4.3 The Parol Evidence Rule

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

4.3 THE PAROL EVIDENCE RULE

4.301 In General. "'The parol evidence rule is a time-honored fixture in the law of this Commonwealth'" ¹⁶³ that "developed at common law as a principle of contract interpretation," ¹⁶⁴ and that "'has nowhere been more strictly adhered to in its integrity than in Virginia.'" ¹⁶⁵ The parol evidence rule provides that evidence of prior or contemporaneous oral negotiations is generally not admissible to alter, contradict, or explain the terms of a written instrument, provided the document is complete, unambiguous, and unconditional. ¹⁶⁶ It is "not a rule of evidence subject to waiver" but "a matter of

[Page 130]

substantive law." ¹⁶⁷ When the parties set out the terms of their agreement in a clear and explicit writing, the document is the sole memorial of the contract and the sole evidence of the agreement. ¹⁶⁸ Since Virginia follows the plain meaning rule, ¹⁶⁹ if the meaning of an agreement is plain, and it contains no ambiguity, it must be given effect accordingly. ¹⁷⁰ The rule is strictly adhered to in Virginia. ¹⁷¹ Nevertheless, "[t]he parol evidence rule does not prohibit

[Page 131]

introduction of evidence of oral or written agreements made subsequent to the execution of a written agreement." ¹⁷²

In Utsch v. Utsch, ¹⁷³ the court unanimously agreed that if there were no parol evidence rule, "'no lawyer would be safe in advising upon the construction of a written instrument, nor any party in taking under it; for the ablest advice might be controlled and the clearest title undermined, if, at some future period, parol evidence of the particular meaning which the party affixed to his words, or of his secret intention in making the instrument, or of the objects he meant to take benefit under it, might be set up to contradict or vary the plain language of the instrument itself.'"

A panel of the Fourth Circuit has confirmed that while contract interpretation issues are generally reviewed de novo, when a trial court has properly reviewed parol evidence to resolve an ambiguity, appellate review is conducted under the more deferential plain error standard. ¹⁷⁴

4.302 Parties to Which the Rule Applies. The parol evidence rule applies only to controversies between the parties to the contract. It does not apply to a controversy between third parties or to a controversy between a third party and one of the parties to the contract. This is because the third party is not a party to the contract and, therefore, is not bound by its terms and is free to vary or contradict it. ¹⁷⁵

[Page 132]

There is one circumstance, however, in which the rule does apply to third parties: where the third party is a third-party beneficiary to the contract. ¹⁷⁶ They are not deemed "strangers" to an instrument and, like any party to an agreement, are entitled to enforce its terms and are subject to the defenses arising from that agreement. ¹⁷⁷

4.303 Exceptions to the Parol Evidence Rule.

A. In General. Virginia recognizes several exceptions to the parol evidence rule. ¹⁷⁸ These exceptions allow parol evidence to add to or explain the written contract or to establish a separate additional agreement. However, these exceptions never allow parol evidence to contradict the contract in question. ¹⁷⁹ The exceptions are related and courts may not always be explicit about which exception they are applying.

B. Ambiguity. If a court finds a contract ambiguous, it may admit parol evidence to determine the intent of the parties. ¹⁸⁰ An ambiguity

[Page 133]

exists when language may be understood in more than one way or refers to two or more things at the same time. ¹⁸¹ However, a document is not ambiguous simply because the parties disagree about the meaning of the language in their agreement. ¹⁸² "The construction of an ambiguous contract is a matter

[Page 134]

submitted to the trier of fact, who must examine the extrinsic evidence to determine the intention of the parties." ¹⁸³

Whether an ambiguity is latent or patent may determine whether parol evidence is admissible in a case. The Virginia Supreme Court has defined a latent ambiguity as one that is not self-evident from the contract ¹⁸⁴ or as a term that, upon application to external objects, is found to fit two or more of them. ¹⁸⁵ Parol evidence may be considered to resolve a latent ambiguity. ¹⁸⁶ Thus, when a contract called for the general contractor to pay his subcontractors after the contractor "ha[d] received payment from the owner," and the contractor was never paid because of the owner's insolvency, the court found a latent ambiguity. ¹⁸⁷ While the phrase in question was clear at the time the contract was made, because of subsequently discovered or developed facts, it could reasonably be interpreted in either of two ways. Where a contract guaranteed the payment of an amount owing under a purchase order, but evidence outside the contract showed two applicable purchase orders, there was a latent ambiguity that would permit the introduction of parol evidence. ¹⁸⁸

