7.3 Parol Evidence Rule

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

7.3 PAROL EVIDENCE RULE

7.301 In General. Determining whether a beneficiary is intended or incidental often involves the threshold question of whether extrinsic parol evidence beyond the "four corners" of the document involved may be considered. For years, the cases failed to indicate whether Virginia was a four corners-only jurisdiction ⁴⁶ or to suggest any principled approach in handling this issue. While the parol evidence rule was perhaps but an underlying current in earlier cases, the Virginia Supreme Court has made it clear that the parol evidence rule controls this issue—even in the third-party beneficiary context. ⁴⁷

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7.302 Applicability of the Parol Evidence Rule. The starting point of the analysis has always been the contract documents themselves. ⁴⁸ If the parties' intent to confer a benefit on a third party can be clearly discerned from the contract, the court will not look to extrinsic evidence. For example, in Cobert v. Home Owners Warranty Corp., ⁴⁹ home buyers brought suit as third-party beneficiaries under "Insurance/Warranty Documents" entered into between a builder, a home warranty company, and a home warranty insurer seeking to recover for structural, fixture, and other defects in the buyers' new home. Pointing to language in the contract documents, the court held that the builder, warrantor, and insurer "clearly and definitely intended to confer a benefit upon the [buyers]." ⁵⁰ For example, the insuring clause of the policy agreed to insure against loss resulting from "'Builder Default under the Home Warranty' and from 'Major Structural Defects' of the Home which first occur after expiration of the Home Warranty and before the termination of this Policy." ⁵¹ The court also pointed out that the policy's provisions contained the option of payment to the purchaser. Finally, the court found the term "Purchaser," defined in the policy as "a beneficiary of the Insurance Coverage provided in this Policy," to be the "clincher" binding the contracting parties. ⁵²

By contrast, in Century Indemnity Co. v. Esso Standard Oil Co., ⁵³ the court held that where the contract between a contractor and city-obligee required that the contractor post bond, and where the language of the bond was clear that the obligee was the only party intended to benefit thereunder,

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a materialman who had not been paid by the contractor could not recover on the bond against the surety as a third-party beneficiary. The court found that although the bond incorporated the contracting documents by reference, when read together, the contract and bond contained nothing suggesting that the surety assumed any obligation to third parties when the bond expressly limited its liability. ⁵⁴

More recently, in Flowers v. Richardson, ⁵⁵ the Circuit Court of Carroll County held that where the construction contract between a father and the representatives of a general contractor did not reference or imply that the construction of a house was for the father's son, the son was not an intended third-party beneficiary to the contract. The court reasoned that the intent necessary to create a third-party beneficiary "must be determined from the 'four corners' of the contract," and that because the son was not mentioned "and there [was] absolutely no language in the contract which would lead one to believe that anyone was intended to be an intended third party beneficiary," the son was not a third-party beneficiary and did not have standing to bring the action. ⁵⁶

7.303 Application in Various Contexts. If the contract itself does not unambiguously establish the parties' intentions concerning beneficiaries, Virginia's courts will look to extrinsic evidence to determine whether the contracting parties clearly and definitely intended to confer a benefit on a third party. ⁵⁷ In Forbes v. Schaefer, ⁵⁸ for example, the plaintiff lot owners

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who had erected private residences sued to halt development of multi-family dwellings on an adjacent parcel at Bryce Mountain Resort, alleging, among other things, that they, as third-party beneficiaries, had a right to enforce certain special covenants that they claimed governed the parcel under a deed between the parcel owner's predecessor in interest and the resort. The plaintiffs claimed that even though the resort released these covenants and therefore could not enforce them, the covenants created rights in them as unnamed third parties that the release failed to extinguish. ⁵⁹

In rejecting this claim, the court looked to the trial testimony, noting that it showed that the resort originally entered into the special covenants to prevent competition if a hotel or high rise were developed on the parcel, thereby protecting its own interests and only incidentally benefitting the lot owners. Because they were mere incidental beneficiaries, the lot owners had no right to enforce the provisions of...