Parol Evidence Rule - Contract Law
When Outside Information Cannot be Used to Interpret a Contract
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What is the Parol Evidence Rule?
This rule or doctrine concerns the evidence that parties may introduce to the court interpreting the disputed contract. Specifically, it addresses the introduction into court of any evidence of the parties agreement that arose prior to the execution of the final agreement and is not included within the written document. This rule either allows or disallows a party from introducing that evidence to the court to modify or add terms to a contract. The purpose of this rule is to prevent confusion in the interpretation of the contract and fraud by any party against another.
Prior Communications - The parol evidence rule primarily serves to exclude any evidence of prior negotiations (either before or contemporaneous with the signing of the contract) that has the effect of altering the express terms of the agreement. Information or communications contemporaneous with execution of the contract may be admissible in interpreting the contract, but are not admissible if they expressly contradict unambiguous, contract terms.
- Example: You and I enter into a contract for the sale of goods. Later, we argue over the what goods are being sold under the contract. In a lawsuit over the matter, the parol evidence rule will cause the court not to consider our prior communications before we executed the contract if those communications contradict the contract.
Final Agreement - For the parol evidence rule to apply, the contract must be the final agreement between the parties. This means the contract is an integration. If the party is determined to be a final expression of the parties agreement, the parol evidence rule is effective to limit what information outside of the writing the parties can introduce to the court in interpreting the agreement.
- Example: In the above example, the court will determine whether the contract was meant to contain all of the terms of our agreement. If we specifically make reference to our prior communications in the contract, it would not be an integration. In determining whether the contract is the final agreement, the court will look to see if the contract includes an integration clause.
Integration Clause - The best way to make certain that the contract is deemed a complete and final expression of the parties intent is to include an integration clause. An integration clause, also called a merger clause, is a provision in a contract that says that the contract is a complete and final understanding of all the terms of the agreement. In other words, these clauses state that the contract is intended to be a complete integration. Some merger clauses will specifically state that any outside information or communications contemporaneous with the execution of the contract or prior thereto should not be considered a part of the contract. Other, more specific clauses, will specifically reference outside information, documents, or communications and state whether the terms of those items are included in the final agreement. These clauses are usually conclusive unless a contract defense applies (such as fraud, duress, etc.).
- Example: In the above examples, the court finds a clause that states, This contract is the complete and final agreement of the parties. In that case, the court will not review our prior email communications to determine what goods are included under the contract. The court will only look at the provisions of the contract itself.
An agreement may appear on its face as simply a partial understanding of the agreement between the parties. In such as case, the contract is not an integration.
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Discussion: Why do you think courts want to exclude prior communications that alter or contradict the terms of the contract? Can you think of any situations in which the court should certainly review prior communications, even if an integration clause is present?
Practice Question: Clayton enters into an agreement with Samson to provide consulting services. Clayton and Samson later sue each other over the extent of services Clayton is obligated to perform for Samson. Clayton argues that the contract only calls for him to do some preliminary business analysis. Samson argues that Clayton was obligated to perform far more services. He says that prior communications indicate the extent of Claytons intended services. What do we need to know to determine whether the court will consider the prior communications in determining Clayton's obligations under the contract?
- In the event of dispute concerning contract terms, the courts will not use prior communications when identifying the terms of the contract if the contract is a complete integration. This means that the parties intend for the contract to be the complete and final expression of the terms of agreement. In such a case, the parol evidence rule prevents the parties from introducing other evidence such as conversations from earlier negotiations between the parties as evidence of a different intent as to the terms of the contract. However there are exceptions to this rule. If the court identifies a patent or latent ambiguity, it will consider prior communications to clear up the ambiguity.