When your business needs a standardized contract, it’s tempting to reach for Google and ChatGPT. After all, you’re smart and you’re going to review each clause of the contract before using it, right? But even a good clause—maybe even one that is perfectly drafted—can bite you, as the Utah Court of Appeals recently illustrated in Montes v. National Buick GMC Inc., No.20210621-CA.
We’ve all seen boilerplate clauses in contracts, usually relegated to the “Miscellaneous,” “General” or “Other” sections. These are the provisions that aren’t tailored to a particular deal and generally include things like non-waiver, choice of law, blue pencil authority, force majeure, notice and non-assignment clauses. One of the most common provisions is an integration clause, which is intended to avoid a later claim that the parties orally agreed to terms beyond those written in the contract. It does so by providing that the written contract is the entire and complete agreement made by the parties. It often goes something like this:
Entire Agreement. This Agreement contains the entire agreement of the Parties regarding the contract’s subject matter, supersedes all prior written and oral agreements, and may only be modified by a writing signed by all Parties.
Montes involved a car dealership (National) that sold a used car to a buyer (Mr. Montes). National drafted and used its own purchase agreement, which included an integration clause similar in principle to the one above as well as a blank area where “other terms agreed to” could be added. The parties signed this purchase agreement, leaving the “other terms agreed to” section empty. On the same day, the parties also signed an arbitration agreement, which primarily stated that any claim or dispute between the parties would be resolved in binding arbitration rather than by litigation in court. Both agreements mentioned in fine print that the car was being sold “as is” without a warranty from National.
With the grim inevitability of a Greek tragedy, the deal soured within a month. Mr. Montes filed suit against National, seeking more than $300,000 in damages. On the strength of the arbitration agreement, National filed a motion to compel arbitration. The district court denied the motion, reasoning that the arbitration was effectively nullified by the integration clause in the purchase agreement. National took an interlocutory appeal, bringing the drama to the center stage of the Utah appellate courts.
National pointed to the fact that the arbitration and purchase agreements overlapped as to the lack of a warranty on the vehicle as well as the fact the documents were signed on the same day, as evidence that they concerned the same transaction. National argued that the only way to reconcile this evidence was to view the documents not as two separate contracts but as two parts of the same contract. Essentially, National asked the court to look at evidence outside the four corners of the purchase agreement to guide its interpretation of the meaning of that document.
The Utah Court of Appeals was not swayed by this creative argument. The court explained that the integration clause effectively prevented any consideration of outside evidence. According to the court, outside evidence was admissible only to clarify ambiguous terms and not to contradict the clear terms of the purchase agreement. Because the integration clause unambiguously stated that the document it was within included all the terms of the deal between the parties, the court held that it would be improper to look at any evidence other than that document itself—even the arbitration agreement—to contradict the plain language of the integration clause. As a result, National could not force Mr. Montes to arbitrate his $300,000 claim and would instead have to defend itself in the court system.
When selling a used car “as is,” the seller is going to want an integration clause to prevent a buyer from later claiming that the seller made additional unwritten promises about the condition of the car. And many businesses opt to require arbitration due to the costs, uncertainty, and time delay of going through the courts. Both the integration clause and the arbitration agreement were probably smart business choices by National. However, to avoid the conflict between the integration clause and arbitration agreement, National could have checked the box and stated that the arbitration agreement was part of the purchase agreement. Better yet, National could have used a single contract that included all the terms. But that didn’t happen, because National didn’t anticipate the problem before it arose.
These documents were not poorly drafted or worded. The language used was essentially boilerplate, similar to any example clauses you might find online. Nor was the problem a lack of wisdom, intelligence or business savvy. It was simply a lack of experience managing the potential for deal failure. Successful businesspeople are experienced at creating successful deals. Your attorney has the additional experience to anticipate, manage and mitigate potential contract failures. An experienced attorney can preemptively spot and remedy the myriad ways contract language may be misread or misinterpreted. Consulting legal counsel early on and making them aware of your intended use of the contract can help you avoid the types of surprises that were sprung upon National.
