Q&A #103 – What does an “entire agreement” clause mean in a contract?

Question: My nonprofit recently signed an employment agreement with a new Executive Director.  The Executive Director says the organization promised to pay for her relocation expenses, but this is not in the agreement. The agreement also includes a clause that states that the agreement is the “final and entire agreement understanding of the parties, and supersedes all prior discussions, agreements, arrangements, understanding and negotiations between the parties regarding the subject matter hereof.” Does this language mean that the organization is not obligated to pay for the relocation expenses?

Answer: The purpose of “entire agreement” language in a contract (sometimes called an “integration” or “merger” clause), like the example you mentioned, is to avoid misunderstandings and disputes about terms that may have been discussed during negotiations but were never included in the final agreement. When drafted properly such a provision should generally prevent one party from seeking enforcement of promises outside of the written terms of the contract. It appears that the language you quoted should achieve that, although it would be necessary to review the full agreement to provide a fully informed answer.

However, there are limits to how effective these provisions can be. The following are some common issues that typically arise when assessing the effectiveness of an “entire agreement” clause.  

First, if the parties had a prior written agreement in place, an “entire agreement” clause might not be effective to supersede the terms of the prior agreement unless there is language explicitly referencing that agreement and making clear that the parties intend to completely replace that agreement. This does not appear to be at issue in your case, since you mentioned this Executive Director is new to the organization.

Second, an “entire agreement” clause does not prevent the parties from using statements or documents outside of the agreement to cast light on the meaning of the contract terms. This also does not appear to be at issue here, since the Executive Director is claiming the arrangement contained an additional term, not trying to use statements to interpret the language in the agreement.

Third, an “entire agreement” clause will generally not prevent a party from attempting to void a contract based on a misrepresentation of material fact made by the other side on which the party relied when agreeing to sign the contract. For example, a misrepresentation might include a false statement about the organization’s budget when recruiting the Executive Director. It would be a stretch to characterize an alleged promise to pay for moving expenses as a misrepresentation. Nonetheless, it is helpful to include language in the agreement stating that the parties have not relied on any statement, representation, or warranty other than those expressly set forth in the agreement.

Additionally, there may be issues related to the timing of the promise. If the alleged promise was made after the employment agreement was signed, the Executive Director could argue that this term was separate and independent from the employment agreement. For this reason, it is helpful to include language stating that no provision of the agreement or any term relating to the subject thereof can be modified without the express written consent of both parties. 

Planning Tip – The “recitals” or “preambles” section of an agreement (often containing numerous sentences starting with the word “Whereas”) is an excellent place to explain and clarify the context of the agreement in relationship to any past agreements or arrangements the parties may have signed. While this is not a substitute for thoughtfully drafted boilerplate provisions like an “entire agreement” clause, referencing past agreements by title and date and explaining what led the parties to sign this new agreement is very helpful to ensure the intent of the parties is clear.

While I cannot say with confidence whether your organization is obligated to pay the moving expenses in this case without reading the entire agreement, it appears that you included language that would generally override prior statements and terms outside of the contract.

Situations like these are all too common and precisely why “entire agreement” clauses exist. Even well-meaning parties do not have perfect memories regarding terms that may have been discussed during negotiations. In the end, the parties should be able to rely on the written terms as signed by both parties.

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