THE PAROL EVIDENCE RULE AND CONRACT INTERPRETATION—
WHAT A CONTRACT DOES AND DOES NOT MEAN
INTRODUCTION
Contracts are often the result of a bargaining process. Sometimes the negotiation process that arrives at the final terms of an agreement may take months or even years. In order for there to be a sense of continuity and security in human affairs, it is fundamental that when the bargaining process is completed there is a high degree of certainty as to just what was agreed upon. Alas, it is also an unfortunate part o4 the human condition that we tend to be inexact and misunderstand words—our tools for reaching agreements. In order to minimize the uncertainty that is the inevitable result of our use of language, our legal system has created a series of rules that assist us in determining what has been agreed upon and what it means. The Parol Evidence Rule is designed to do the former and the various rules of contract interpretation are designed to do the latter.
You need only recall the events of recent international history to appreciate the havoc created when there is an absence of rules to assist in providing certainty to agreements. The international treaties of our time—merely contracts on a grand scale—have been the source of great debate. Many of these debates were due to disagreements
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concerning whether certain “understandings” not made part of the written treaties were binding or disagreements concerning the interpretation of the words used. The Viet Nam Accords, The SALT Treaties, The Panama Canal Treaty, and the Camp David Accords have all suffered from these problems. In our smaller, but in the aggregate no less important, arena of everyday contractual relationships, disagreements as to whether prior negotiations are part of a written contract are resolved by the Parole Evidence Rule which excludes certain prior negotiations from consideration as part of a final written document. Disagreements as to what the parties intended from their words are resolved through the use of rules of contract interpretation whether the contract be written or oral.
THE PAROL EVIDENCE RULE
STATEMENT OF THE RULE
Where the parties have entered into a written contract which is intended to be a final and complete statement of their agreement, oral or written evidence of agreements made prior to or at the same time as the execution of the written document may not be introduced into evidence for the purpose of adding to or contradicting the terms of the written instrument.
Note: Even though the Rule is named the Parol Evidence Rule, parol meaning ‘oral’, the Rule applies to both written as well as oral evidence.
APPLICATION OF THE RULE
The Parol Evidence Rule given above may well seem quite complex; however, when the Rule is separated into its several requirements, it will be much easier to understand and apply. In order 4 or the Parol Evidence Rule to apply, the following requirements must be met:
1. There must be a written instrument—the Rule does not apply to oral contracts.
2. The written instrument must be intended by the parties to be the final and complete statement of their agreement. It must appear from the written document and the circumstances leading to its execution that the parties intended all prior negotiations to be incorporated into and superseded by the written document.
3. There must be an attempt by one of the parties in a lawsuit involving the written contract to introduce evidence of oral or written agreements which were made prior to or at the same time as the execution of the written contract.
4. The evidence that the party seeks to introduce either adds to or contradicts the terms of the written document. Essentially, the party seeking to introduce the evidence of prior or contemporaneous agreements is arguing that her evidence rather than the written contract alone represents the real agreement of the parties.
If the requirements of the Rule are met, the evidence sought to be introduced will be excluded—it will be inadmissible for consideration as being part of the agreement of the parties. The result of an application of the Rule, then, is that the Court will declare, as a matter of law, that the agreements sought to be introduced are not part of the contract of the parties.
Case 1: Sally Simple and Tim Temperate, after a series of negotiations that have proceeded over a period of several weeks, entered into a written contract whereby Sally agreed to purchase Tim’s house for $80,000.00. The written contract did not state that Tim’s washer and dryer were included as part of the sale. Additionally, the written contract stated the following: “all previous negotiations and understandings are merged into arid superseded by this written agreement”. In a suit concerning the transaction between Sally and Tim, Sally seeks to introduce evidence that prior to the signing of the written agreement she and Tim agreed that the washer and dryer would be included in the purchase. Under the Parol Evidence Rule, the Court would hold that Sally cannot introduce the evidence of the prior agreement. The effect of this holding would be that the agreement between Sally and Tim does not include the washer and dryer.
I can state from personal experience that there have been written contracts that I have entered into that I later wished had contained terms that they did not contain. In some of those circumstances, I had neglected to examine the written contract closely enough to determine that certain prior understandings were not included in the written document (fortunately the results were not drastic and I learned by them to be more careful); at other times the additional terms were merely wishful afterthoughts. It is clear from what has been shown above that the Parol Evidence Rule in its design to create certainty as to the terms of written contracts also accomplishes two secondary goals: (1) it encourages parties to written contracts to carefully examine their agreements before executing them; and (2) it prevents parties to a final written document from attempting to convince a jury of the truth of their wishful afterthoughts. One major criticism of the rule, however, is that it sometimes will result in the exclusion of evidence of prior agreements that in fact did take place.
Unfortunately, it is usually consumers and small businessmen that suffer from an application of the Rule that excludes truthful evidence of prior agreements as these groups are less likely to scrutinize written contracts with sufficient care. When you are about to enter into a written contract make sure that everything that was promised to you is included in the writing. If anyone your dealing with says “Don’t worry about having it in writing, you can trust me”—Don’t trust them.
