Contract Law: The Parol Evidence Rule

The Parol Evidence Rule

             Despite its similarity to the word “parole,” the parol evidence rule does not have anything to do with criminal law. The parol evidence rule is a contract law doctrine that prevents parties to a written contract from presenting “extrinsic” evidence of terms in a contract that contradict, modify, or vary the terms of a written agreement, when that written agreement is considered complete and finalized.[1]

For example, in a dispute over the sale of a home, if the buyer and seller have signed a written contract for the sale of a home and have written down that the sales price is $500,000, the buyer will be barred from introducing evidence of a discussion that he had with the seller where she agreed to sell it to him for $400,000 or that she agreed to throw in a car as part of the purchase price.

The parol evidence rule can thus be simplified as “the outside evidence rule.” Outside evidence cannot be used where there is a written contract. Like most legal doctrines, however, this one has lots of qualifications and exceptions.

The rule applies to evidence that relates to a contract, but is not contained in the body of the contract. Outside evidence can be other written agreements, written promises, oral agreements and discussions prior to finalizing the written contract.

Contract must be a “complete integration”

First, the parol evidence rule applies only when a contract is completely finalized, or “integrated.” This means an unambiguous execution of the written agreement that leaves no doubt that the parties intended it to be the final contract. A complete integration captures the parties’ full and exclusive agreement on a contract matter.

To determine when a contract has become integrated, courts will look at the circumstances to see whether the parties wanted the written agreement to be a final and complete agreement. This includes the provisions of the contract.

For example, an employment agreement can be said to be integrated when it has all contractual provisions that would normally be expected of an employment agreement, such as employment length, employee salary, vacation time, health insurance coverage and other benefits. The circumstances and terms need to indicate that the writing is intended to be a completed agreement.

Contracts can also indicate by their own terms that they are intended to be final and complete agreements. For example, a complete agreement may have a clause that states something to the effect of: “This written contract contains the final and complete agreement of the parties. The parties do not intend to be bound by any additional terms not included in this writing.” A provision like this virtually ensures a conclusion that it is an integrated agreement.

When is outside evidence allowed?

There are exceptions to the parol evidence rule in that outside evidence is allowed to achieve certain goals that are distinct from the content of the agreement.

The first case in which parol evidence is allowed is to clarify terms in a contract when a term’s meaning is missing or ambiguous.

Sometimes, a term is ambiguous and needs outside evidence to clarify. For example, what is meant by the word “timber”? When drafting a contract, parties sometimes forget to define such a key term. In Kerl v. Smith, parties disputed the meaning of this term in an agreement.[2] The Mississippi Supreme Court allowed the plaintiff to introduce parol evidence to show the meaning which the parties themselves attached to words in their own written contract. The court allowed the plaintiff to introduce evidence of a prior written agreement the parties had when defining timber, which was “merchantable pine timber”, to explain the meaning of the word in the current contract.

The second case in which parol evidence is allowed is to demonstrate evidence of collateral agreements.

Outside evidence can be used to prove that an independent collateral agreement exists side-by-side with a completely integrated and finalized written agreement. This means that the parties made a separate agreement in addition to the one being litigated. This is only allowed, however, if the collateral agreement:

·         Does not contradict the written and finalized contract; and

·         Does not contain terms that would normally be included in the present agreement.[3]

In Green v. Booth, two parties entered into two agreements: the first was a written and fully integrated option agreement to purchase real property and the second was a promise made by the seller that he would pay the option holder a commission if the option holder sold the property instead of buying it himself.[4]

The second agreement was outside evidence, but a court permitted its introduction for two reasons. First, the oral agreement didn’t contradict the written and fully integrated option agreement. Second, an agreement to a commission isn’t something that similarly situated parties would normally include in a real property purchase agreement.

Finally, parol evidence may be used to demonstrate that a party was fraudulently induced to enter into an agreement

            In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., the plaintiffs restructured a debt agreement. In the new contract, the plaintiffs pledged real property as collateral for the loan and the defendant, a credit association, promised not to take any enforcement action for three months after execution of the contract.

The plaintiffs signed the contract without reading it and soon defaulted. In the dispute, the plaintiffs alleged that the credit association acted fraudulently to get them to restructure the debt agreement. The plaintiffs wanted to introduce outside evidence that the credit association’s vice president met with them two weeks before the contract was signed and promised them that the association would extend the loan for two years and not three months. These alleged promises directly contradicted the written contract, which provided for a forbearance of only three months, not two years.[5]

            The court held that the outside evidence of these meetings and promises could be introduced. It determined that the fraud exception to the parol evidence rule applied to prevent injustice and because these meetings and promises induced the plaintiffs to sign the written and finalized contract.

Conclusion

The parol evidence rule is all about outside evidence and contracts. When a contract is “integrated” and finalized, a party to a contract is going to have a difficult time introducing outside evidence of other agreements or promises made. However, there are numerous exceptions that allow outside evidence to sometimes be introduced.