Parol Evidence Rule - Overview

Overview

The rule applies to parol evidence, as well as other extrinsic evidence (such as written correspondence that does not form a separate contract) regarding a contract. If a contract is in writing and final to at least one term (integrated), parol or extrinsic evidence will generally be excluded. However, there are numerous exceptions to this general rule, including for partially integrated contracts, agreements with separate consideration, to resolve ambiguities, or to establish contract defenses.

To take an 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, evidence contradicting the writing is excluded under the parol evidence rule. However, for a partial integration, terms that supplement the writing are admissible. To put it mildly, this can be an extremely subtle (and subjective) distinction.

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

• The court may first determine if the agreement was in fact totally reduced to a written document. In the case of State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, NSW Court of Appeal, at 191, per McHugh JA, the parol evidence rule has 'no operation until it is first determined' that all the terms of the contract are in writing.
• To prove the parties to a contract. In Gilberto v Kenny 48 CLR 620, a written agreement to sell land signed by Mrs Kenny at times made reference to Mr Kenny, and the court held that oral evidence was admissible and that she was signing for herself and as an agent for her husband.
• To prove an error. Extrinsic evidence was allowed in Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan and Co 26 CLR 410 where equity allowed rectification of a written agreement to accord "with what one party intended and the other party knew the first intended".
• To prove a condition precedent. In Pym v Campbell (1865) 119 ER 903, Pym entered into a written contract with Campbell to sell an interest in an invention. The court allowed Campbell to include the oral terms of acknowledgement that the sale was subject to an inspection and approval by an engineer. The engineer did not approve the invention.
• To prove that the written document is only part of the contract as in Hospital Products Limited v United States Surgical Corporation 156 CLR 41 where the court found for a written contract to be only part of an agreement. In State Rail Authority of NSW v Heath Outdoor Pty Ltd 7 NSWLR 170, the court held that the parol evidence rule is persuasive and the evidenciary burden is on the party wishing to rebut the claim that the whole contract was not in writing.
• To prove that an implied term of custom or trade usage or past dealings is part of a contract even if not in a written agreement, as in Hutton v Warren 1 M and W 466, where the party wishing to add the term bears the evidenciary burden and in this case a lease had to be read in the light of established custom.
• To prove what is true consideration, not something added to avoid taxes.
• To prove the term or promise is part of a collateral contract.
• To aid in the interpretation of existing terms.
• Specific to US law; in a minority of jurisdictions (Florida, Colorado, and Wisconsin) extrinsic evidence is barred from being used to interpret a contract
• To resolve ambiguity using the contra proferentum rule. 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.
• To disprove the validity of 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.
• 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.

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 (Second) of Contracts § 213.