Parol Evidence Rule

Parol evidence specifically refers to oral testimony given in court, though the term is most commonly used in the context of contract law, where it refers to extraneous or superfluous evidence, such as an oral or written agreement that was not part of the original contract. The parol evidence rule states that once a written agreement has been signed by all of the parties, it cannot be changed by an oral agreement, except when fraud or a serious mistake is involved. To explore this concept, consider the following parol evidence rule definition.

Definition of Parol

Pronounced

Par-ohl

Noun

1. Something stated or declared by mouth

Adjective

2. Given by word of mouth, not contained in documents

Origin

1470-1480 Anglo-French parole (speech)

What is the Parol Evidence Rule

The parol evidence rule exists in common law for contract cases. It bars a party to a written contract from bringing up outside evidence that illustrates an ambiguity, seeks to clarify, or adds to the written terms of the agreement. The purpose behind this rule is that, as the parties went to the trouble to put their agreement in a single, written contract, evidence of past agreements or terms that are not in the written contract should not be considered in interpreting that contract. A common misbelief is that the parol evidence rule is a rule of evidence, but it is, in fact, a rule of contracts.

The actual text of the parol evidence rule states:

“Once the parties have reduced their agreement to a writing that they intend to contain the final and complete statement of their agreement, then evidence of terms that would supplement or contradict it are not admissible.”

This rule is not found in either federal or state statutes, as it exists in common law. That means that the parol evidence rule is based on prior decisions made by a higher court.

Essential Elements of a Contract

A contract is a legally binding document. If there is a disagreement, the court will interpret the contract solely by the written provisions it contains. The parol evidence rule does not allow the court to consider oral testimony of prior agreements, or alleged oral declarations made separately, and not included in the written contract. Because of this, it is important to ensure certain essential elements of a contract are included, and that the document contains every provision of the parties’ agreement.

The three essential elements of a contract include:

1. Offer – one party makes an offer, promising the other party something of value in exchange for something (goods, services, or promise to do something)
2. Acceptance – the second party accepts the terms offered by the first party
3. Consideration – there must be something of value for each party to the contract. This may be money, goods, services, or other thing valued by the parties

Exceptions to the Parol Evidence Rule

The parol evidence rule is intended to prevent a party to a contract from claiming there were verbal terms to the parties’ agreement that somehow never made it into the written contract. There are certain circumstances in which the court may allow parol evidence to be submitted in a case. Exceptions to the parol evidence rule include:

• Errors or defects in the written contract due to mistake, fraud, duress, or illegality
• The contract is ambiguous as to the parties’ intent
• There is some problem with the consideration
• There was a prior, valid agreement that was not described or referred to correctly in the written contract
• There is a related agreement that does not contradict or modify the main contract in question
• There was a condition that had to occur before the contract performance was due
• There was a subsequent modification to the terms of the contract

Example of incomplete contract:

Bob agreed to purchase a 2-acre lot from Sam for the amount of $200,000. The real estate purchase contract was completed and signed by both parties two months ago. When Bob attempts to obtain building permits, he discovers that the property is not zoned for commercial use, which upsets him because Sam expressly stated that the property had commercial zoning.

Bob files a civil lawsuit to have the contract voided because his sole purpose in purchasing the property was to build a strip mall. In court, Sam’s attorney argues that the transaction was complete, and the contract cannot be voided simply because Bob failed to make the proper checks into the property’s zoning before the purchase was complete. When Bob’s attorney argues that Sam had verbally represented the property as being commercially zoned, the parol evidence rule is brought up by the other party.

It becomes clear to the judge that the issue of zoning was discussed, but that it wasn’t specifically stated in the real estate purchase contract. In such a case, the judge may decide to allow evidence and testimony as to the parties’ understanding of the nature of the property, even though that fact is not included in the written contract.

Example Parol Evidence Rule Exception

Diane hires Superior Swimming Pools to install an in-ground pool in her backyard. After discussing what type of pool Diane wanted, the contractor prepared a contract, and the parties signed it. A few days later, while the hole was being dug, Diane decided she wanted more attractive glass border tiles, and she discussed the change with the contractor, who agreed.

When the pool was finished, Diane was disappointed to see that the glass border tiles had not been installed. She asked the contractor to remove the plain tiles and replace them with the glass tiles they had agreed would be installed. When he refused to do the extra work, Diane filed a lawsuit. At trial, the conversation about the glass tiles is brought up, and there is some question about whether the parol evidence rule bars any agreement made after the written agreement had been signed. In this example of parol evidence rule, the court is likely to allow evidence of the subsequent verbal agreement, as this is a common exception to the rule.

