The parol evidence rule is a rule applicable to contracts. The word “parol” means “oral,” and the parol evidence rule provides that oral testimony concerning the meaning of provisions in a contract is inadmissible if it would change the agreement made by the parties. The parol evidence rule applies to both oral and written contracts.
- The Final Expression of the Parties’ Agreement.
The parol evidence rule prohibits testimony that would add to, vary or contradict the terms of a contract if the terms of the contract were intended by the parties to be the final expression of their agreement on the terms set forth in the contract. If the contract did not specifically so provide, the court will admit testimony on the issue of whether the parties intended the terms to be the final expression of their agreement. If it were determined that the contract was not intended to be the parties’ final expression, then the parol evidence rule would not prohibit testimony concerning other terms the parties agreed to on the same subject set forth in the parties’ original contract.
- The Subjects Covered by the Contract.
Another aspect of the parol evidence rule concerns the subject or subjects of the parties’ agreement. No matter how final the expression of the parties’ agreement, the parol evidence rule does not prohibit testimony concerning agreements between the parties on subjects not covered by the agreement in question. Oftentimes, parties enter into multiple contracts with one another, each one dealing with a different subject, and the parol evidence rule was not intended to preclude evidence of such dealings.
- The Intent of the Parties.
The parol evidence rule precludes introduction of evidence that would add to or vary the terms of a contract, only if the parties intended the contract to be a final expression of their agreement on the subjects covered by the contract. The court or jury may consider several factors in determining whether the contract was intended by the parties to be a final expression of their agreement on the subject(s) covered by the agreement.
One such factor would be the words the parties used and whether the provisions of the agreement appear to be incomplete, in that they do not include terms one would expect to see in the contract based on the type of contract in question. In one case, an employer and employee both signed a written employment agreement, but the document made no mention of the employee’s salary or the conditions under which he would be continued to be employed, if any. Since typical employment contracts either specify a duration or say they are “at will” and virtually always spell out the employee’s compensation, oral testimony was permitted on those subjects.
Another factor would be whether the agreement, especially if in writing, contained an “integration clause.” An integration clause will typically state that it is the complete and final agreement of the parties and that it replaces any and all prior agreements or understandings of the parties. Such an integration clause makes it pretty clear what the parties’ intentions are.
Other factors would be whether the alleged oral agreement contradicts the terms of the earlier written contract, whether the terms of the alleged oral agreement are the type that would typically be set forth in a separation agreement, and whether admission of evidence of the alleged oral agreement would be confusing or misleading to the jury.
- The Complete Expression of the Parties’ Agreement.
The parol evidence applies only if the contract in question is intended by the parties to not only be the final expression of their agreement, but the complete expression of their agreement. The parties may intend that the terms in their contract not be added to, varied or contradicted, in which case, it would be the final expression of their agreement on those terms. But what if the parties forgot to include one or more other provisions important to them, and later realized that fact. A judge or jury would be permitted to consider testimony that the parties later agreed to those additional provisions, so long as it was not clear that the parties’ intent was that the original contract be the complete expression of their agreement.
- Parol Evidence to Explain the meaning of the Terms Used.
Parol evidence will also be permitted to explain the meaning of the words used in the parties’ agreement, even if it is determined that the terms of the agreement were intended by the parties to be a final and complete expression of their agreement. That is because an explanation of the meaning of the words used is not an attempt to add to, vary or contradict the terms of the contract. In determining what the words used mean, evidence may be submitted of prior course of dealings between the parties on the same or similar subjects, usage within the trade or industry in question, and the course of the parties’ performance, either with respect to the contract in question, or prior contracts between the parties.
- The Effect of Fraud or Mistake
Unfortunately, it is not uncommon for a party to enter into a contract based on representations made to him by the other party, which turn out to be false or incorrect. A party may be induced to enter into the contract based on the other party’s fraud, a civil wrong known as a tort, or on a mistaken belief as to factors material to the making of the contract.
If one is induced to enter into a contract based on misrepresentations made by the other party which are extrinsic to the contract, the party defrauded may seek rescission. In a rescission, the contract is terminated and the parties are returned to the position they were in before they entered into the contract. Similarly, if both parties are mistaken concerning a fact material to the contract, or if one party is mistaken, and the other party wrongfully caused the mistake, the mistaken party is entitled to rescission of the contract.
The parol evidence rule does not bar evidence that one party induced the other to enter into the contract based on material misrepresentations, or based on either a mutual or unilateral mistake of fact. That is because the party seeking rescission in either case does not seek to change the terms of the contract; rather, he seeks to cancel the contract based on other factors.
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