This article is written by Amandeep Kaur. It discusses the law relating to the Parol Evidence Rule in the US contract law with the help of illustrations and case laws. The article tries to include a detailed explanation of every clause under the contract law and Uniform Commercial Code, its applicability, all the exceptions to it and the evolving perspectives and criticisms.
It has been published by Rachit Garg.
The parol evidence is one of the important doctrines of common law contract jurisprudence. It has its origin under English Law in the 17th century. The existence of documents replaced the system of proving the transactions by witnesses. Then, with the introduction of the “Statute of Frauds”, the contracts were to be in written form. The written contracts were considered to be rules rather than exceptions. The written evidence was considered at an edge with respect to any other types of evidence due to the following reasons. The written evidence displays the clear intent of the parties with respect to any prior understandings between the parties, and it is kept on a better footing in relation to any other evidence. During the initial times when it came into being, any contract that was in written form could not be altered, varied or added on the basis of extrinsic evidence. Since then, it has been one of the most disputed and controversial laws in American jurisdiction.
In this article, we will try to demonstrate the basics, applications, and exceptions to this rule. Also, we will try to analyse how this rule has evolved over the years and addressed the modern needs of international commercial law.
Basics of the Parol Evidence Rule
Definitions Of “Extrinsic Evidence,” “Parol Evidence,” and the “Parol Evidence Rule”
To begin with, we came across two terms in the introduction part. The first is “parol evidence” and the other is “extrinsic evidence”. So in order to understand the applicability of the Parole Evidence rule, we need to understand these two terms.
The word “parol” as per Oxford English Dictionary means “Expressed or given orally”. As per the 19th law dictionary, Parole or more properly Parole is a French word that means speech. According to Black’s Dictionary,” Parol evidence” means “evidence of oral statements”. The term “extrinsic evidence” is defined as the “evidence relating to the contract but not appearing on the face of the contract because it comes from other sources, such as statements between the parties or the circumstances of the agreement.” Thus, it can be summed up that “parol evidence” is the form of extrinsic evidence, but it is not the only form. It can be called a subset of extrinsic evidence since extrinsic evidence includes the circumstances of the agreement.
The term ”parol evidence” includes any words spoken or written that are made before entering into the contract and the term “extrinsic evidence” includes not only these words by the parties but also other evidence, and circumstances of the parties with respect to the contract.
As per the Parole Evidence rule, when the written agreement between the parties is enforceable and final and clearly expresses the intent of the parties, then the contract cannot be varied, altered, added or subtracted with respect to the original terms. In simpler terms, any form of parol evidence cannot establish the terms of the contract when the written agreement is complete. In addition to this, when the written agreement is not final or complete, then the parol evidence can add to or supplement the written contract. However, the parol evidence cannot be given to contradict the terms of the parties. The leading case of The Countess of Rutland’s Case (1793), was the first judgment dealing with the application of Parole Evidence rule. It was held by the court dealing with the jurisdiction under England and Wales that when the contract is reduced in writing, then the written agreement is considered the evidence for the agreement. Any oral discussions or conversations that occurred before the contract was finalized are deemed to be extinguished and cannot challenge the terms of a written contract.
In the recent case of Burlison vs. United States (2007), the court of United States District Court, W.D. Tennessee, Western Division, held that courts often combine both the plain meaning rule and Parole Evidence rule, which is that the courts consider the plain meaning rule to interpret the words of the contract and Parole Evidence rule help the courts to determine the important parts of the contract that should be considered to interpret the terms of the contract.
Law students, lawyers and judges often deal with certain questions while dealing with “parol evidence” and “extrinsic evidence”. Both these terms are often misused. The questions can be- Is there any difference between parol evidence and extrinsic evidence? Do the courts consider both these terms separate while dealing with the Parole Evidence rule? To what extent can the courts consider the importance of the final written version of the contract with respect to the prior discussions or agreements? The most important question is what holds more significance for the courts:
- Is it the rigid rule that provides certainty? Or
- Will it be a kind of liberal rule that provides justice?
The following two illustrations explain the use of the word “parol evidence” in the respective contracts.
Problem 1: A and B, the parties involved, have a written contract for janitorial services at US$800 per month, due by the twentieth of each month. The contract do es not specify the starting time for the services. A claim that they agreed before signing the contract that the janitorial work could begin after 10 a.m. as it was contained in their mail conversations. On the other hand, B argues that starting work at 8 a.m. is a well-known trade custom. The court must decide the appropriate starting time. Should the court consider A’s testimony about the prior agreement or B’s evidence about the trade custom?
Problem 2: A and B disagree on the meaning of the term “daily” in their written contract. A believes that it means “every day,” and they have pre-contract emails supporting their interpretation. B contends that “daily” refers to business days, i.e., Monday through Friday, based on trade usage. The court needs to interpret the meaning of “daily.” Should the court consider A’s evidence or B’s evidence? Should there be a distinction between the two pieces of evidence?
In both problems, we need to assume that there is a final and written contract. Problem 1 deals with the contract supplementation that A and B are asking the court about clarity on the time of performance, whereas in the second problem, A and B are asking for contract interpretation, that is to interpret the term “daily” in the contract. Both these two problems will require the court to interpret the terms of the contract on the basis of parol evidence.
Restatements and Parol evidence rule
Restatement (First) of Contracts
The American Law Institute was formed in 1923 with the objective of clarifying and simplifying the law so that it could adapt to the changing needs of society. Therefore, a need was felt to enact a Restatement of Law which could solve issues such as clarity in the legal terms and fair interpretation of law by the legal authorities. The Restatement of Law was a voluminous enactment that had about 609 Sections. Chapter 9 of this enactment dealt with “The Scope and Meaning of Contracts‘ ‘ which contained three topics namely, interpretation of contract, Parole Evidence rule and usage of parole evidence rule.
