12/18/2012 05:33 pm ET Updated Feb 17, 2013

Marketing Materials May Not Be Legally Binding

The discussions preceding a written agreement frequently contain numerous promises concerning future actions. These may be in the form of oral statements or marketing materials. However, within the signed written agreement may well be a paragraph that begins something like this example: "The terms of this contract.. constitute the entire agreement between the parties...." This language might be easily overlooked by the casual observer -- who reads all the fine print and legalese. Nevertheless, the "entire agreement" language typically makes the prior oral promises unenforceable. This language is called a "merger clause" as it essentially reduces or merges all the prior discussions and negotiations to one final document.

A recent decision of the U.S. Court of Appeals for the First Circuit, Endlow v. RBW LLC, illustrates the legal danger in relying on marketing materials and oral statements in the context of purchasing a residential condominium unit. In essence, the luxury development was to consist of a residential unit, commercial unit, and hotel unit. Owners of residential units were to have access to the hotel's "first-rate" amenities, according to the marketing materials. Endlow initially agreed to purchase three residential units. When the hotel construction fell behind schedule, Endlow was assured that "all promised amenities would be available." Subsequently Endlow received written notice that some services mentioned in the marketing materials would not be available, but he signed an amended agreement. Later Endlow demanded the return of his deposit and sued, asserting a variety of contract, tort, and statutory violations.

Regarding breach of contract claims, the Court of Appeals stated while some marketing materials and oral statements may have promised specific amenities, the signed agreement's merger clause excluded their consideration and the Master Deed did not include them.

Endlow also argued the violation of an implied "covenant of good faith and fair dealing." The court declined to extend any duty beyond the specific terms contained in the written contract.

Endlow asserted misrepresentation. The court determined that statements of opinion are not legally actionable misrepresentations and that in light of the merger clause, Endlow's "reliance on such statements would have been neither reasonable nor justifiable." All of Endlow's remaining claims were dismissed by the court.

In any transaction each party makes the best possible optimistic presentation. What counts as a legally binding promise is what is specifically contained in the final signed agreement. It is difficult to successfully assert fraud in situations where there is a difference in the prior statements and the final written agreement. One must prove intentionally false statements (a state of mind) and furthermore that the reliance on the statements was justified.

Parties have freedom of contract and accept the risks of an uncertain future. If one wants oral promises and marketing materials to be legally enforceable, their language must be contained within the final signed agreement or the documents must be carefully incorporated by reference. Incorporation by reference means that the written agreement names another document and indicates that this document is part of the written agreement.

Arguments of unfairness, however ethically based, are typically unsuccessful in litigation involving clearly written contracts since their acceptance would negate the actual written agreement that concluded the negotiation. This would create uncertainty concerning the actual agreement as what is "fair" would potentially override the words of the final written agreement. Oral promises and marketing materials presented prior to a final agreement frequently are not legally binding. Be cautious.