WHEN THE RULE DOES NOT APPLY
Many authors, in discussing the Parol Evidence Rule, provide students with long lists of “exceptions” to the Rule. Rather than being confused and burdened with a multitude of “exceptions’, all you need to remember is that whenever any of the above requirements for the application of the Rule are not met, the Rule does not apply and the evidence is admissible. Under thi5 analysis, the evidence will be admissible in any of the following circumstances: (1) where there is no written document; (2) whore the written document is not intended to be the final and complete understanding of the parties; (3) where the evidence sought to be introduced does not relate to prior or contemporaneous agreements; or (4) where the evidence sought to be introduced is not being introduced for the purpose of adding to or contradicting the terms of the written document.
To elaborate, the Parol Evidence Rule would not operate to exclude evidence of prior agreements where the overall contract is intended to be part oral and part written, or where there are two separate contracts—one oral and one written.
Case 2: Gary Greenthumb and Harry Homeowner enter into a written contract whereby Gary agrees to do landscaping for Harry for a period of three months. Prior to executing the written contract, Gary and Harry make a separate oral agreement whereby Gary agrees to buy Harry’s old car for $450.00. If any dispute arose, Gary could offer evidence on the prior oral agreement because there are two separate contracts—one oral and the other written.
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Later oral changes can always be introduced into evidence as the Rule applies only to prior or contemporaneous agreements. Note, however, that the introduction of evidence of later oral changes can bring up other problems such as lack of consideration or failure to comply with the Statute of Frauds. For example, a later modification of a contract for the sale of land would have to be supported by consideration and be in writing to be enforceable.
Evidence which is introduced for some other purpose than varying or contradicting the written document can be admitted. This would include all of the following:
1. Evidence that is introduced to explain ambiguous terms in the written document (for example, evidence to show whether the sale of 1,000 gallons of gasoline was for or U.S. or Imperial gallons);
2. Evidence which is introduced to show that the written document was not intended to be a final integration; and
3. Evidence introduced to show that the written document is void, voidable, unenforceable, or inoperative. In this category are all the principles you have learned in previous chapters which affect the enforceability of contracts: fraud; duress; mutual mistake; undue influence; illegality; and lack of capacity. Additionally, two concepts to be considered in future chapters—conditions precedent and conditions subsequent—may also be introduced in relation to a written document as they do not vary or contradict the terms but show whether the contract ever came into effect or has become void. A condition precedent is an agreement that the contract will not become effective unless and until an specific event happens in the future; a condition subsequent is an agreement that a contract will become null and void upon the happening of some future event.
Case 3: Kathy Ring and George Bell enter into a written contract whereby Kathy agrees to purchase Georges house for $75,000.00. Prior to executing the written contract Kathy and George agree that the written contract will not go into effect unless and until Kathy sells her present home. The written contract is silent on this point. If a dispute develops, Kathy can introduce evidence of the prior agreement because the condition precedent that she sell her home before the contract for Georges house goes into effect does not vary or contradict the written document, it merely shows when the document will go into effect.
Case 4: Cary Consumer enters into a written contract for the sale of a used car with Fly By Night Auto Sales. Prior to executing the written contract, the salesman assures Cary that the car has a six month—six thousand mile warranty. The written agreement disclaims all warranties and states that the purchaser agrees that no representations have been made by the salesman. In a suit to rescind the contract on the basis of fraud, Cary may introduce evidence of the salesman’s representation. The introduction of this evidence would not be for the purpose of varying or contradicting the terms of the written document, but to show that the contract is voidable on the basis of fraud.
Note: One concept that students sometimes forget is that the introduction of evidence does not mean that it will be believed. Where the Parol Evidence Rule applies, the triar of fact never has the opportunity to consider the evidence. Where the evidence is introduced there is no guarantee that the jury will believe it. In Cases 3 and 4, for example, Kathy and Cary will be able to introduce the evidence in question, however, the jury might not believe it.
THE PAROL EVIDENCE RULE UNDER THE CODE
The Code contains an additional Parol Evidence Rule applicable to the sale of goods: 2—202, which reads as follows:
Terms with respect to which the confirmatory memoranda agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
(a) by course of dealing or usage of trade (Section 1—205) or by course of performance (Section 2—208); and,
(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
This Code provision is more liberal than the common law in that it always allows the introduction of evidence relating to course of dealing or usage of trade, also, non—contradictory additional terms may be introduced more readily than at common law. Ordinarily, course of performance evidence would not present a parol evidence problem because such evidence applies to conduct taking place subsequent to the making of the contract. Course of performance will be discussed later in relation to rule5 of contract interpretation.
Course of dealing and usage of trade are defined in 1—205 as follows:
(1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their. expressions and other conduct.
(2) A usage of trade is any practice or method having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.