Parol evidence rule

The parol evidence rule is a substantive common law rule in contract cases that prevents a party to a written contract from presenting extrinsic evidence that discloses an ambiguity and clarifies it or adds to the written terms of the contract that appears to be whole. The term of art parol means "oral" and comes from Anglo-French, Anglo-Norman, or Legal French.

The supporting rationale for this rule is that since the contracting parties have reduced their agreement to a single and final writing, extrinsic evidence of past agreements or terms should not be considered when interpreting that writing, as the parties had decided to ultimately leave them out of the contract. In other words, one may not use evidence made prior to the written contract to contradict the writing. A common misconception is that it is a rule of evidence (like the Federal Rules of Evidence), but that is not the case.[1]

Overview

The rule applies to parol evidence, as well as other extrinsic evidence (such as written correspondence that does not form a separate contract) regarding a contract. If a contract is in writing and final to at least one term (integrated), parol or extrinsic evidence will generally be excluded.[2] However, there are a number of exceptions to this general rule, including for partially integrated contracts, agreements with separate consideration, to resolve ambiguities, or to establish contract defenses.

To take an example, Carl agrees in writing to sell Betty a car for $1,000, but later, Betty argues that Carl earlier told her that she would only need to pay Carl $800. The parol evidence rule would generally prevent Betty from testifying to this alleged conversation because the testimony ($800) would directly contradict the written contract's terms ($1,000).

In order for the rule to be effective, the contract in question must first be a final integrated writing; it must, in the judgment of the court, be the final agreement between the parties (as opposed to a mere draft, for example).

A final agreement is either a partial or complete integration, provided that it has an agreement on its face indicating its finality.[3] If it contains some, but not all, of the terms as to which the parties have agreed then it is a partial integration. This means that the writing was a final agreement between the parties (and not mere preliminary negotiations) as to some terms, but not as to others. On the other hand, if the writing were to contain all of the terms as to which the parties agreed, then it would be a complete integration. One way to ensure that the contract will be found to be a final and complete integration is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties. However, many modern cases have found merger clauses to be only a rebuttable presumption.

The importance of the distinction between partial and complete integrations is relevant to what evidence is excluded under the parol evidence rule. For both complete and partial integrations, evidence contradicting the writing is excluded under the parol evidence rule. However, for a partial integration, terms that supplement the writing are admissible. To put it mildly, this can be an extremely subtle (and subjective) distinction.

To put it simply, (1) If the parties intend a complete integration of the contract terms, no parol evidence within the scope of agreement is permitted. (2) If the parties intended a partial integrated agreement, no parol evidence that contradicts anything integrated is permitted. And (3), if the parol evidence is collateral, meaning it regards a different agreement, and does not contradict the integrated terms, and are not terms any reasonable person would always naturally integrate, then the rule does not apply and the evidence is admissible.

In a minority of U.S. states, (Florida, Colorado, and Wisconsin), the parol evidence rule is extremely strong and extrinsic evidence is always barred from being used to interpret a contract. This is called the Four Corners Rule, and it is traditional/old. In a Four Corners Rule jurisdiction, there are two basic rules. First, the court will never allow parol evidence if the parties intended a full and completely integrated agreement, and second, the court will only turn to parol evidence if the terms available are wholly ambiguous. The policy is to prevent lying, to protect against doubtful veracity, to enable parties to rely dearly on written contracts, and for judicial efficiency.

In most jurisdictions there are numerous exceptions to this rule, and in those jurisdictions, extrinsic evidence may be admitted for the following purposes. This is called the Admission Rule. It favors liberalizing the admission of evidence to determine if the contract was fully integrated and to determine if the parol evidence is relevant. In these jurisdictions, such as California, one can bring in parol evidence even if the contract is unambiguous on its face, if the parol evidence creates ambiguity. The policy is to get to the actual truth.

The third and final admissibility rule is that under the UCC § 2-202: Parol evidence cannot contradict a writing intended to be the "final expression" of the agreement integrated but may be explained or supplemented by (a) a course of dealing/usage of trade/ course of performance, and by (b) evidence of consistent additional terms unless the writing was also intended to be a complete and exclusive statement of the terms of the agreement.

In order for evidence to fall within this rule, it must involve either (1) a written or oral communication made prior to execution of the written contract; or (2) an oral communication made contemporaneous with execution of the written contract. Evidence of a later communication will not be barred by this rule, as it is admissible to show a later modification of the contract (although it might be inadmissible for some other reason, such as the Statute of frauds). Similarly, evidence of a collateral agreement - one that would naturally and normally be included in a separate writing - will not be barred. For example, if A contracts with B to paint B's house for $1,000, B can introduce extrinsic evidence to show that A also contracted to paint B's storage shed for $100. The agreement to paint the shed would logically be in a separate document from the agreement to paint the house.

Though its name suggests that it is a procedural evidence rule, the consensus of courts and commentators is that the parol evidence rule constitutes substantive contract law.

Additional information on the parol evidence rule may be found in Restatement (Second) of Contracts § 213.

Examples

The parol evidence rule is a common trap for consumers. For example:

Other jurisdictions

Australia

South Africa

Notes

  1. Casa Herrera, Inc. v. Beydoun, 32 Cal. 4th 336, 9 Cal. Rptr. 3d 97, 83 P.3d 497 (2004). This case reaffirmed that the parol evidence rule is a substantive rule of law and not a mere procedural or evidentiary defense, and then held on that basis that a dismissal of a case on the basis of the parol evidence rule is a favorable termination on the merits sufficient to support a subsequent action for malicious prosecution.
  2. Austlii (1982) 149 CLR 337, 347.
  3. Corbin, Arthur L. (1965). "The Interpretation of Words and the Parol Evidence Rule". Cornell Law Quarterly (Cornell Law School) 50: 161.
  4. Saleh v Romanous [2010] NSWCA 373 Austlii
  5. Hoyt's Pty Ltd v Spencer [1919] HCA 64
  6. 1 2 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 AustLII
  7. Pacific Gas & Elec. Co. v. G. W. Thomas Drayage Co., 69 Cal. 2d 33, 39, 69 Cal. Rptr. 561, 442 P.2d 641 (1968). Pacific Gas & Electric is one of Roger Traynor's most famous (and controversial) opinions, which has been criticized by a number of prominent jurists, including Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit. See Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564 (9th Cir. 1988) and Jeffrey W. Stempel, Stempel on Insurance Contracts, 3rd ed., § 4.02, 4-9, n.16 (2006).
  8. 1 2 Wollner KS. (1999). How to Draft and Interpret Insurance Policies, p 10. Casualty Risk Publishing LLC.
  9. Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853, 856 (2d Cir. 1918).
  10. State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191
  11. Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5 AustLII
  12. "Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7".
  13. (2009) 2 All SA 523 (SCA) par 39.
  14. 2013 6 SA 520 (SCA).
  15. Cornelius, Steve Redefining the Rules for the Admissibility of Evidence in the Interpretation of Contracts 2014 De Jure 363.

References

See also

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