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Contracts

Parol Evidence

We put contracts in written form to make an enduring accurate record of the parties actual agreement. A written agreement avoids later disputes about the terms of the agreement. A written agreement likewise helps separate negotiations from the final deal. Many contracts evolve over time through negotiations. During those negotiations, the parties retract certain demands and add new ones. Sometimes a party is forced to give up very important goals in order to accommodate the other side and conclude a deal. This process creates the danger that later a party might seek to recover what has been given up during negotiations by insisting that the item once ceded actually remains part of the contract. The final written contract serves as a mechanism of resolving such disputes by showing the final terms of the deal. Without this finality principle, we run the risk that parties may clog up the courts with disputes over the actual terms of the deal.

But what if a party contends that the agreement is incomplete, that there are additional terms, or that the true meaning of the agreement will be explained by things that were said during negotiations? What if a problem arises not foreseen when the agreement was drafted? What if we are having difficulty discerning the parties' intent from the agreement, because it was poorly drafted. If we allow the parties to bring in evidence of their intent from outside the agreement, we interfere with the finality principle. But if we refuse to allow this additional evidence, we may fail to find the parties' true intent. This problem leads us to discuss legal rules under which courts will accept additional evidence, beyond the contract itself to discern the content of an agreement.

Parol Evidence Rule: The Parol Evidence Rule bars a party from trying to change the meaning of a contract with outside ("extrinsic") evidence when the parties intended the written document to represent their final agreement on the subject. The rule applies only when the contract is sufficiently clear as to provide the court with definitive guidance on the topic. An example: For example, suppose a contract states that the buyer agrees to purchase 1000 televisions for $250 each. Suppose that later, the buyer claims that during negotiations, the seller's agent promised that he would receive a $50 discount for each of the last 250 televisions, upon timely payment. The seller objects, because the discount is nowhere mentioned in the agreement, and the alleged discount contradicts the price unambiguously stated in the agreement. Who should win.

Why does the parol evidence rule matter: From a litigation standpoint, application of the parol evidence rule can make all the difference in the world. If a case can be resolved solely by resort to the contract, the chances increase that the case may be resolved by summary judgment, a process which avoids trial. On the other hand, if the terms of the contract itself are in dispute, the parties each must expend resources in costly discovery to determine all of the facts which may bear on meaning. The parol evidence rule limits the cost of disputes. It applies, as we have said to contracts which cover the entire agreement. We call a contract integrated when it covers everything, the whole agreement.

Back to our example: The seller says, look, what's the point of writing a contract if it doesn't mean anything. If the buyer can change the price in the written document, we might as well throw out the document. We should ask the question: if there was an agreement on discount, why in the world would the parties have left it out of the agreement. The agreement appears to be closed (integrated) on the subject of price. The parties, having spoken on the topic of price should be forced to live with what they wrote. The buyer says, awe jeepers, people give discounts all the time. That doesn't contradict the price. The agreement doesn't contradict the possibility of a discount at all. He promised me one!!! He gives discounts to other people like this all the time.

Here we come to a critical point in the analysis of the parol evidence rule. Can the buyer bring evidence from outside the contract to prove that the contract is not integrated, or that it is ambiguous. Or must we look only at the contract itself. When we look at the television contract in our example, it seems fully integrated and totally unambiguous. Looking at the contract alone, the buyer doesn't stand a chance. The price is the price is the price. If the buyer is going to have any chance at all, he needs to get in additional outside evidence, perhaps of prior conduct, of the content of negotiations, or industry practice.

This question of whether outside evidence can create ambiguities which otherwise are not apparent from the agreement is somewhat controversial. Some states allow this additional evidence to show that a contract is not fully integrated--others do not. The uniform commercial code section 2-202, applicable to goods in all states, is relatively lenient with respect to additional evidence. It says the following:

  • Terms with respect to which the confirmatory memoranda of the parties 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 or by course of performance; 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.

Integration Clause: The parties can add a clause to their contract which says, in effect, this is the whole deal, nothing but the whole deal, and we really mean it. The clauses typically tell the court that it must not consider evidence of negotiations and other pre-contract documents to find the meaning of the contract. The danger here is that the contract itself may not anticipate all potential problems. And if it does not, where else but evidence outside the contract is the court to go to find an intelligent solution.