The Parole Evidence rule is mentioned in Section 237 of Restatement (First of Contracts). It states that except under Sections 240 and 241 of the Restatement (First of Contracts), whenever there is integration of the agreement courts cannot accept contemporaneous or oral agreements which add, vary and alter the terms of the contract.“Integration” is defined in Section 228 of the Restatement (First of Contracts). Integration means the parties to the contract agree on the matters which clearly describe the intent of the parties by way of a written agreement.
Now, if problem 1 is interpreted with Section 237 alone, then it will not aid the court in settling their issue. However, when Section 237 is read with Sections 239 and 240, it can be ascertained that the court can rely on the mail conversation between A and B that contained the evidence regarding time. Further, Partial integration (Section 229) means that whenever the parties to the contract agree to certain terms of contract in writing, prior contemporaneous oral and written agreements can be accepted to vary these terms to the extent the contract has been integrated.
And in Problem 1 where B states that timings at 8 a.m are primarily the trade custom to begin their work. The word usage has been dealt under separate Section 245, which provides that courts can look into usage such as in this scenario, there is a custom to begin work at 8 a.m. Section 246 further provides that when the contract is silent on the terms regarding the time of the contract, then it would be determined from the earlier operative usage. So here in Problem 1 the court could include the B’s evidence with respect to trade customs to prove the starting time.
Problem 2 involves the interpretation of a contract, which includes the interpretation of the word “daily”. The Restatement of the Contracts clearly specifies the significance of Parole Evidence rule that when it can be used and when it cannot. It states that Parol evidence can be allowed to be given in order to interpret the real intent of the parties. However, it does not allow the parol evidence to be given to add new terms to the contract. Interpretation is allowed to give meaning to the actual words in the contract when the meaning of the contract is unclear and ambiguous. So, in Problem 2, it is clear that evidence which is either “parol” or “extrinsic”, is not offered to alter or vary the terms of the contract. Section 230 of Restatement of Contracts allows for the interpretation of a contract to such an extent where the contract is ambiguous and the meaning of the word would be interpreted in such a manner that a reasonably intelligent man would interpret it. Section 230 clearly specifies that oral statements can be allowed to determine the ambiguous words in the contract. In Problem 2, the evidence by A which are emails between the parties is not a form of oral evidence but is a form of earlier writings between the parties. These writings can be used by the court to interpret the word “daily” because the same was used to interpret the ambiguous terminology in the contract.
Restatement (Second) of Contracts
The American Legal Institute completed the Restatement Second in 1979 and published it in 1981. The Restatement Second is a better and final version to include the legal rules with respect to the Parole Evidence rule. It explains the usage of this rule and gives different interpretative and supplementation principles. It states that Parol Evidence is not a rule of interpretation but a subject matter of interpretation. Now let’s understand the application of this law with respect to the above two problems:
In Problem 1, A wanted to include the parol evidence with respect to determining the timings of janitorial services. Section 216(a) of Restatement Second authorises the court to include the parol evidence. However, the court first needs to consider whether the agreement was completely integrated or not. Furthermore, the court can also include the parol evidence to determine the question of integration. In this case, A’s evidence about the time of performance, which was not mentioned in the contract but in the email conversation between the two parties, determines that the contract was silent as to the time of performance. These email conversations in the form of parol evidence can be used by the court that the contract was not integrated, which could determine the final intent of the parties. However, B wanted to prove his point by using the word “trade customs” that were already prevalent between them. The Restatement Second to some extent is similar to the interpretation of the word “usage”. It however includes new definitions such as “usage of trade” and “course of dealing”. Since it follows the original law under Restatement, similarly, the court can consider the custom usages to supplement the terms of the contract.
In addition to this, interpretation of the contract under Restatement Second is dealt with under Section 212, which replaces Section 230 of Restatement First. As per Section 212, to determine the issue of interpretation, all the relevant evidence including the parol evidence is admissible. There is no requirement for ambiguity, and it is only based on the principle that courts must interpret the contract that determine the real intent of the parties. To strengthen this, Section 214(c), provides that parol agreements can be allowed by the court to determine the true meaning of the contract. This is further elucidated by various illustrations provided in the Restatement Second of the contract which can help the court to determine the meaning of the term “daily” in Problem 2, which automatically means that daily meant everyday.
The questions that are raised in the above two problems are generally dealt with by the legal fraternity on a daily basis. Thus, both Restatements aid the courts to balance the text and context that is common to both the laws.
Purpose of Parol Evidence Rule
The main objective behind comprehending this rule is to display the clear intent of the parties with respect to a contract. When the contract is made in written form, it is expected that all the other utterances with respect to the contract are done in accordance with the terms of the contract. Another reason to embody this rule into the legal system of the US is to preserve the integrity of contracts that are written in form. This principle refuses to allow the admission of oral statements or any previous correspondence that relates to the written agreement. This helps to maintain the credibility of written evidence that can be relied upon by the judges while deciding a case. The Parole Evidence rule has much significance in the USA due to the majority of civil jury trials in the US. At present, it has been codified with respect to “transaction of goods” under Section 2-202 of the Uniform Commercial Code. Its application in the common law system is based on the following two approaches:
- Consent of Parties: It is the intent of the parties while making a contract whereby they agree to a final written agreement that supersedes all the prior understandings with respect to the contract.
- A better quality of evidence: When the document is in written form, it clearly depicts the intention of the parties and is considered at a much preferred position with respect to any other agreement between the parties.
