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Contracts/Parol evidence rule
The parol evidence rule is the legal application of a rule of substantive law in contract cases that prevents a party to a written contract from contradicting (or sometimes adding to) the terms of the contract by seeking the admission of evidence "extrinsic" (outside) to the contract. For example, Carl agrees in writing to sell Betty a car for $1,000. Betty argues that Carl told her that she would only need to pay Carl $800. The parol evidence rule would generally prevent Betty from testifying to this conversation because the testimony ($800) would directly contradict the written contract's terms ($1,000).
In order for the rule to be effective, the contract in question must first be a final 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).
A final 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. One way to ensure that the contract will be found to be a final and complete integration 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.
The importance of the distinction between partial and complete integrations 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 show that in light of all the circumstances surrounding the making of the contract, the contract is actually ambiguous, thus necessitating the use of extrinsic evidence to determine its actual meaning (California law).[1]
- 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 correct mistakes.
- To show wrongful conduct such as misrepresentation, fraud, duress, unconscionability (276 N.E.2d 144, 147), or illegal purpose on the part of one or both parties.[2]
- 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.
- To make changes in the contract after the original final contract has been agreed to. That is, oral statements can be admitted unless they are barred by a clause in the written contract.[2]
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. However, the salesperson in misleading you into the terms of the contract constitutes a misrepresentation and you may seek to rescind the contract.
- 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. However, this also constitutes misrepresentation.
- 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. Evidence that the contract was entered into under duress will not be precluded by the parol evidence rule.
References
- ↑ Pacific Gas & Elec. Co. v. G. W. Thomas Drayage Co., 69 Cal. 2d 33 (1968). Pacific Gas & Electric is one of Roger Traynor's most famous (and controversial) opinions, which has been criticized by a number of prominent jurists, including Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit. See Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564 (9th Cir. 1988) and Jeffrey W. Stempel, Stempel on Insurance Contracts, 3rd ed., § 4.02, 4-9, n.16 (2006).
- ↑ 2.0 2.1 Wollner KS. (1999). How to Draft and Interpret Insurance Policies, p 10. Casualty Risk Publishing LLC.
