Kisabeth’s Contracts II Outline (Summer 2015)
The Parole Evidence Rule
A. What is the Parol Evidence Rule (PER)? At a minimum, it says that a document intended by the parties to be the final written expression of their agreement (i.e. it is integrated) may not be contradicted by prior or contemporaneous statements, agreements, negotiations, (i.e. extrinsic evidence), whether oral or written.
B. How the rule applies: Before signing a written agreement, the parties typically engage in preliminary oral negotiations. Furthermore, they may exchange pieces of paper (e.g. Letters, lists of items for discussion, etc.) that are not intended to be Ks in themselves. When the written K is finally signed, it may fail to include any treatment of some of the issues raised in these preliminary oral discussions or written documents, or it may deal with these issues in a way that is different from their treatment in the earlier discussions. When this occurs, to what extent may one party later try to prove in court that these earlier oral or written discussions are part of the K, despite their absence from the writing?
Effect of the rule: the “PER,” whose precise formulation varies from one authority to another, attempts to answer this question. In its more strict forms, the PER bars all evidence of certain preliminary agreements that are not contained in the final writing, even though this evidence might persuasively establish that the preliminary agreement did in fact take place and that the parties intended it to remain part of their deal despite its absence from the writing.
When PER does not apply à Evidence is admissible
Total and Partial Integration
A. The concept of “integration”: a written document does not always represent a deal that the parties consider final. The writing may, for instance, be intended only as a tentative draft of their agreement. But if the parties do intend a document to represent the final expression of their agreement, the document is said to be an “integration” of their agreement. The PER applies, as we shall see, only to documents which are integrations, i.e. final expressions of agreement.
B. “Partial” vs. “total” integrations: once it is determined that a document is an integration (i.e. a final expression of agreement), it must be determined whether the parties intended that integration to contain all of the details of their agreement, or only some of these details. If the document is intended only as a memorandum of the agreement, it may state only that most important details, and leave the others to the parties’ recollection.
Unintegrated — The document is not the final expression of the parties, but merely reflects preliminary negotiations. E.g. a “Draft” document.
What result? The PER does not apply at all.
Partial Integration — The document is not intended by the parties to include all details of their agreement.
What result? The document can’t be contradicted, but may be supplemented by consistent, additional terms (“CATs”)
Total Integration — The document is the total and complete written statement of the parties.
What result? The writing can’t be contradicted by extrinsic evidence; neither can it be supplemented by “CATs”
C. Statement of the Parol Evidence Rule: having defined the concepts of “partial integration” and “total integration,” we are now ready to state the PER. The rule has, in effect, two parts, one dealing with partial integrations and the other with total integrations. The rule provides as follows:
Partial integration: when a writing is a partial integration, no evidence of prior or contemporaneous agreements or negotiations (oral or written) may be admitted if this evidence would contradict a term of the writing.
Total integration: when a document is a total integration, no evidence of prior or contemporaneous agreements or negotiations (oral or written) may be admitted when would either contradict or even add to the writing.
Summary of rule: in summary, the PER provides that the evidence of prior agreement:
– May never be admitted to contradict an integrated writing and
– May furthermore not even supplement an integration that is intended to be complete.
Approaching a PER problem
Is the K in writing? (not in writing PER does not apply)
Do any of the 5 exceptions apply?
Evidence on whether the writing is integrated
Statements/agreements subsequent to the writing
Evidence to interpret a writing
Evidence to show that a condition to formation of the K exists
Evidence to show matters of avoidance exists (i.e. fraud, mistake duress, etc.)
ü The PER doesn’t apply to, or exclude the above information àevidence is admissible
Is it a final statement of the parties (i.e. integrated; was it intended to be the final statement)?
Is the final writing a TOTAL or PARTIAL integration?
TOTAL: Means every term of the final contract is in the writing. (if so, can’t contradict or supplement with CATs)
PARTIAL: means every term of the final contract is not in the writing. (If so, can’t contradict, but may supplement with CATs “Consistent Additional Terms”)
Example of (e): Avoidance
· After numerous meetings and discussions, Buyer buys an apartment building from Seller. The K of sale contains a standard “merger clause reciting that the K constitutes the sole agreement between the parties. Buyer later discovers that Seller has lied about the profitability of the property, and sues to rescind the deal. The PER will not prevent Buyer from showing that Seller made fraudulent misrepresentations to induce him to enter into the K.
For two years World Wide Widgets (WWW) negotiated for the construction and purchase of a new computer system from MegaHard Computers, with teams of lawyers bargaining heatedly over the K terms. The K was finally signed by the 2 parties and the new system designed and installed. 2 days later the president of WWW cancelled the purchase, saying that the system was unsatisfactory and that, in addition to all the terms of the written K, the parties had an oral understanding that WWW could get out of the deal at any time if it didn’t like the way the computer system was functioning. You are the trial judge hearing the lawsuit that arose out of this. Will you allow in evidence of this oral understanding? Answer:
a. Is the K in writing? (if not in writing PER does not apply). Yes
b. Do any of the 5 exceptions apply? No
c. Is it a final statement of the parties (i.e. integrated)? Yes, based on the facts “teams of lawyers bargaining heatedly”
d. Is the final writing a TOTAL or PARTIAL integration? Total integra
to contradict) the writing
Contemporaneous writing: If an ancillary writing is signed at the same time a formal document is signed, the ancillary document will be treated as part of the writing and will thus not be subject to the PER. In other words, the writings will be treated as if they formed one document and everything in them will be considered by the court in construing the K.
Subsequent agreements: it is essential to remember that the parol evidence rule never bars consideration of subsequent oral agreements. That is, a written K may always be modified after its execution, by an oral agreement.
No-oral-modification clauses: of course, the parties often put into their writing a “no oral modification” (NOM) clause. As the name implies, a NOM clause says that the writing cannot be modified except via an amendment signed by both parties.
– Enforceability, but subject to waiver: Courts typically enforce NOM clauses, holding that where such a clause exists, a true “modification” or amendment to the writing cannot be made except by another signed writing. However, the practical effect of NOM clauses is frequently weakened by courts’ use of the doctrine of “waiver” – the K is not modified by a later oral agreement, but A is frequently held to have waived the benefits of the NOM clause by inducing B to rely on A’s oral statements that some provision of the K won’t be insisted upon.
Change orders in construction Ks: this principle is frequently illustrated in construction Ks. Such Ks generally contain a type of NOM clause inserted for the owner’s benefit, providing that no request for extra work will be effective unless it is made in writing. Yet this kind of clause is often ineffective because of the waiver doctrine.
· Ex. Owner and Contractor have construction K with clause stating “no extra work will be effective unless in writing and signed by Owner.” Owner and Contractor make oral modification to K. Contractor performs and Owner refuses to pay for extra work claiming it was not in writing. Answer: If the court believes that this conversation happened, the court is likely to hold that Owner’s oral statement constituted a waiver by him of the benefits of the NOM clause, so Owner will have to pay the agreed-upon price.
Explicit modification required: but, for a “no oral modification” clause to be rendered ineffective, it is usually required that something more occur than a mere oral agreement to overlook it. For a waiver of the no oral modifications clause to be effective, the party trying to escape from the clause must generally show that she relied, i.e., that she materially changed her position in reliance upon the waiver.