On the other hand, "parol evidence cannot be considered to explain a patent ambiguity, that is, to supply the understanding that the parties could have reasonably been expected to reach where the language of the instrument reflects no understanding." ¹⁸⁹ In Galloway Corp. v. S.B. Ballard Construction Co., ¹⁹⁰ the court referred to the latent ambiguity in that case as

[Page 135]

"not patently evident on the face of the contract," implying that a patent ambiguity is obvious on the face of the contract. ¹⁹¹

In Aetna Casualty & Surety Co. v. Fireguard Corp., ¹⁹² the contract at issue named two different people as the owner in two different sections of the contract. The court held that there was an ambiguity with respect to the identification of the owner and parol evidence should have been allowed. ¹⁹³ The court did not mention latent or patent, and the question remained as to why parol evidence would be admitted when the ambiguity seemed to appear on the face of the contract and the language reflected no understanding as to the identification of the owner.

A similar confusion arises in Renner Plumbing, Heating & Air Conditioning, Inc. v. Renner. ¹⁹⁴ In construing an employment agreement, the court found that the terms "advisor" and "bonuses" were "patently ambiguous," and the contract was incomplete without definitions of the terms. In spite of this patent ambiguity, parol evidence was admissible. ¹⁹⁵ Apparently, the court also relied on the partial integration doctrine, discussed below.

C. Partial Integration Doctrine. The partial integration doctrine is a well recognized exception to the parol evidence rule. "Where the entire agreement has not been reduced to writing, parol evidence is admissible, not to contradict or vary its terms but to show additional independent facts contemporaneously agreed upon, in order to establish the entire contract between the parties." ¹⁹⁶ In Baysden v. Roche, ¹⁹⁷ the Virginia Supreme Court applied the partial integration doctrine to a purely oral contract. The plaintiff had borrowed $50,000 from a bank and advanced these funds to the defendant, who had orally agreed to make all payments when due and to pay

[Page 136]

plaintiff an additional $5,000 per year for up to four years. The plaintiff obtained two $25,000 checks, which he endorsed at the defendant's request to the defendant's business. Eight interest payments were made before the defendant declared bankruptcy. The plaintiff paid the loan back himself and then sued the defendant to recover that amount. The trial court granted the defendant's motion to strike at the conclusion of the plaintiff's case, applying the parol evidence rule to find that the checks as endorsed were evidence of a contract between the plaintiff and the defendant's business, not between the plaintiff and the defendant. The checks were inadmissible because the plaintiff was using them to vary the terms of his contract with the defendant's business. The Virginia Supreme Court reversed, holding that because the plaintiff asserted the existence of an oral agreement, the checks were admissible to show the existence of that oral contract without going to the terms of the agreement itself.

In Jim Carpenter Co. v. Potts, ¹⁹⁸ the contract in dispute was a deed of trust that specifically provided for the partial release of individual lots but did not provide the conditions to be satisfied to obtain the release. The court held that providing for a release without providing the terms of the release indicated that the writing was incomplete, and parol evidence was admissible to explain the terms of the release. ¹⁹⁹

In Smith v. Smith, ²⁰⁰ a property settlement in a divorce case stated that taxes assessed on the income of the parties were to be determined by the "allocation method," which had been applied in previous years by the parties' tax return preparer. However, the specifics of the "allocation method" were not described in the agreement. The Court of Appeals held that the entire agreement had not been reduced to writing, and parol evidence was admissible to show additional facts to establish the entire contract. ²⁰¹

D. Collateral Contract Doctrine. The collateral contract doctrine is similar in many respects to the partial integration doctrine. ²⁰² "Under this doctrine the parol evidence rule does not exclude parol proof of a prior or contemporaneous oral agreement that is independent of, collateral to and not

[Page 137]

inconsistent with the written contract, and which would not ordinarily be expected to be embodied in the writing." ²⁰³ In High Knob, Inc. v. Allen, ²⁰⁴ Allen entered into an agreement to purchase a lot from High Knob which was silent as to how he would receive water for his home. Allen sought to prove that he and High Knob had entered into an oral agreement with respect to the water. The court held that parol evidence was admissible because (i) additional consideration was to be paid for the water; (ii) this was a subject that...