Contract Law Considerations

Terms:


Parol evidence:
Oral or verbal evidence. The ordinary kind of evidence given by witnesses in court.

Statute of Frauds:
Certain contracts cannot be enforced unless they are evidenced by a writing.

Parol evidence rule

Generally, if a written document evidences the transfer of legal title to property and the document reflects the complete expression of the settlor’s intentions, extrinsic (outside) evidence (except for evidence of fraud, duress or mistake) is not admissible to contradict or alter the writing. In contrast, if the meaning of the writing is unclear or ambiguous, under the parol evidence rule, extrinsic evidence may be admitted to interpret the document.

As applied to trusts, pursuant to the parol evidence rule, extrinsic evidence is not admissible to vary the plain language of the writing. For example, if the settlor did not indicate a trust purpose (i.e., the property is to be used for the settlor’s benefit) in the writing, parol evidence is not admissible to contradict this conclusion.

EXAMPLE: Myrtle gave property to herself in trust “for her own use and benefit.” In this case, parol evidence is not admissible to show that Myrtle intended to hold the property in trust for another. Doing so would contradict the language of the writing, which is impermissible under the parol evidence rule.

Conversely, if the writing explicitly indicates that property is to be held in trust for another person, parol evidence is not admissible to show that the transferee was intended not to hold the property in trust.

EXAMPLE: Myrtle gave property to Molly “in trust for Mary Beth.” In this case, Molly may not offer oral evidence that she was to take the property as the beneficial owner. Rather, this arrangement establishes Molly as the trustee of the property for Mary Beth’s benefit. Additionally, Molly cannot use an alternate argument that she is also a beneficiary of the trust, along with Mary Beth, despite what Myrtle may have told her.

Yet, if the writing is silent as to the settlor’s intention, most courts will allow parol evidence to show whether the transferee was intended to hold the property in trust either for the transferor or for a third party.

The requirement of a writing—the Statute of Frauds

As previously stated, a written instrument is not necessary to create a trust. However, when land is involved, a different rule applies. Where real property is the trust res, a signed, written document is necessary, pursuant to the Statute of Frauds. Otherwise, oral trusts of land are voidable.

The writing does not have to be elaborate; however, it must be complete and definite, including essential terms of the trust, such as a description of the property that is to be the res, identity of the beneficiaries and the trust’s purpose. If the writing is subsequently lost, oral evidence is allowable to prove its contents.

EXAMPLE: Oliver deeds his summer home on Lake Michigan to Rhoda upon an oral trust for his daughter, Amy. Here, since the trust property is land, a written document is necessary. Although a trust was formed, it is not enforceable, absent the written document.

The Statute of Frauds does not apply to trusts arising by operation of law, such as constructive or resulting trusts (both are discussed in the next subchapter). Accordingly, parol evidence would be admissible, if needed, in these two circumstances.