Thus, it is the intention of the parties that clearly allows the Parole Evidence rule. This rule assumes that there has never been an oral agreement and although there was an agreement between the parties, it was deliberately ignored by the parties by the introduction of a written contract between them. The Parole Evidence rule ignores all the other oral evidence that actually never existed.
Interpretation of Parol Evidence Rule
The substantial law related to Parole Evidence rule is that any contract that is made by the parties supersedes any earlier promises made by them. The Parole Evidence rule comes into play when the contract is in writing, and this written contract is final with respect to any earlier promises made. To make the interpretation of this rule, we need to go to the philosophical perspective, which has been interpreted at times by various authors. In the context of American Contract law, there are two schools of thought that exist to interpret the Parole Evidence rule. The traditional approach/rule has been named after Professor Samuel Williston, called the Williston Rule and the modern approach/rule has been suggested by Professor Arthur L. Corbin, called Corbin’s Rule. However, both schools of thought have tried to interpret the Parole Evidence rule on the integration part, but what differs in their approach is their interpretation of the intentions of the parties. We will begin with the traditional approach by Williston.
Professor Williston’s approach is similar to the original Parole Evidence rule. He states that intention can be determined from the writing itself, whether the contract was integrated or not. Therefore, the court should focus on the face of the instrument to determine the integration of it. It tends to deal with the determination of integration on the basis of objectivity. According to this rule, if parties have reduced their agreement in writing, then the court must draw a presumption that the writing is the final representation of the parties. However, if the writing does not appear final on the face of it, only then the court must allow any kind of extrinsic evidence of additional or contradictory terms. Williston focused on the act of writing that since the parties had reduced it into writing, it shows the clear intention of the parties to reduce it into the enforceable final agreement.
However, Williston’s rule was criticized a lot as it was based on thoughts which were far from reality. It was criticized on the thought that since it focused entirely on the written agreement, sometimes the contractual obligations do not flow from the words of the writing but from the intention of the parties. This rule makes any kind of representations, agreements and understandings ineffective, which in turn leads to gross injustice. This Williston approach can be called the rigid evidentiary approach.
As per Professor Corbin, when both the parties to the contract have agreed upon the terms of the contract in writing and considered it final, then any evidence, whether parol or otherwise, of earlier negotiations or understandings will not be admitted to vary or contradict the terms of writing. The Parole Evidence rule excludes any kind of prior or subsequent agreements but as per Williston and the Restatement Second of Contracts § 213, contemporaneous expressions should be treated as the same as prior expressions, but Corbin rejects the above interpretation as it seems to confuse the concept. Corbin states that his rule deals with three issues:
- Was the contract made?
- Was the contract void or voidable due to fraud, mistake, illegality or any other issue?
- Is the writing of the parties final, and have the parties assented to it to be final and completely integrated?
Corbin outrightly rejects the notion that the court presumes the instrument to be final only on the grounds that it was written. The finality of the agreement cannot be determined by exclusively looking into the writing itself. Thus, the contractual obligations of the parties can be determined from the intention of the parties, not from what is reduced in writing. He argued that although the written instruments can be substantive and persuasive pieces of evidence, but the presumption of the court that they are conclusive is not appropriate.
But Corbin’s approach has been criticized on the grounds that he focused his thoughts on the intentions and rather than writing. His approach reduces certainty in contracts by undermining the courts to consider a lot of additional evidence rather than focusing on the writing itself. This would in turn promote a lot of litigation and reduce efficiency in private and commercial transactions.
Key Differences Between Corbin and Williston’s Interpretation on the Parol Evidence Rule
There are certain points of difference between Williston and Corbin regarding the interpretation of the Parole Evidence rule. Though they agree to major points on this rule, there are certain key points which are discussed below, separately, which are the major areas of conflict while interpreting this rule.
Total integration and intent
Williston argues that whether the contract is totally integrated or not depends on the written instrument itself. He supports his argument by the fact that when an instrument has a merger clause in it, that is a clause specifically mentioned in the instrument which determines whether the writing is final or not.
On the other hand, Corbin argues that the merger clause cannot establish the total integration of the contract. Whether a document is totally integrated or not depends on the intent of the parties, which is the actual expression of the parties.
Extrinsic evidence includes any prior negotiations and understandings between the parties, except written agreement prior to the contract. Williston follows a strict approach to not include any kind of extrinsic evidence when the writing is complete and final on the face of it. However, Corbin follows a flexible approach to this. He argues that extrinsic evidence can be allowed to determine whether the writing was a total integration. The parol evidence should not bar any such evidence which helps to reveal the true intent of the parties. In the case of Baker v. Bailey (1988), the Supreme Court of Montana refused to admit parol evidence and allowed extrinsic evidence to determine if the original contract was clear and definitive.
Role of the Judge vs. Jury
Williston argues that if the parties adopt that writing is complete and final, it should be presumed by the courts to be a total integration. However, it is left to the judge to make such determinations. On the other hand, Corbin suggests mere form of writing cannot conclusively determine the intent of the parties. So, it is the jury that must decide the questions relating to the intent of the parties if there is a dispute regarding the same.
Uniform Commercial Code and modern trends
Both authors acknowledge that modern courts are moving toward a more flexible approach, but Uniform Commercial Code, 1951 (“UCC”) often leans closer to Corbin’s view. It also emphasizes on determining the parties’ actual intent. The U.C.C. has tried to modify the common law doctrine of the Parole Evidence rule. It tries to reject the traditional approach under which writing is presumed to be the final integration, and has shown its significance towards Corbin’s approach. Under U.C.C., extrinsic evidence cannot be used to contradict a writing that was intended by the parties to be final. The U.C.C. does not use any terminology of “partial integration” and “complete integration”. Partial integration meant that writing was final, and complete integration meant that writing was final as well as complete. It issues certain directions to the courts where the courts can admit extrinsic evidence to determine the partial or complete integration by the parties. Thus, U.C.C. aids the courts in determining the true understanding between the parties. Parol evidence rule in the U.C.C. can be considered as realistic in method and subjective in ambition. It has been praised a lot on the ground that Parole Evidence rule, under U.C.C., provides the court with much clarity and a clear method of application.
