Tackling the most important topics of law school, Part 7a: The parol evidence rule

September 11, 2013

Law School 101a(Editor’s note: Over the next ten weeks, we’ll be covering some of the most prominent legal concepts taught in law school to help students faced with these topics, whether for the first time or as part of a review, better comprehend them.)

A previous topic in this series was “hearsay,” an important set of rules of evidence.

The topic this week, the parol evidence rule, is also about “evidence,” but it has far more to do with contract law than the rules of evidence.

The parol evidence rule prevents certain types of evidence from being introduced in contract disputes in certain circumstances.

“Certain types of evidence” is any evidence of terms outside of the written contract that would supplement or contradict the terms of the contract itself.

These “certain circumstances” are those in which there’s a written contract, and it’s clear that the contract is intended to be a complete and final expression of the parties’ agreement.

So how do you know whether the contract is intended to be a “complete and final expression” of the parties’ agreement?

Traditionally, as long as the contract itself did not reference any then-existing outside documents or party communications, the presumption is that the parties intended the contract to be “complete and final.”

Say, for example, that Sam agreed to sell his iPad for $500 to Barbara.  Sam agreed to deliver his iPad to Barbara by April 15, and Barbara agreed to pay by April 20.  The two put down their agreement in writing and signed it, formalizing the contract.  During a phone call shortly before the two met to sign the contract, Sam told Barbara that “if [she] couldn’t make the payment until the end of May, that would be okay.”

April 20 rolls around, and Barbara doesn’t pay.  Sam sues Barbara for breach of contract, and, in court, Barbara testifies about the phone conversation that she and Sam had, claiming that she did not, in fact, breach the contract, since payment wasn’t due until the end of May (Sam and Barbara live in a world where courts can schedule hearings very quickly).

Because of the parol evidence rule, Barbara’s testimony is inadmissible; it is being introduced to contradict the terms of the contract itself, and the contract, not having referenced the conversation (or any other outside documents or communications), appears to be a “complete and final expression of Sam and Barbara’s agreement.

As a quick point of clarification, it’s important to note that the parol evidence rule is not a procedural rule of evidence in the same way that the hearsay rules are, for example.  As such, the parol evidence rule is more easily understood as a substantive rule of contract interpretation that dictates how a court should understand a contract.

In Sam and Barbara’s case, for example, if Sam himself admitted to the conversation and the court fully accepted Barbara’s testimony, the parol evidence rule would nonetheless require the testimony’s exclusion from the court’s reading of the contract, for the reasons stated above.

In addition, the parol evidence rule applies to both oral and written evidence.  Thus, even if Barbara were to produce this same conversation as it occurred over email, it would still be excluded under the rule.

What if, for example, the contract wasn’t “complete and final” as to the method of payment – specifically, that the contract called for the method of payment “to be agreed to by the parties at a later date?”

The parole evidence rule can still apply in situations such as these, as long as the evidence being introduced attempts to modify a term in the contract that is intended to be a “complete and final expression” of the parties’ agreement.

Thus, even if Sam and Barbara’s contract was not “complete and final” on how Barbara was to pay Sam, the contract was final on when payment was due.  The parol evidence rule still excludes Barbara’s testimony (unless the conversation occurred after the signing of the contract).

If this conversation occurred after the contract was signed, the parol evidence rule may not apply.  Instead, the conversation may be construed by the court as either a waiver of one or more of the contract’s conditions by one party, or a separate contract that modifies the original (in Sam and Barbara’s case, it could likely be interpreted as a waiver by Sam of Barbara’s original payment due date).

The parol evidence rule would almost certainly not apply in Sam and Barbara’s case if the payment date were modified to accommodate a method of payment “agreed upon by the parties at a later date,” as specified in the contract.

In addition to contracts that contain terms that are by definition neither complete nor final, you will come across many contracts that contain a “merger clause” (which is standard practice is contemporary contract drafting).

A merger clause, also known as an integration clause, states something along the lines of “this contract is intended to be the complete and final agreement between the parties.”

The presence of a merger clause in a contract certainly strengthens the presumption that the contract was intended to be the complete and final agreement.  However, if evidence is presented in court about additional terms not addressed by the contract, the presumption could be defeated under certain circumstances.

This is an example of one of many exceptions to the parole evidence rule, which we’ll get into in further detail in Part B of this topic.