If, in the above situation, the discussion of the glass tiles had taken place before the written contract had been signed, but left out of the contract, Diane would be out of luck. It is assumed that any provisions discussed and agreed to prior to putting the agreement in writing would be included in the writing. The only exception to the rule is if an agreement was reached after the contract was signed.

Frequently Disputed Contracts Subject to the Parol Evidence Rule

In modern society, there exist certain contracts in which one party has all of the bargaining power, and the other party must either sign or walk away. These are referred to as “adhesion contracts.” Adhesion contracts are commonly used in businesses such as cable TV service, cell phone service, auto insurance contracts, and apartment lease contracts. The following are examples of frequently disputed contracts subject to the parol evidence rule:

• Cell Phone Contract – the customer service representative who is enrolling new customers to the company’s service tells the customer that he will be charged half of what his old company is charging him. When the bill comes, the customer realizes that he is only getting half off of his connectivity charge, which is a very small portion of his overall bill. The representatives statements are parol evidence.
• Health Club Contract – when a potential new customer expresses concern over the cost of membership vs. any benefit he may receive, the salesperson tells the customer that he can try it out, and cancel if he doesn’t like it. When the customer tries to cancel a couple of weeks later, he is told the contract is non-cancellable, and that any verbal representation that may have been made by the salesperson is not enforceable. (If the salesperson intentionally misled the customer regarding the terms of the contract, however, the customer may be able to have the contract rescinded.)
• Auto Sales Contract – although the car salesperson says the car is in better-than-new shape, the written contract states it is an “as-is” sale. Even if the salesperson made the car sound as though it had no mechanical problems, any discussion before signing the contract would not be admissible, unless it contained fraudulent statements.

Parol Evidence Rule in Sales Contracts

In certain types of sales contracts, between parties who regularly deal in sales transactions with one another, the court may consider parol evidence. When parties have a history of working together, doing business on a regular basis, or within an industry in which similar transactions and contracts are the norm, the court may consider other agreements between the parties that were made prior to, or at the same time as, the contract at hand. Such parol evidence may only be considered if it does not contradict the contract, but supplements it, or explains it.

The court may also consider evidence of the parties’ normal course of dealing with one another, and with similar customers, the industry standard course of conduct, or evidence of prior consistent additional terms that are not normally included in the written agreement. When the parties to a disputed contract have a history of dealing with one another, the court may consider that history to determine the intent or meaning of the contract.

The Parol Evidence Rule in Family Property Contract

In 1968, Dallas and Rebecca Masterson, who owned their family’s ranch, deeded the property to Dallas’ sister and her husband, reserving the right to buy the property back within 10 years. Before the 10-year time limit, Dallas filed bankruptcy, and the bankruptcy trustee brought an action to exercise the couple’s option to repurchase the property, for use in repaying their debts.

Dallas’ sister objected to the idea that the bankruptcy court could order the deed transferred to the trustee, and the property sold, as it was always the parties’ intent that the ranch remain in the possession of a Masterson family member. The couple argued that the option to repurchase the property was personal to the Mastersons, and could not be exercised by the bankruptcy trustee. The court disagreed, ordering that the trustee exercise the option to reacquire the property, citing ambiguity in the option provision, and denying the admission of parol evidence as to the parties’ intent.

Dallas’ sister appealed the court’s decision, leaving two questions for the appellate court to address:

1. In what circumstances should evidence of oral agreements be excluded; and
2. How the court should decide whether such an agreement is of a type that might naturally be made separately.

The appellate court ruled that the lower court should only exclude evidence of oral agreements made before, or at the time of, the agreement at hand if it is likely to mislead the court. It also ruled that, in making such a determination about a collateral oral agreement, the court should consider the actual relationship experience and dealings between the parties, and how they likely view the collateral agreement.

The appellate court ruled that the trial court should not have excluded parol evidence that the option to repurchase the property was personal to the Masterson family, and could not be assigned to another party. In this case, the agreement was a partial agreement, in that the family did not see a need to state in the deed that the property was to remain in the family, as that was always the family’s intent. The appellate court reversed the trial court’s decision, agreeing that the option on the property could not be assigned to the bankruptcy trustee.

Related Legal Terms and Issues

• Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
• Common Law – Law that is developed through decisions of higher courts, rather than statutes and regulations.
• Consideration – A benefit bargained for between parties to a contract; Recompense or payment.
• Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
• Duress – Threats, intimidation, or bullying intended to force someone to do something.
• Fraud – A false representation of fact, whether by words, conduct, or concealment, intended to deceive another.