We’ve previously discussed integration clauses in contracts providing that a written agreement is the complete and final expression of the parties’ agreement and that it cannot be contradicted by evidence of a prior or contemporaenous oral agreement. If you want the term in the contract then it should go in. This is contained in California Code of Civil Procedure Section 1856. Fair enough.
In late December, the California Court of Appeal decided Albert Kanno v. Marwit Capital Partners II, L.P. involving Albert Kanno’s sale of three businesses to a private equity fund. There were three agreements–a sale agreement, stock subscription agreement, and stockholder agreement, and all three had integration clauses. But Kanno alleged there was also an oral Stock Redemption Agreement. Kanno alleged that over the course of several conference calls, he insisted he had to have his stock repurchased and be cashed out by the end of three years for tax deferral reasons. Kanno asked the private equity firm’s principal Christopher Britt to “promise this to me” and Britt responded “okay, Albert, I promise.”
Going back to Section 1856, the Court explained that the section “creates two levels of contract integration or finality: (1) the parties intended the writing to be the final expression of their agreement; and (2) the parties intended the writing to be the complete and exclusive statement of the terms of their agreement.”
Level #1 written agreements (final expression) can be explained or supplemented by oral agreements, so long as it doesn’t completely contradict the written agreement. Level #2 written agreements (complete and exclusive statement) are a different story, and cannot even be explained or supplemented. The question is whether the three agreements were the former, the latter, or neither.
So two levels. Three options. And the analysis? It involves asking four questions: “(1) does the written agreement appear on its face to be a complete agreement; obviously, the presence of an ‘integration’ clause will be very persuasive, if not controlling, on this issue; (2) does the alleged oral agreement directly contradict the written instrument; (3) can it be said that the oral agreement might naturally have been made as a separate agreement or, to put it another way, if the oral agreement had been actually agreed to, would it certainly have been included in the written instrument; and (4) would evidence of the oral agreement be likely to mislead the trier of fact.”
Taking each in turn:
- Does the written agreement on its face appear to be a complete agreement? In Kanno, the Court found that “[t]he presence of three agreements … is persuasive evidence the parties did not intend the Contribution and Purchase Agreement to be the ‘complete and exclusive statement’ of the parties’ agreement.” That’s one for Kanno.
- Does the oral agreement directly contradict the written instrument? Kanno’s oral agreement related to “future redemption of the shares of preferred stock” and the written agreement was “silent” on this matter. That’s two for Kanno.
- Can it be said that the oral agreement might naturally have been made as a separate agreement? The Court found that “Kanno apparently believed he could avoid an immediate taxable event by having stock redemption expressed in a separate oral agreement” and that “[r]egardless whether Kanno was mistaken in that belief, he did believe it, and his stated belief and desire, which is supported by substantial evidence, shows that the Oral Stock Redemption Agreement would naturally be separate[.]” Three for Kanno.
- Would evidence of the oral agreement be likely to mislead the jury? The Court found that the jury had to resolve conflicts but that “does not mean the jury likely was misled. We routinely entrust juries with the responsibility to resolve such conflicts and assess witness credibility.” Four.
In the end the Court held that the agreement was not completely integrated and the evidence of the Oral Stock Redemption Agreement could come in. The above analysis was with regard to the Contribution and Purchase Agreement only, which was under California law. The other two written agreements were analyzed under Delaware law – and the result was the same.