Contracts/Parol evidence rule: Difference between revisions

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The parol evidence rule enacts a principle of the common law of contracts that presumes that a written contract embodies the complete agreement between the parties involved. The rule therefore generally forbids the introduction of extrinsic evidence (i.e., evidence of communications between the parties which is not contained in the language of the contract itself) which would change the terms of a later written contract.

In order for the rule to be effective, the contract in question must be an integrated writing; it must, in the judgment of the court, contain all terms that the parties would logically expect to have within an agreement on a particular subject. One way to ensure that the contract will be found to be integrated for this purpose is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties on a particular subject.

An agreement can be either completely intergrated or partially integrated. If the agreement is complete and integrated, no augmentation by prior discussions or agreements is allowed, as it is forbidden by this rule. If it is integrated but not complete, it is considered to be partially integrated, and it may be supplemented by additional terms as long as the new terms do not modify the original terms.

The parol evidence rule only applies to determining the meaning of a term of a contract; it does not apply when determining whether a right constitutes a term of the contract. Also, despite this rule, the court will examine the factual context surrounding the contract and its formation.

There are a number of exceptions to the parol evidence rule. Extrinsic evidence can always be admitted for the following purposes:

• To work out the subject matter of the contract.
• To resolve an ambiguity in the contract.
• To show that an unambiguous term in the contract is in fact a mistaken transcription of a prior valid agreement. Such a claim must be established by clear and convincing evidence, and not merely by the preponderance of the evidence.
• To show fraud, duress, mistake, or illegal purpose on the part of one or both parties.
• To show that consideration has not actually been paid. For example, if the contract states that A has paid B $1,000 in exchange for a painting, B can introduce evidence that A had never actually conveyed the $1,000.
• To identify the parties, especially if the parties have changed names.
• To imply or incorporate a term of the contract.

In order for evidence to fall under this rule, it must involve a communication made prior to, or at the time of, the execution of the written contract, and must be evidence as to the terms of the agreement itself. Evidence of a later communication will not be barred by this rule, as it is admissible to show a later modification of the contract (although it might be inadmissible for some other reason, such as the Statute of Frauds. Similarly, evidence of a collateral agreement - one that would naturally and normally be included in a separate writing - will not be barred. For example, if A contracts with B to paint B's house for $1,000, B can introduce extrinsic evidence to show that A also contracted to paint B's car for $100. The agreement to paint the car would logically be in a separate document from the agreement to paint the house.

Addition information on the parol evidence rule may be found in Restatement 2d of Contracts § 213.