The Contents of the Contract : The Parol Evidence Rule

August 15, 2020

The Contents of the Contract
1. The Parol Evidence Rule
  1. Definitions
    1. The Parol Evidence Rule renders any evidence of a prior or contemporaneous understanding of the parties inadmissible if offered to contradict or modify the terms of a written agreement. It is best understood as a rule of substantive law concerning the legal effect of the expression of an agreement in a final, fully integrated contract; it declares that when the terms of a contract have been embodied in a writing [called the integration of the agreement] to which both parties have assented as the final expression of their agreement, parol evidence of contemporaneous or prior oral agreement is not admissible for the purpose of varying or contradicting the written contract.
    2. Reformation is an equitable remedy consisting of a “rewriting” of a contract or other document in cases where the written terms of the contract do not express what was actually agreed upon.
    3. Integration is the process by which the parties to an agreement adopt a writing or writings as the full and final expression of their agreement. Also called merger.
  2. UCC §2-202
    1. Final Written Expression: Parol or Extrinsic Evidence
      1. Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
        By course of dealing or usage of trade or by course of performance (see UCC §2-208) and
        By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
      2. Don’t be fooled! The Parol Evidence Rule does not keep out terms that are added after the agreement is written.
  3. Integration
    1. Restatement 2d §210 says
      1. A Completely Integrated Agreement is adopted by the parties as a complete and exclusive statement of the terms of the agreement.
      2. A Partially Integrated Agreement is an integrated agreement other than a completely integrated agreement
      3. Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of question of interpretation or to application of the parol evidence rule.
    2. Williston’s view
      1. Merger clause – will conclusively establish that the document is a total integration, unless the doc is obviously incomplete.
      2. Rest of Writing – without a merger clause, if the doc is obviously incomplete, it is a partial integration, allowing consistent terms to be submitted from oral evidence.
      3. Four Corners – reasonable person standard looking just at the document. Would a reasonable person have put the terms of the alleged oral agreement in the document?
    3. Corbin’s view
      1. The actual intention of the parties should be looked to in answering if it is a partial or total integration.
      2. Corbin places less importance on the actual writing and more on the intent. The Corbin view comes close to eviscerating the parol evidence rule.
  4. Baker v. Bailey
    1. Facts: The value of Π’s land plummeted when Δ enforced a rule in their contract stating that if Π sold their land, Δ had the right to disallow the subsequent buyer the use of Δ’s well. Π argues that the original purpose of the clause was to keep undesirables from using the well, not to prevent Π’s buyer from using the well.
    2. Analysis: Parol Evidence Rule requires that, in the absence of fraud, duress, or mutual mistake, all extrinsic evidence must be excluded if the parties have reduced their agreement to an integrated writing.
      1. The Baileys argue that the parties had a common understanding that the Bakers would continue to share the well water with subsequent purchasers provided that the purchasers were acceptable to the Bakers, but this is not evidenced in the terms of the contract.
      2. The fact that there may have been further oral understandings b/w the parties is not admissible–where the language of a written contract is clear and unambiguous, there is nothing for a court to construe.
    3. Integration
      1. 2^nd Rst., Sec. 210: distinguishes between a completely integrated agreement (one adopted by the parties as a complete and exclusive statement of the terms of the agreement), and a less than completely integrated agreement.
        Incompleteness may be evident from “the face of a writing” or “by other writings…or it may be shown by any relevant evidence, oral or written, that an apparently complete writing never became fully effective, or that it was modified after initial adoption.”
      2. 2^nd Rst., Sec. 213, Comment b: “Whether a binding agreement is completely integrated or partially integrated, it [the agreement] supercedes inconsistent terms of prior agreements.”
        Comment c: Proof of additional terms may be shown if the agreement is only partially integrated, BUT proof of additional terms may not be shown if the agreement is completely integrated.
      3. It is important whether extrinsic evidence is being used to contradict the expressed terms of the contract–this is NOT allowed.
      4. Parol E. R.: applies to both written and oral extrinsic evidence; if the parties intend the final agreement to be the integrated writing, the Parol Evidence Rule will apply. If it’s completely integrated, you can’t introduce terms that would add to the contract. If it’s partially integrated, you CAN introduce terms that would add to the contract.
        Whether agreement is completely integrated depends on the intent of the parties. How to determine?
        Four corners of the document.
        Use extrinsic evidence to determine intent of the parties.
    4. Result: Parol evidence rule prevents extrinsic evidence of the Π’s reason for including the clause allowing them to deny the well usage to subsequent landowners. Ruled for Δ.
  5. Parol Evidence is Allowed in Interpreting Terms that Aren’t Clear
    1. The fact that an essential term is omitted may indicate that the agreement is not integrated or that there is partial rather than complete integration. Restatement 2d §204.
    2. Where the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition. Restatement 2d §217.
