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
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.
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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
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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
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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.
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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
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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.
Under 2-202, if there were a question of whether a contract for the sale of 5,000
barrels of beer was to be for 42 gallon or 50 gallon barrels, evidence of the course of
dealings between the particular parties would be used to settle the issue, and in the
absence of a previous course of dealing, evidence of size of barrels in the beer industry
would be used to define the term. [1—205(4)].
THE INTERPRETATION OF CONTRACTS
INTRODUCTION TO THE RULES OF CONTRACT INTERPRETATION
Even after the problem of determining what the contract consists of has been
decided, there still may remain a question of the meaning of the terms. Disputes as to
meaning of contractual terms can occur for any of the following reasons:
1. The contract contains provisions that apparently conflict with one another (not an
uncommon problem where the parties use a form contract and add terms to it).
2. The contract contains ambiguous language (as was the case with the ‘barrels’ of beer
example).
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3. The parties failed to anticipate a problem that develops during performance.
4. The parties reach an understanding but fail to define or elaborate as to specific terms
(In a recent agreement I negotiated, the main agreement was completed in a matter of
several hours; the details took more than a week to put into specific terms).
The sole purpose of the various rules of interpretation which will be discussed
below is to determine the intention of the parties. When there is a dispute as to the
meaning of contractual language, rules of interpretation are applied to solve the dispute.
RULES OF CONTRACT INTERPRETATION
Some of the rules of contract interpretation (as there are many, many such rules)
are quoted below from the Restatement of the Law of Contracts:
(1) A writing is interpreted as a whole and all writings which are part of the same
transaction are interpreted together.
(2) All circumstances accompanying the transaction may be taken into consideration.
(3) The ordinary meaning of language throughout the country is given to words unless
circumstances show a different meaning is applicable.
(4) Conduct of the parties subsequent to a manifestation of intention indicating that all
of the parties placed a particular meaning upon the manifestation may require the
adoption of such meaning.
(5) Technical terms and words of art are given their technical meaning unless the
context or a usage which is applicable indicates a different meaning.
(6) The principal apparent purpose of the parties is given great weight in determining the
meaning to be given their manifestation of intentions.
(7) An interpretation which gives a reasonable, lawful, and effective meaning to all
manifestations of intention is preferred to an interpretation which makes a part of such
manifestations unreasonable, unlawful, or of no effect.
(8) Where there is an inconsistency between general provisions and specific provisions,
the specific provisions qualify and control the meaning of the general provisions.
(9) Where written provisions are inconsistent with printed provisions, an interpretation is
preferred which gives effect to the written provisions.
(10) Where a public interest is affected, an interpretation is preferred which favors the
public. Restatement, Contracts, sections 235-236.
Another rule of interpretation which is quite beneficial to consumers is that a
written contract is construed most strongly against the party who drafted it. This rule is
usually applied where a dispute remains after the other rules of interpretation have been
applied; however, as most consumer contracts are drafted by the merchant, the rule is
applied in consumer transactions with some regularity.
INTERPRETATION UNDER THE CODE
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As discussed previously, course of performance under 2-208 of the Code is a
specific rule of interpretation for contracts involving the sale of goods. The Section reads
as follows:
(1) Where the contract for sale involves repeated occasions for
performance by either party with knowledge of the nature of the
performance and opportunity for objection to it by the other, any course of
performance accepted or acquiesced in without objection shall be relevant
to determine the meaning of the agreement.
Section 2—208(2) establishes a priority, in terms of contract interpretation, for
evidence of course of performance, course of dealing, and usage of trade. It reads as
follows:
(2)
The express terms of the agreement and any such course of
performance, as well as any course of dealing and usage of trade, shall be
construed whenever reasonable as consistent with each other; but when
such construction is unreasonable, express terms shall control course of
performance and course of performance shall control both course of dealing
and usage of trade.
This, and other rules of priority in contract interpretation, give priority to the best
indication of the intention of the parties. Their expressed words, first priority; their
conduct in performing the current contract (course of performance), second; their conduct
in previous contracts (course of dealing), third; and how others behave in similar
businesses (usage of trade), last.
Case 5: Obnoxious Novelty Company entered into a contract with Terrible
Toy Manufacturing, Inc. to purchase novelty items for a period of one year.
Eight months into the performance of the contract, a dispute arose
concerning the payment terms. Obnoxious maintained that the terms of
payment were cost plus ten percent. Terrible argued that the basis of
payment was list price minus fifteen percent. If Obnoxious were correct,
there would be no money due Terrible, in fact, Obnoxious would have a
credit balance. If Terrible were correct, Obnoxious would still owe over
$12,000.00. The written contract was ambiguous on this point. The usage
of trade in the novelty business was payment on the basis of cost plus ten
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percent, however, all billings by Terrible and payments by Obnoxious for
the eight months of the agreement had been made on a basis of list price
less fifteen percent. These two parties had not had previous dealings in the
past. The court would rule that the course of performance evidence would
control the usage of trade and hold that the payment terms intended were
list price minus fifteen percent.
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