Standards of Interpretation
As per Restatement (First) of contracts (1932), there are certain parameters which are termed standards of interpretation of the Parole Evidence rule. These can be classified as under:
- Standards of general usage: These standards allow the courts to interpret the contract in accordance with general prevalent terms in business or any transactions.
- Standards of limited usage: It means that interpretation of a particular contract can be made according to the local applicability of the law based on a particular locality, particular occupation or local dialect.
- Mutual standard: It means the contract will be interpreted in such a way that it explains the mutual intention of both parties.
- A standard of reasonable expectation: This means that certain meanings are attached to the contract in such a way that it is reasonably expected that they would want to convey to the other party.
- A standard of reasonable understanding: This means that the terms of the contract are interpreted in accordance with the understanding of a reasonably prudent person.
Relationship between standards of interpretation and rules of interpretation
In addition to the standards of interpretation, there are certain rules of interpretation. Now we need to understand what these rules are. The standards of interpretation are basically the guidelines or certain standards to interpret certain terms in a contract. Whereas the rules of interpretation are additional guidelines or instructions that help along with the standards of interpretation to interpret the contract. These rules are classified as primary and secondary rules and are mentioned in footnote 96 and 98 of Section 235 of Restatement. Now, as the name suggests, primary rules are the basic instructions that apply to contracts and help us understand the basic nature of contracts. On the other hand, secondary rules are kind of additional guidelines that help to clear any kind of unclarity in the terms of the contract.
Both Williston and Corbin follow a different approach in the interpretation of contracts for this rule. Williston follows an approach under which secondary rules should only be followed when there is confusion regarding interpretation using the primary rules. However, Corbin does not agree to follow any of these rules, as he focuses on the intention of the parties. He argues that these rules are mere suggestions, and they must not be followed blindly to interpret the contract.
Relationship between the Parole Evidence rule and standards of interpretation
It is the duty of the judge to determine that the writing intended by the parties was final. The question of intent is determined according to the standards and rules of interpretation discussed above. The Parole Evidence rule has no effect on the questions of interpretation. Before invoking the Parole Evidence rule, the meaning of writing must be determined. This meaning can be determined by including the evidence of prior or contemporaneous expressions, which aid in determining the meaning of integration.
Extrinsic evidence can only be allowed to determine the meaning of certain words or interpret them in accordance with local usage or trade. However, extrinsic evidence cannot be allowed to prove the true intention of the parties. Although the Corbin approach allows extrinsic evidence to some extent, Williston completely relies on the written instrument, as he assumes that courts can ignore the intention of the parties. So, the Williston method of interpretation which is different from the Parole Evidence rule and standards of interpretation is not relevant.
Many courts that follow the Williston approach still state that when a writing appears clear and unambiguous, it must be interpreted without the inclusion of any extrinsic evidence. Any evidence related to trade usage as well as prior and contemporaneous agreements are not allowed to be included as evidence. However, this approach has been explicitly condemned by the Uniform Commercial Code, and it allows the use of evidence in the course of dealing or performance to explain the terms of the agreement. It has been agreed by various authors that Corbin’s approach, which is followed in Restatement (Second) of Contracts, is a much better approach to interpret the Parole Evidence rule as per the expectations of the contracting parties.
Application of the Parol Evidence Rule
Generally, the Parole Evidence rule is applicable to almost all the commercial contracts made by the parties. It applies to any controversies existing between the parties of a written agreement. However, this rule cannot be invoked by or against the non-parties to the agreement that is in written form. This rule allows the extrinsic evidence that is given to explain a written agreement. It also allows extrinsic evidence concerning collateral agreements or any subsequent oral or written agreements. On further elaboration, the following are the particular situations where the Parole Evidence rule is applicable
The parol evidence is merely used as an explanatory evidence to explain the written agreement. It is allowed so that the parties can explain the meanings of the words that were used by them in the written contract. It is allowed to explain the intent of the parties with respect to the contract. In the case of Kerl v. Smith, (1910) the evidence that explained the word ”timber” was disallowed by the lower court, but the appellate court held that the lower court made a mistake by not allowing the plaintiff to give the evidence to clarify its meaning as it was the plaintiff who could provide the particular information about the type of business he was involved in. This would help to understand the true intent of the parties rather than contradicting the terms of the contract.
Evidence concerning collateral agreements
A collateral agreement is a separate agreement that relates to the main contract. It is independent and not a part of the main contract. The collateral agreement cannot be merged with the main terms of the contract. It always stands separate from the main agreement.
According to the Parole Evidence rule, extrinsic evidence is not allowed to prove the terms of the contract when the written instrument is complete and final. However, extrinsic evidence in the case of collateral agreements is allowed if it affects or changes the rights of parties in a written contract. But there is one condition to allow the evidence of collateral agreements, that the additional evidence offered must not go against or be contradictory to the terms of the main contract.
In the case of Universal Computer Services, Inc. v. Lyall (1985), the employee offered extrinsic evidence regarding salary and commissions, which was denied by the employer on the ground that it was an extrinsic evidence, and it must not be allowed. However, the Mississippi Supreme Court allowed such evidence on the grounds that the original employment contract did not deal with any kind of salary or commission issues. The evidence offered relates to the employment agreement and not the entire contract, so it must be allowed.
