Contracts/Parol evidence rule

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 document is the sole repository of the terms of the contract (Jacobs v. Batavia & General Plantations Trust Ltd [1924] 1 Ch 287). The rule therefore generally forbids the admittance of extrinsic evidence (i.e., evidence of communications between the parties which is not contained in the language of the contract itself) which would add or change terms of a later written contract. The introduction of extrinsic evidence is always allowed.

In order for the rule to be effective, the contract in question must be a fully integrated writing; it must, in the judgment of the court, be the final agreement between the parties (as opposed to a mere draft, for example). One way to ensure that the contract will be found fully integrated is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties. However, many modern cases have found merger clauses to be only a rebuttable presumption.

An integrated agreement is either a partial or complete integration. If it contains some, but not all, of the terms as to which the parties have agreed then it is a partial integration. This means that the writing was a final agreement between the parties (and not mere preliminary negotiations) as to some terms, but not as to others. On the other hand, if the writing were to contain all of the terms as to which the parties agreed, then it would be a complete integration. The importance of this distinction is relevant to what evidence is excluded under the parol evidence rule. For both complete and partial integrations, any evidence contradicting the writing is excluded under the parol evidence rule. However, for a partial integration, terms that do not contradict the writing but merely add to it are not excluded.

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

• To aid in the interpretation of existing terms
• To resolve an ambiguity in the contract (California law) .
• 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 within this rule, it must involve either (1) a written or oral communication made prior to execution of the written contract; or (2) an oral communication made contemporaneous with execution of the written contract. 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 storage shed for $100. The agreement to paint the shed would logically be in a separate document from the agreement to paint the house.

Though its name suggests that it is a procedural evidence rule, the consensus of courts and commentators is that the parol evidence rule constitutes substantive contract law.

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

Examples

The parol evidence rule is a common trap for consumers. For example:

• Health club contracts. You enroll in a health club, and the salesperson tells you that the contract can be cancelled. You later decide you would like to cancel, but the written contract provides that it is non-cancellable. The oral promises of the salesperson are generally non-enforceable.

• Auto sales agreements. You purchase a used car, and the salesperson tells you it is "good as new." But the contract provides that the sale is As Is. Again, in most circumstances the written contract controls.

• Timeshares. While in certain jurisdictions, and in certain circumstances, a consumer may have a right of rescission, some people attend real estate sales presentations at which they may feel pressured into immediately signing binding contracts.

A perfect example of the rule playing out in an employment setting where the contract includes an integration clause is in the legal dispute between West Virginia University and its former football coach, Rich Rodriguez. Rodriguez accepted a job at the University of Michigan four months after signing an extension at West Virginia. The University sued Rodriguez to recover $4 million under the buyout provision of the coach's contract. In his answer to the University's complaint, Rodriguez alleges that an oral promise was made to him in advance of signing the extension that the buyout clause would not be enforced (or, if it were to be enforced, would be split between the sides). Absent fraudulent inducement by the University, it does not appear Rodriguez would prevail because of the parol evidence rule.

References

Alternative ways of describing the parol evidence rule [1]

See also

• Statute of frauds