Parol Evidence Rule

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 What is the Parol Evidence Rule?

“Parol evidence” is evidence of any agreement between two or more parties that is not contained within their written contract.

There are instances where one of the parties to a written contract may feel that not all of the agreements they wanted were added. They want to alter the contract to include the terms they think are missing in the final written document. To do so, they may try to introduce evidence of prior oral agreements with the other party before the terms of the existing contract were ever written. The parol evidence rule prevents this from happening. Perhaps the contract does not have any clause about how the parties can cancel the contract, and one of the parties believes they had agreed to those terms; they just didn’t include them in the written agreement.

To get those terms included, they may try to introduce evidence of a prior oral agreement with the other party before the terms of the existing contract were written. The parol evidence rule prevents this from happening.

The parol evidence rule bars a party to a written contract from bringing up outside evidence that illustrates an ambiguity, seeks to clarify, or adds to the written terms of the agreement. Once all parties have signed a written agreement, it cannot be changed by an oral agreement, except when fraud, duress, or mutual mistake is involved.

The purpose behind this rule is that, as the parties went to the trouble to put their agreement in a single, written contract, evidence of past agreements or terms that are not in the written contract should not be considered when interpreting that contract. This includes prior or contemporaneous oral agreements and prior or contemporaneous written agreements that contradict or create a term variation in the contract. In other words, the judge or jury will only look at the writing within the document itself to decide a contract dispute.

What is the Rationale for the Parol Evidence Rule?

The parol evidence rule treats the parties’ formal written documents as reflections of their true contractual intentions. In other words, if something was discussed before the official written contract and was subsequently left out of its terms, then those terms must have been intentionally left out of the document for one reason or another. The parol evidence rule assumes that any original discussions regarding the parties’ duties or restrictions would have appeared in the written contract, and because they do not, the parties never wanted those terms to survive past the initial bargaining stages.

Some examples of what the parol evidence rule is useful for include:

  • Helping to increase the predictability and finality of commercial transactions by encouraging the parties to draft clearer, more thorough, and less ambiguous contracts
  • Reducing litigation or conflicts between the parties over the meaning of the terms in the final contract
  • Assisting with determining the parties’ true intentions at the time the contract was signed.

How Flexible is the Parol Evidence Rule?

Classic Approach

When the parol evidence rule was first created, it was applied rigorously to contract cases. The classic approach was to analyze the language of the formal document the parties created and signed to determine their true intentions. The courts would look at the portion the parties were arguing over and glean their interpretation from the actual words on the paper, not from any implied meanings not written down.

For instance, in a key case from New York, the plaintiff purchased land from the defendant. The plaintiff alleged that the defendant had promised to remove an ice house that was sitting on the property, but the contract said nothing about that. The defendant did not remove the ice house before nor after the plaintiff’s purchase.

The court enforced the rule of parol evidence and barred the extrinsic agreement because it found that if the parties had reached an agreement on removing the ice house, it would have been written into the contract.

Modern Approach

However, the trend in recent times seems to be shifting towards the courts becoming increasingly willing to admit parties’ parol evidence. This modern approach asks the court to interpret the language of the official contract in light of all relevant circumstances. These include considering prior dealings between the parties and customary usages of specific terms within a trade.

For example, in contracts between parties who regularly deal in sales with each other, the court may consider certain parol evidence when interpreting their contract. The court may consider evidence of the parties’ normal way of dealing with one another and similar customers. The court may also consider other agreements made before, or at the same time as, the contract under consideration and may consider the industry standard course of conduct.

In short, when the parties to a disputed contract have a history of dealing with one another, the court may consider that history to determine the intent or meaning of the contract.

However, parol evidence may only be considered if it does not contradict the contract but supplements or clarifies it.

Exceptions to the Parol Evidence Rule

The parol evidence rule is intended to prevent a party to a contract from claiming there were verbal terms to the parties’ agreement that somehow never made it into the written contract. There are certain circumstances in which the court may allow parol evidence to be submitted.

Exceptions to the parol evidence rule include:

  • Errors or defects in the written contract due to mutual mistake, fraud (a lie about an important contract term), duress (threats), or illegality (the subject matter of the contract violates the law)
  • There was a prior valid agreement that was not described or referred to correctly in the written contract
  • There is a related agreement that does not contradict or modify the main contract in question
  • There is some problem with the consideration (something of value that is exchanged in return for the promise of performance by the other party.)
  • There was a condition that had to occur before the contract performance was due
  • One or more of the terms is ambiguous. If the language in the original written contract is reasonably susceptible to more than one meaning, the court will permit the admissibility of parol evidence to determine the meaning of the contract language under the ambiguity exception.

Do I Need a Lawyer to Help Me with the Parol Evidence Rule?

The best way to avoid a dispute involving the parol evidence rule is to make sure that any contract you decide to form with another party includes all of the terms you want and that they are clearly defined.

An experienced contract lawyer in your area can help you to draft a contract that includes all of the above aspects, plus one that is valid and legally enforceable.

Additionally, if you are already involved in a situation requiring overcoming the parol evidence rule, a lawyer can assist you with this process.

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