Evidence concerning subsequent agreements
The Parole Evidence rule applies to the oral and written agreements that are made between them after the execution of the written agreement. The evidence concerning subsequent agreements is allowed on the ground that the subsequent agreement has its own separate value and meets all the requirements of a valid contract. The extrinsic evidence can be used to prove the new agreement, even if it changes or cancels the terms of the original written agreement.
In the case of Luka Guaranty Bank v. Beard (1995) money was borrowed from Iuka Guaranty Bank by Nancy and her ex-husband by keeping their two properties as security. When the bank enforced the foreclosure clause on Nancy, she paid off the entire loan in lieu of the return of both properties. However, the bank refused to return the deed of trust on the other property. She sued the bank on the ground that there was a subsequent agreement between them under which the bank promised to release deeds of trust of both properties if she would pay the loan. Thus, the evidence regarding the subsequent agreement between the bank and Nancy was allowed by the Mississippi Supreme Court.
General application of the rule
The doctrine of parol evidence is applicable to the written contracts made by the parties. The major reason behind allowing the written evidence to be admissible in the court is that the evidence of a written contract is strongest and undisputed in nature. Written statements are at a higher rank with respect to oral ones on the grounds that oral statements are very weak statements and can be influenced by a mistake of remembering, personal opinion or bad faith. The written agreement shall prevail over the oral one if the oral agreement intends to change the terms of the contract or the intention of the parties. There are certain circumstances where the Parole Evidence rule is made admissible, which are explained below:
Partially integrated, ambiguous agreements
The contract is said to be integrated if it finally expresses the intent of the parties. However, there may be circumstances where the writing is not final, and it is difficult to determine the main intent of the parties. Therefore, in such situations, parol evidence is allowed to add or clarify as the terms of the contract and give a clear meaning to the contract. However, while allowing parol evidence, it must be kept in mind that such evidence should not vary or contradict the terms of writing that are complete and final.
In the case of Keppner v. Gulf Shores, Inc (1985), the parol evidence was allowed by the Mississippi Supreme Court to determine the terms of the contract where the dispute was regarding the sewage disposal system between owners of three ventures. Two of them were restaurants and one a motel known as the Omelette Shoppe, Wendy’s and Gulf Shores, respectively. They all three were joint owners of the property. One of them went bankrupt. One of them applied that joint venture agreement no longer applied after bankruptcy. However, the court accepted the evidence of joint venture as it was challenged before the court by the defendant on the ground that it was in violation of the Parole Evidence rule. Thus, it was held by the Mississippi Supreme Court that parol evidence can be allowed in cases where the terms of the writing are incomplete. Provided that such evidence is not offered to vary the terms of a written agreement.
In the case of Fortune Furniture Manufacturing, Inc. v. Pate’s Electronic Co (1985), the question that arose before the Mississippi Supreme Court was the determination of the reasonable time of performance of the contract. The court did not allow the testimony of the plaintiff about the oral agreement that was related to the time of performance of the contract within thirty days. The court held that the determination of the time frame is a question of law and thus, it has to be decided by the court when there is no specified time frame and conflicting evidence presented by either party.
Integrated ambiguous agreements
An integrated agreement can be either fully integrated or partially integrated. A contract is fully integrated when it explains the final expression of the parties. But a contract is partially integrated where the parties to the contract express all the terms and conditions, but some of the terms to the contract are not agreed upon by the parties. The parol evidence is allowed to be admissible when the writing which is either full or partially integrated but is ambiguous, provided it should not vary or contradict the terms of the contract. In the case of Travelers’ Insurance Co. v. E.D. Edwards Post No (1887)., the question that arose before the Supreme Court of the United States was with respect to the time frame of performance of the contract which included two statements of duration. Thus, the court held that the trial court had erred while not allowing parol evidence as to the facts of the time frame. The court should allow the parol evidence in such a case in order to clarify the terms of the contract.
The Parole Evidence rule does not apply in the cases where the writing is not final, or it is incomplete. Where the terms of the contract are not clear, then the Parole Evidence rule does not apply. In such contracts, there exists a condition precedent that must be fulfilled in order to make the contract effective. The parties are allowed to demonstrate whether the condition was met or not. Thus, the evidence can be given in disintegrated agreements without violating the Parole Evidence rule. However, in integrated contracts, external evidence cannot be provided to prevent the terms of the written contract from being altered by additional information.
Modification of contracts after concluding them by the parties
The Parole Evidence rule does not apply when the contracts are closed and modifications are done by the parties later on. Provided that these modifications do not alter the original terms of the contract. However, the Parole Evidence rule may apply in such situations wherein if the contract falls under the statute of fraud, then the modification must be according to the statute so that it can be made enforceable. If the modifications are made orally, such would not be enforceable. The evidence from such enforceable contracts cannot be presented in the courts, and the Parole Evidence rule will apply in such situations.
Factors affecting the applicability of Parole Evidence rule doctrine
The Parole Evidence rule seems to be very simple in theoretical terms, however, its practical application is very difficult. The courts must consider the following factors while deciding whether a certain part of evidence has to be admitted or not.
- Does any written agreement exist that could cover the subject matter of extrinsic evidence?
- And if so, is this written agreement the final agreement between the parties?
- Is this the complete and exclusive agreement between the parties?
- Is the agreement that is complete, final and exclusive, an unambiguous one?
- Does this agreement include any prior or contemporaneous oral agreement?
- If the answer to any of the above questions is no, then the court can allow the extrinsic evidence to be taken rather than written only.
