Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc.

Brief Fact Summary.

Suburban Leisure Center, Inc. (Plaintiff) entered into an oral franchise agreement with AMF Bowling Products, Inc. (Defendant) to promote and sell AMF products in its stores. Later, the parties entered into a written e-commerce agreement that included a merger clause and an arbitration clause. When Defendant told Plaintiff to stop selling and promoting its products, Plaintiff sued and Defendant claimed that the merger clause in the e-commerce agreement subsumed the oral franchise contract, requiring that disputes over the franchise agreement be submitted to binding arbitration.   

Synopsis of Rule of Law.

The parol evidence rule does not apply to evidence outside of the written agreement that does not contradict or change the terms of the written agreement. It also does not apply to an independent agreement under the collateral contract doctrine.

Facts.

Plaintiff was a distributor of leisure equipment with its own stores. Defendant franchised pool tables and accessories. The two entered into an oral franchise agreement which granted Plaintiff the right to promote and sell Defendant’s products in its stores. Later, the two entered a written e-commerce contract that obligated Plaintiff to deliver and install Defendant’s products ordered over the internet to customers living in areas where Plaintiff had stores. The written agreement contained a merger clause stating that the agreement superseded all previous agreements between the parties. It also contained a clause requiring binding arbitration for the resolution of all disputes. At some point, Defendant informed Plaintiff that it could no longer promote or sell Defendant’s products. Plaintiff filed suit in state court for breach of the oral franchise agreement and Defendant removed the case to federal court where it moved to dismiss or to require arbitration. The trial court found that Plaintiff’s claims did not arise from the written e-commerce agreement since that agreement did not discuss the ability of Plaintiff to promote or sell Defendant’s products. Defendant’s motions were denied and Defendant appealed.

Issue.

Does the parol evidence rule prohibit the introduction of evidence of prior agreements or negotiations that do not contradict or change the terms of a written agreement and does it apply to an agreement independent of, and collateral to, the written agreement?

Held.

(Shepherd, J.) No. The parol evidence rule does not apply to evidence outside of the written agreement that does not contradict or change the terms of the written agreement. It also does not apply to an independent agreement under the collateral contract doctrine. A merger clause, also known as an integration clause or a whole agreement clause, merges previous negotiations between the parties into the written contract and usually has language stating that the written agreement is the entire agreement between the parties. One effect of a merger clause is that the written contract must be analyzed by applying the parol evidence rule. This rule requires the dispute to be resolved through interpretation of the written agreement only, with no evidence of prior agreements or negotiations admitted or considered. This rule only extends to barring evidence outside of the agreement that would contradict or change the terms of the written agreement. Applying these contract principles to this case, the oral franchise agreement dealt with Plaintiff’s ability to promote and sell Defendant’s products. The e-commerce agreement did not deal with these matters and therefore the oral franchise agreement cannot be said to contradict or change the terms of the written e-commerce agreement and so the parol evidence rule is not applicable. Further, the oral franchise agreement was not superseded by the e-commerce agreement because it was an independent agreement under the “collateral contract doctrine.” The parol evidence rule does not apply to prior or contemporaneous oral agreements that are independent of, collateral to, and not inconsistent with the written agreement, and which would not ordinarily be expected to be included in the written agreement. The two agreements here were independent of each other and their subject matters did not overlap, so the oral franchise agreement fits within the collateral contract doctrine. Therefore, the written e-commerce contract does not subsume the oral franchise agreement and Plaintiff has not agreed to binding arbitration for disputes arising from the oral franchise agreement. Affirmed.

Discussion.

A merger clause establishes a presumption that all of the parties’ prior agreements were merged into the written agreement. The presumption can be overcome by showing that the prior oral contract was independent of, collateral to, and not inconsistent with the written contract. The Restatement (Second) of Contracts adopts this approach in § 213(2), stating that the effect of a completely integrated agreement is to “discharge prior agreements to the extent that they are within its scope.” § 216(2) states that an agreement is not completely integrated if the written contract leaves out a term that is consistent with the written agreement and is agreed to for separate consideration, or which is of the type that it would normally be left out of the written agreement.