Licensing Lies: Merger Clauses, the Parol Evidence Rule and Pre Contractual Misrepresentations

Abstract

Many contract lawyers seem to consider the rules assigning liability for fraudulent - and sometimes even negligent - misrepresentation in contract formation to be among the few mandatory rules of the contracting game. This article challenges that assumption. There are both moral and economic objections to allowing individuals to contract out of liability for fraud. However, few judges or lawyers seem to recognize that those objections usually do not apply when parties have negotiated their agreement through agents rather than by bargaining face-to-face. This article explores both the moral and economic ramifications of enforcing disclaimers of liability for fraud in a variety of contexts. The analysis suggests that sophisticated parties should routinely be allowed to disclaim liability for their agents' pre contractual misrepresentations, whether fraudulent or not. Individuals however, should not be permitted to contract out of liability for their own fraud. These conclusions are potentially significant because the relevant legal rules affect a large number of transactions and the case law is divided. This article is also significant from a theoretical perspective because it emphasizes the importance of adapting the rules of contract law to reflect modern commercial reality in which face-to-face bargaining is the exception rather than the rule.

JEL Classification: K12, K49