If the answer to all the above questions is yes, then does the written agreement come under any of the exceptions? Thus, these questions must be resolved as early as possible by the court to determine how much evidence that is written can be included by the court. There are certain factors which affect whether the extrinsic evidence must be made part of the contract or not. These factors play an important role in determining to what extent the court applies this rule in disputes arising from contracts.
Skill and knowledge of the parties
The Parole Evidence rule holds significance when the terms of the contract between the parties are decided on the basis of the skill and knowledge of the parties. This is because most of the judges while admitting the evidence consider the fact that whether the agreement that was preliminary or parol evidence can be considered as a part of the contract or not. The court takes the view that the party which exhibits more skill and knowledge as compared to the other has a superior position than the other with respect to the object of the contract. It is also possible that skill and knowledge can also help to determine what cannot be included to be a part of a contract.
Lapse of time between the statement and the contract
When there is a dispute between the parties as to the terms of the contract, time can be an important factor that is considered by the judges. The longer the time has elapsed on a contract, the weaker the proving of parol evidence. Thus, the Parole Evidence rule has much less applicability option to apply in such cases. It becomes difficult for the courts where a large amount of time has lapsed between the preliminary agreement and formal contract to apply the Parole Evidence rule.
Exceptions to the Parol Evidence Rule
The common law rule is that a written contract between the parties discharges the parties of all the previous promises, statements, or agreements that add to, vary or conflict with the terms of the contract. In simple words, as per this rule, when there is a written contract between the parties, then extrinsic (parol) evidence cannot be used to change the terms of the contract. Thus, parol is the rule of law that bars the introduction of any evidence by the parties to show that something else was agreed upon by the parties which was different from what was written in a contract. This rule applies to any prior written or oral discussions before the contract has become final in nature. Despite this stringent rule, there are certain exceptions under which these prior negotiations and agreements can be accepted as evidence. These exceptions can be broadly classified into two groups:
- Exceptions concerning the validity or enforceability of the contract at the time when the contract was formed.
- Exceptions concerning the validity or enforceability of the contract at the time when there was a breach or when a declaratory judgment was sought.
The exceptions to the parol rule of evidence are explained below:
The party can offer extrinsic evidence when one of the parties to the contract shows that there has been fraud with the party while entering into the written agreement. The party can be allowed to give the parol evidence irrespective of the fact that the other party was relying solely on his or her knowledge for the purpose of determining the main intent. It did not rely on any other negotiations and representations that were included in the writing.
A party to the contract can prove fraud on the ground that while entering into the contract, the other party had fraudulently omitted those terms which were agreed to be incorporated in the final written contract. Elements of fraud invalidate the contract, thus, the parol evidence is allowed to show that fraud had influenced the contract by omitting something important to the contract or by misrepresentation of the facts.
In the case of State Highway Commission v. Powell (1939), the construction of an underpass was to be done through the fields of the plaintiff, but the defendant defrauded the plaintiff to construct a drainage rather than an underpass. Under such a situation, the Mississippi Supreme Court allowed the testimony of the plaintiff against the defendant to prove the above facts. The parol evidence was admissible on the ground that it did not vary, alter or contradict a valid written instrument. However, in order to prove fraud, there must be clear and convincing evidence.
The parol evidence is allowed by the courts to be given by the parties to the contract when they entered into an agreement by some material misrepresentation. For example, A sells a car to B. During negotiation, A assures that the car is in perfect working condition and based on this information B buys the car. But when the car is delivered to B, he finds out that there is a significant defect in the car. The representations made by A are the negligent representations and if B decides to take legal action against A. In this scenario, the verbal representations made by A can be allowed as evidence by the court as an exception to the Parole Evidence rule.
Duress or undue influence
The word ”Duress” implies coercion under which one party to the contract is made to enter into the contract by force or pressure, whereas in case of undue influence, one party is in such a position that it affects the decision of the other party by using its power or manipulating the other party. The parol evidence is allowed to be admitted when it is established that a written contract was made under duress or undue influence by the other party.
As a general rule, only written evidence of the terms of the contract is allowed in the court of law. However, extrinsic evidence is allowed by the courts when there is a mutual mistake by the parties. The rationale behind allowing the extrinsic evidence in case of mutual mistake is that the parties can rectify the terms of the contract to match with the true intention of the parties which they had at the time of making the contract. The need of the hour is that the court must be cautious while taking such evidence into consideration.
Illegal provisions or agreements
Parol evidence is admissible to show that there are certain grounds that resulted in the contract being void. These grounds can be described as fraud, duress, mistake, and misrepresentation. It may also be allowed to be admitted before a court to show that an integrated or unambiguous contract was entered into by the parties and such contract was contrary to the law, public policy and public morals.
In the case of Merchants Bank & Trust Co. v. Walker (1942), the trial court allowed the defendant to present extrinsic evidence to depict the illegal purpose of the note. It was upheld by the higher court that the evidence admitted is valid, as it constitutes the mere admission of a fact that the evidence was made in furtherance of an object forbidden by law. Further, in the case of Mitchell v. Campbell (1964), parol evidence was allowed to be admitted to prove the fact that the lease agreed upon by the parties was related to an illegal business. Thus, the court held that even if the contract is in writing, the parol evidence is admissible to prove the immoral and unlawful character.
Non-existent or sham contracts
Non-existent or sham contracts are those contracts in which the written agreement does not reflect the true intent of the parties. So, the parol evidence is allowed in the case that there was never a valid contract between the parties. Despite the fact that there was a written agreement between the parties, the intention of the parties was never to perform it.
Lack of or failure of consideration
The parol evidence is allowed in certain cases to show want or failure of consideration. The lack of consideration renders the contract illegal. Thus, the evidence can be given to show that neither the writing was valid enough nor it had a legal existence.
