CONTRACTS II
III. The Making of Agreements (cont’d from Fall 2000)
A. The Effects of Adopting a Writing—The Parol Evidence Rule
1. Introduction
a) The parol evidence rule is not actually a rule, but rather a substantive area of contract law governing what is allowed as admissible in a proceeding to determine exactly what was mutually assented to in the contract.
b) Rule applies to EXTRINSIC evidence—written modifications that follow either oral or written contracts.
2. Parol Evidence Rule (PER)—the goal is to determine the parties’ intentions—to what did they mutually assent?
3. General rule: parties are free to modify a contract
a) If original K includes a clause that requires any future modifications to be made in writing, the common law treats such clauses as ineffective.
i. Parties are implicitly, if not explicitly, modifying that clause as well by mutual assent when they make subsequent oral modifications.
b) Parties always have freedom of contract (and thus have the freedom to MODIFY their contracts) and may not restrict this freedom by K.
i. EXCEPTIONS
(1) Some states have statutes that are designed to give writings more sanctity and will give effect to clauses requiring written modifications
(2) UCC
c) Statute of Frauds may come into play for oral modifications.
i. Example: Original K to be Gaetke’s research assistant for 6 months; modification extends the term of employment to 18 months—the modification brings the contract under the Statute of Frauds. This modification is unenforceable if oral.
ii. Conversely, if an oral contract was originally for a performance which covered more than one year and was subsequently orally modified to cover a term of LESS than one year, the modification would be enforceable.
4. Application of the PER
a) PER applies when the last agreement between the parties is in writing.
i. If K1 is oral and the subsequent modification is oral (K2), there is no parol evidence rule issue.
ii. If K1 is written, and the modification is oral (K2), there is no PER issue.
iii. If K1 is oral and K2 is written, OR if K1 is written and K2 is written, there MAY be a PER issue.
b) Overly simplistic definition
i. When a written K is intended by the parties to be the final expression of their rights and duties relevant to a transaction, evidence of prior oral or written negotiations or agreements which add to or contradict the written K are not admissible.
ii. Application of the PER operates to exclude prior oral AND written agreements. PER does not exclude subsequent modifications (parties always have freedom of contract, unless the transaction falls within the UCC or if a state statute dictates otherwise).
iii. PER issue may arise when parties reach a “bare bones” agree
harge for it. Farmer A says $300. Farmer B says “It’s a deal.” Farmers sit down and enter a written lease that does not include mention of the tractor.
i. At trial, tenant attempts to prove the oral agreement re: the sale of the tractor. Landlord objects to this prior oral evidence because there was a writing that would preclude the introduction of this evidence [PER].
ii. PER does not apply when the agreement made prior to the written contract is legally distinct.
(1) Factors that show legal distinctiveness are:
(a) Separate consideration ($300 for tractor independent of lease terms),
(b) Distinct subject-matter of the contract (tractor vs. land)
(c) The writing does not have any term related to the separate subject-matter (land lease does not include a term re: the tractor).
Williston: “Two entirely distinct contracts each for separate consideration may be made at the same time and will be distinct legally.” There is no reason to believe that allowing evidence of the agreement re: the tractor will violate the intent of the parties to enter into the contract for the lease of the land.