    3. The term must not be contradictory to a term in the written document. A test in the §2-201 official comment is “if the additional terms are such that, if agreed upon, they would certainly have been included in the document tin the view of the court, then evidence of their alleged making must be kept from the trier of fact.”
  6. Masterson v. Sine
    1. Facts: Π sells his interest in a TIC to a relative with the option to repurchase it later for the same price as given. Π then goes into bankruptcy. Π’s trustee sues his relative to enforce the option.
    2. Analysis: This case is distinguishable from Bailey: Traynor puts more emphasis on the intention of the parties, outside the four corners of the writing, whereas in Bailey the court looks to the language of the contract first to discern intention. Also, Bailey was an “arm’s length” transaction. Bailey’s contract had an integration/merger clause, as well (that the parties intended the document to be a full and complete statement of their agreement). The language of a deed is generally standard, and although it would be easy to modify the deed, one might not think to do so; whereas in Bailey, it was a contract from scratch. Also in Bailey, there are other terms in the contract that give indications as to how the parties want the contract handled in terms of their property rights.
    3. 2^nd Rst., Sec. 240(1)(b): permits proof of a collateral agreement if it is “such an agreement as might naturally be made as a separate agreement by parties similarly situated.”
      1. UCC: proof of collateral agreement should be admitted unless the “additional terms are such that, if agreed upon, they would certainly have been included in the document.”
        Under these standards, Traynor holds extrinsic evidence re: assignability should be admitted
        Writing was not completely integrated; the deed does not explicitly provide in the language of the writing that it contains the complete agreement, and the deed is silent on the question of assignability; the case is not one where the parties “would certainly” have included the collateral agreement about assignability in the deed, and thus extrinsic evidence of its existence should be admitted.
    4. Result: Parol evidence was allowed to determine what was meant by the unclear terms in the written contract.
    5. IN CALIFORNIA, the parol evidence rule was greatly limited by this ruling.
  7. Note: The UCC Parol Evidence Rule
    1. “Consistent”. The UCC’s parol evidence rule is § 2-202.
      1. Analysis:
        “A writing intended by the parties as a final expression of their agreement”; a trial judge will determine whether such a writing exists. If yes, then
        The writing “may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement by may be explained or supplemented” by two sorts of parol information:
        “by course of performance, course of dealing, or usage of trade”, which the UCC treats as always admissible (although interpretive preference is given to the express terms of the agreement)
        “by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.” Admissible only after a finding that the writing is not “a complete and exclusive statement”
        If not a “complete and exclusive statement”, then admissible only if it tends to establish “consistent additional terms”
        What is consistent? “To be inconsistent the term must contradict or negate a term of the writing. A term or condition which has a lesser effect is provable.”
      2. Alternative theories:
        “intended by the parties as a final expression of their agreement with respect to such terms as are included therein.”
        Even an integrated document may be subject to an oral condition that forestalls its enforceability, and parol evidence is admissible to prove that condition.
      3. “Certainly… Included”
        “If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact.” § 2-202, Comment 3. This test is not clear.
  8. Thompson v. Estate of Coffield
    1. Facts: Δ sold his land to Π retaining royalties for coal found under current “valid, recorded leases.” However, none of the current leases had been recorded. Δ urges that reformation of the deed is required because the deed did not conform to the negotiations, intent, and knowledge of the parties.
    2. Analysis: Reformation is a remedy to make a written contract conform to the antecedent expressions on which the parties based their agreement, and insofar as the written document differs from these antecedent agreements, it will be reformed. If there’s been fraud, mistake or an accident, reformation allows for the parties to go back and reflect the “true” intent of the parties.
      1. To obtain reformation, Seller must show:
        An instrument representing an antecedent agreement which should be reformed,
        mutual mistake or mistake by one party and inequitable conduct on the part of the other, which results in an instrument that does not reflect what either party intended, and
        proof of these elements by clear and convincing evidence.
      2. In an action for reformation of a contract, “parol evidence is admissible to show the parties’ intent and a mutual mistake(or mistake by one party + inequitable conduct by the other)
      3. The trial court incorrectly excluded all extrinsic evidence relating to the prior discussions or agreements and court proceedings between the parties–regardless of whether evidence is conflicting, it should be considered when the equitable remedy of reformation is sought.
    3. Result: the case was remanded to determine what the true intent of the parties was. Parol evidence will be allowed.
  9. Bottom Line:
    1. Is there an integrated agreement?
    2. NO: Then Jury can hear the evidence
    3. YES –>
      1. Does the oral term directly contradict the written agreement?
      2. YES: Then Jury can NOT hear the evidence
      3. NO –>
        Would the oral term naturally be omitted from (or is it in reasonable harmony with) the written agreement?
        YES: Then Jury can hear the evidence
        NO: Then Jury can NOT hear the evidence

The Contents of the Contract : The Parol Evidence Rule

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