Scrivener’s errors are clerical mistakes or omissions in any legal document. Extrinsic evidence is allowed to be given to prove the fact that there were clerical mistakes or omissions in the written document.
In the case law of Valley Mills, Division of Merchants Co. v. Southeastern Hatcheries (1962), the Mississippi Supreme Court allowed the oral testimony of the plaintiff that the terms regarding the payment were mistakenly written in the contract.
Further, in the case of Newell v. Hinton (1990) there was a mistake regarding the name of the car which was written as “1984 Ford Mustang” instead of “1985 Ford Mustang”. The Mississippi Supreme Court allowed the extrinsic evidence to prove the true intention of the parties where the name of the car was a clerical error while writing a contract. Thus, this exception aids the court in determining the real intention of the parties whenever there is an error or omission in the written agreement.
Lost or destroyed contracts
The parties cannot prove the existence of the original document when the contract that was made between the parties was lost or destroyed. The exception to the Parole Evidence rule allows evidence to be made before the court concerning lost or destroyed contracts.
In the case of Bolden v. Gatewood (1964), one of the parties to the contract refused to agree on the existence of a buy-sell agreement and hence declined to pay the estate to another party on his death. Thus, the Mississippi Supreme Court, in such a situation where the original contract is missing, allowed the other party to prove that such a contract existed. In this case, the court allowed the oral testimony of the insurance agent who helped create the buy-sell agreement.
However, it has to be kept in mind that such exceptions do not encourage changing the written contracts but in order to ensure fairness and honesty in the contracts, oral testimony is allowed whenever material alterations are made in the contract.
Evolving perspectives and criticisms
The main objective to allow the parol evidence was limited only to written agreements. No other forms of evidence were allowed by the courts. It was considered that the written agreement is complete and final and explains the true intent of the parties. But with the developments in the legal field and the need of the hour, the courts could not rely on just the written agreement. The prior understandings and negotiations need to be included to be given as extrinsic evidence, as the written agreement could not alone explain the intent of the parties. The focus now shifted from the mere act of writing to the concept of integration. Under this concept, the extrinsic evidence was excluded only if the parties had full representation. This shift was driven by the ideas of scholars such as Williston and Corbin which is discussed in the previous part of the article, The concept of evolving perspectives under this rule can be discussed under the following heads:
Parol evidence rule and merger doctrine
As per the Parole Evidence rule, the written contract is final and only such written document will be used as evidence and nothing else will be allowed by the court. A merger clause is a kind of clause that is kept by the parties in the contract to determine that the particular written document is agreed upon by the parties and nothing outside of this agreement will be allowed further. The merger doctrine had much significance in the past, where the Parole Evidence rule was strictly followed. However, this doctrine has been diluted with time, where if the parties to the contract show some other evidence for example emails or other evidence, then the merger clauses stand at a lower footing than this evidence.
As per merger doctrine, the old agreement is replaced by the new one when the same parties enter into a new agreement on the same subject matter. This doctrine is generally applied in those cases when the parties to the contract even before the performance of the contract tend to change their obligations by subsequent agreements. Thus, the subsequent agreement shall supersede the earlier agreement and now while considering its applicability related to the rule of parol evidence, it can be said that this doctrine is very closely related to Parole Evidence rule. As in both of these rules, it is always implied that the subsequent written agreements shall always hold a higher legal value with respect to any negotiations, understandings or oral agreements between the parties. Though to some extent, the merger doctrine relates to the concept of “novation” under contract law. As per these doctrines, the new contract generally superimposes over the earlier one and makes the older one legally unenforceable.
Factors deciding the applicability of the Parole Evidence rule
This is the most controversial part, as it becomes really difficult for the courts to decide how much of the written thing has to be taken as evidence. This rule does not provide any simple, short formula which could help the courts to decide whether the writing is complete and final. It is left free to the courts to decide how much of writing is to be considered. The courts generally weigh their decision upon the facts and circumstances of the case.
For instance, when a party argues that a prior agreement which was oral was replaced by a written contract, it can be held by the court that this written contract by default replaces the earlier oral agreement by application of the merger doctrine. In addition to that, if a party needs to add something to the contract by integrating, then the prior oral agreement stands discharged by the new contract and hence courts can decide how much of integration of written documents will be considered.
Evidentiary aspect of Parole Evidence rule
As per this rule, only the written evidence is allowed by courts when there is a written contract. The major objective to allow such evidence was to tell the courts about what facts mattered or what facts did not matter to be considered by the court. This rule has undergone a sea change since its inception, as earlier it merely excluded any other type of evidence, but as of today the particular and strict application of the rule has changed. It has been seen that as of now, even if there is a written contract but where the parties to the contract have the intention to include some other things as evidence rather than written ones, it is allowed by the courts.
Parol Evidence Rule: a state wise discussion
Applicability of the Parol Evidence Rule in the United States
The Parol Evidence rule was made applicable to commercial contracts in America by the efforts of the American Law Institute, which had played a significant role in shaping this law in the US. As per the institute, the rule does not merely relate to contract interpretation but deals with the scope of interpretation. The rule deals with the integration concept, under which it helps to determine the complete understanding between the parties.
Now, the question arises, how does the court determine whether the contract is final and complete? The courts apply the “four corners” rule. Under this rule, the court itself examines if the contract is complete and final, excluding all the extrinsic sources. The other way by which the court determines its finality is by the merger clause, which explicitly mentions that the contract is a final and complete agreement.
Also, the Restatement (Second) of Contracts provides that the binding agreement supersedes any kind of existing prior agreements whenever there is any kind of inconsistency. The U.C.C. has been adopted in many U.S. states and provides guidelines for commercial transactions, including sales. Under U.C.C , it is the intention of the parties which determine that the writing is final. However, it should be kept in mind that the common law tradition still continues to influence this rule, as Restatement (Second) of Contracts and U.C.C just provide additional guidance to this rule.
