When two parties agree to form a contract, they attempt to write down all of the specific terms of the agreement when they formally draft the contract. Occasionally, however, one party later feels that all the terms of the agreement were not included in the written document and wishes to introduce evidence of prior oral agreements to alter the terms of the existing contract.
The purpose of the parol evidence rule is to prevent a party from introducing evidence of prior oral agreements that occurred before or while the agreement was being reduced to its final form in order to alter the terms of the existing contract.
The parol evidence rule treats formal written documents created by parties as reflective of their true intentions regarding which terms are meant to be included in the contract. In doing this, it assumes that duties and restrictions that do not appear in the written document, even though apparently accepted at an earlier stage, are not intended by the parties to survive.
The Parol Evidence Rule helps with:
- Increasing the predictability and finality of commercial transactions by encouraging parties to draft better contracts.
- Reducing litigation and arguments between parties over the meaning of a written document.
- Assisting in determining the true intentions of the parties at the time of contract formation.
At the time it was created, the courts strictly applied the parol evidence rule. The classic approach favored analyzing the language of the formal document created by the parties to determine their true intentions.
In recent years, however, courts have been increasingly willing to admit parol evidence varying the terms of a written agreement. The modern approach is to interpret a formal document’s language in light of all relevant circumstances, including the prior dealings between the parties and usages of the trade.
How strictly a state applies the parol evidence rule will differ based on whether the state utilizes a classic or modern parol evidence approach. Several questions that courts analyze in determining whether outside evidence overcomes the parol evidence rule are:
- Is the agreement integrated? Typically, any agreement that has been written down as a formal document will be found to be integrated.
- Is the written agreement completely or partially integrated?
A written agreement that is "completely integrated" is one where all relevant terms of the agreement are included in the contract. Any outside evidence that is "within the scope" (i.e. relevant to the contract) will be excluded, because it should have been included at the time of contract formation.
A written agreement that is "partially integrated" is one where not all of the relevant terms have been included in the contract. Any outside evidence that is "consistent" (i.e. relevant to the agreement) will be presented to the jury for a determination of whether the evidence should be allowed to alter the existing terms of a contract.
The best way to avoid the parol evidence rule is to make sure that any contract you form with another party includes all the terms that you want. An experienced business lawyer can help you draft a contract and include all the relevant terms. If you find yourself in a situation where you need to overcome the parol evidence rule, then you should hire a lawyer to aid you in the process.