent lack of tenants. The restaurants considered amending their leases to extend the date for completion but first sought assurances from the landlord about tenants with whom the landlord had secured binding leases. In response, the landlord sent a list of purported tenants. The list, however, included two high-end tenants that had previously terminated their leases with the landlord. In a follow-up meeting, the landlord allegedly doubled down and verbally misrepresented that both high-end tenants remained in the fold. Based on those representations, the restaurants agreed to amend their leases.
The restaurants subsequently brought claims against the landlord for fraud in the inducement. In a motion to dismiss, the landlord argued that the amended leases were fully integrated and that the parol evidence rule barred the alleged misrepresentations. The court disagreed.
Relying on the Pennsylvania Superior Court’s decision in Giant Food Stores v. THF Silver Spring Development, 959 A.2d 438 (2008), the district court concluded that the integration clauses in the original leases did not serve as integration clauses for the amended leases. Incorporating an integration clause into an amendment “operates to preserve the original integration clause, and preclude evidence of oral or written communications which occurred prior to the execution of the original lease.” The mere incorporation of the integration clause “does not extend, ipso facto, the temporal reach of the integration clause to the time period between the execution of the original Leases to the execution of the amended leases.” Therefore, the court held that “the amended leases do not contain a clause fully integrating the leases during the time between the execution of the original Leases and the execution of the amended leases.”
Consider also the U.S. Court of Appeals for the Third Circuit’s decision in Dansko Holdings v. Benefit Trust, 991 F.3d 494 (3d Cir. 2021). There, Dansko hired the Reliance Trust Co. to serve as trustee for its employees’ stock ownership plan. Dansko and Reliance entered into a written trust agreement that included an integration clause. Three years later, Dansko considered amending the agreement to replace Reliance with the Benefit Trust Co. During its due diligence, Dansko asked if Benefit had recently been investigated by the U.S. Department of Labor. Benefit had been investigated but falsely denied it. Dansko hired Benefit as the new trustee.
Dansko claimed that Benefit fraudulently induced Dansko to hire Benefit. The trial court granted summary judgment in favor of Benefit and dismissed Dansko’s fraudulent inducement claim based on the integration clause in the trust agreement. The Third Circuit reversed.
The Third Circuit explained that, by signing a contract with an integration clause, a party concedes that it has not yet been falsely induced to sign the contract. The trust agreement, including the integration clause, was negotiated and signed by Dansko and Reliance in 2011. When Dansko and Reliance signed the contract, they asserted that they had no other agreements or understandings as of 2011. Although Dansko and Benefit agreed to substitute Benefit in as the new trustee, Dansko and Benefit never updated the integration clause to say that they had no side agreements as of 2014. The integration clause, therefore, applied as of 2011. It did not apply to any false statements made between 2011 and 2014.
The Third Circuit further explained that an integration clause does not automatically update when parties amend their contract. Relying on the Giant Food decision, the Third Circuit held that, under Pennsylvania law, “a contract’s integration clause does not serve as an integration clause for a subsequently signed amendment.”
Conclusion
The lesson from our last article was that inclusion of an integration clause may not be sufficient to ward off fraudulent inducement claims. A written contract should include “integrated-plus” language to maximize the fraud insulating benefit of the parol evidence rule. The lesson from this article is that merely incorporating by reference an original contract’s integration-plus clause into an amendment of the contract may not insulate a client from a fraudulent inducement claim. Although the absence of an integration clause does not preclude a trial court from finding a written contract to be fully integrated, best practice dictates that, if your goal is to insulate your client from a fraudulent inducement claim, include in a contract amendment a new integration-plus clause that disclaims any reliance on pre-amendment representations or alleged oral promises that are not expressly incorporated into the amendment.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.