The Parole Evidence rule and its application in the CISG
The United Nations Convention on Contracts for the International Sale of Goods (CISG), 1988 provides for uniform application of international commercial law. CISG was enacted in the early 1930s by the efforts of the International Institute for the Unification of Private Law (UNIDROIT) to draft a law that could uniformly deal with the sale of goods. In 1930, this law was finalized. CISG came out as one of the most successful laws that dealt with international commercial law. Now, let’s understand how the Parole Evidence rule has been incorporated in CISG. This rule helped the courts to consider what type of evidence to be taken while interpreting a contract.
While CISG was drafted, there were certain key points that were considered, and one among them was whether there were any limitations on the evidence that a party could introduce to contradict or supplement a contract. So in light of this, it was proposed to follow the Williston approach, where the admissibility of evidence was limited when the contract existed in written form. However, this proposal faced criticism on the grounds that it was against the policy of civil nations, under which they allowed all types of evidence to be included irrespective of the fact that the contract was written or not. The interpretation of the Parole Evidence rule is dealt under Article 8 of the CISG. It relates to the interpretation of statements and the conduct of the parties.
Article 8 of CISG enumerated the following rules for interpreting the contract:
- The interpretation of the contract must be held by the way of subjective means, which means it can be based on the understanding of the parties involved while entering into a contract.
- Such interpretation could be done only if the other party was aware of the intent. The contract has to be interpreted based on the mutual intention of the parties.
- However, if the party is unable to determine the subjective intent, it must be interpreted by the objective test under which it would be interpreted in a manner a reasonably prudent man would interpret it.
- In addition to this, Article 8(3) lays down that the court should also consider any negotiations, established practices between the parties, usages, and subsequent conduct while interpreting the contract.
Thus, CISG follows a modern objective approach where the courts should consider every relevant evidence while interpreting the contracts and reject any kind of limits that can be imposed while considering the evidence. CISG does not provide for any rule under which the evidence can be considered, but it provides for the practical evidentiary advantages of a written contract.
The Parol evidence rule has found a place in CISG in a flexible way. There are no strict evidentiary limits while considering the admissibility of evidence. So, it provides for a fair and flexible approach for international commercial transactions so as to avoid any conflicts that could arise from strict application of Parole Evidence rule.
Now, let’s understand the certain issues regarding its applicability, that is whether the Parole Evidence rule is truly incorporated under CISG and the usage of merger clauses in contracts governed by CISG. It is argued that CISG does not have a Parole Evidence rule, and it can be clearly seen from the legislative intent of the CISG. The above assumption is made from the context that Parole Evidence rule is very complex with lots of interpretations and applications due to which it has become complex for uniform application of this law. The problem lies in identifying whether CISG accepts or rejects the Parole Evidence rule, and this can be determined from the CISG test and legislative history.
To conclude, the Parole Evidence rule helps to protect written contracts from any unwanted alterations by not allowing any outside evidence. However, there are certain exceptions that allow the other types of evidence to be made admissible before the court. It has emerged to be a mere enabling rule rather than a strict exclusionary rule.
The main objective lies in explaining the true intent of the parties. Earlier, it was just the written agreements on which the courts relied, but with time the courts changed their approach with respect to its applicability to allow the best evidence to be presented before the court. The shift in this approach has been followed by the Uniform Commercial Code to allow outside evidence. It has been reiterated that the process of interpretation must go beyond the plain meaning of the contract. It must include the intent of the parties rather than focusing on just the writing part.
Frequently Asked Questions (FAQs)
What do you understand by the terms “parol” and “extrinsic evidence”?
The word “parol” as per Oxford English Dictionary means “Expressed or given orally”. The word “extrinsic evidence” is defined as the “evidence relating to the contract but not appearing on the face of the contract because it comes from other sources, such as statements between the parties or the circumstances surrounding the agreement. As per the Parole Evidence rule, any evidence whether it is oral or in written form is inadmissible, and the contract cannot be varied, altered, added or subtracted with respect to the original terms.
What can be the factors affecting the applicability of the Parole Evidence rule?
There are certain factors that affect the applicability of this rule and these can be the skill and knowledge of the parties and how much time has lapsed between the statement and the contract as it is assumed that the longer the time has elapsed on a contract, the proving of parol evidence becomes weaker on such scale. There are also certain other factors such as the finality of the contract, whether the contract was complete or not, and whether there existed any prior or contemporaneous oral agreement.
How is the Parole Evidence rule interpreted in terms of Williston and Corbin’s approach?
Williston follows a strict approach to not include any kind of extrinsic evidence when the writing is complete and final on the face of it. However, Corbin follows a flexible approach to this. He argues that extrinsic evidence can be allowed to determine whether the writing was a total integration. The parol evidence should not bar any such evidence which helps to reveal the true intent of the parties.
What are the exceptions to the applicability of the Parol Evidence rule?
The Parole Evidence rule is the rule of law that bars the introduction of any evidence by the parties to show that something else was agreed upon by the parties which was different from what was written in a contract. There are certain exceptional situations under which these prior negotiations and agreements can be accepted as evidence such as fraud, negligent misrepresentation, undue influence, lack of failure of consideration
Explain to what extent has the Parol Evidence rule been incorporated into CISG.
The Parol evidence rule has found a place in CISG in a flexible way. There are no strict evidentiary limits while considering the admissibility of evidence. So, this provides for a fair and flexible approach for international commercial transactions so as to avoid any conflicts that could arise from strict application of the Parol Evidence rule.
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