Franchising and the Parol Evidence Rule

• Date: 01 September 2013
• Published date: 01 September 2013
• DOI: http://doi.org/10.1111/ablj.12016

Franchising and the Parol

Evidence Rule

Robert W. Emerson*

INTRODUCTION

The parol evidence rule, though a venerable concept in contract law,

remains a source of controversy.1This key tenet of contract interpretation

“bars extrinsic terms agreed upon prior to or at the same time as, a total

integration regardless of whether the term is written or oral.”2In other

words, if the parties intended the document to encompass the entire

agreement, evidence of prior or contemporaneous communications—in

other words, parol evidence—will not be permitted to alter the terms of

the contract, unless the language is ambiguous or some other exception is

present.3

*B.A., Sewanee: University of the South; J.D., Harvard Law School. Huber Hurst Professor

of Business Law, University of Florida.

1By consensus of legal historians (see, for example, Hila Keren, Textual Harassment: A New

Historicist Reappraisal of the Parol Evidence Rule with Gender in Mind,13AM.U.J.GENDER SOC.

POL’Y& L. 251, 264 (2005)), the parol evidence rule has been traced to The Countess of

Rutland’s Case, 77 Eng. Rep. 89 (1604), in which the great British jurist Sir Edward Coke’s

report of the case included this most influential passage:

[I]t would be inconvenient, that matters in writing made by advice and on consideration,

and which finally import the certain truth of the agreement of the parties should be

controlled by averment of the parties to be proved to the incertain [sic] testimony of

slippery memory. And it would be dangerous to purchasers and farmers, and all others

in such cases, if such nude averments against matter in writing should be admitted.

Id. at 90. Lord Coke preferred to avoid “obscurity, ambiguity, jeopardy, novelty, and prolix-

ity” in favor of a rigid interpretation of “bright-line rules.” ALLEN D. BOYER,SIR EDWARD COKE

AND THE ELIZABETHAN AGE 121 (2003).

2JOSEPH M. PERILLO,CALAMARI AND PERILLO ON CONTRACTS 108 (6th ed. 2009).

3See BLACK’SLAW DICTIONARY 1227 (9th ed. 2009) (defining the parol evidence rule as “the

common-law principle that a writing intended by the parties to be a final embodiment of their

agreement cannot be modified by evidence of earlier or contemporaneous agreements that

might add to, vary, or contradict the writing”). The theories advanced to justify the rule are

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American Business Law Journal

Volume 50, Issue 3, 659–728, Fall 2013

© 2013 The Author

American Business Law Journal © 2013 Academy of Legal Studies in Business

659

The Restatement (Second) Contracts outlines the parol evidence rule as

generally recognized at common law:

(1) A binding integrated agreement discharges prior agreements to the

extent that it is inconsistent with them.

(2) A binding completely integrated agreement discharges prior agree-

ments to the extent that they are within its scope.

(3) An integrated agreement that is not binding or that is voidable and

avoided does not discharge a prior agreement. But an integrated

agreement, even though not binding, may be effective to render inop-

erative a term which would have been part of the agreement if it had

not been integrated.4

The rule often presents practical challenges of contract interpreta-

tion.5On the one hand, presumably the vast majority of people who might

(1) “[i]f the parties intend[ed] the writing to be final and complete, they intend to supersede

their prior agreements[,]” (2) “sound policy requires that prior and contemporaneous oral

agreements are suspect” if not included in the writing, and (3) that “the writing deserves a

preferred status against potential perjury” regarding oral aspects of an alleged agreement.

JOHN D. CALAMARI &JOSEPH M. PERILLO,CONTRACTS 187 (3d ed. 1999). It should be noted that

Professor Corbin criticized this approach and any exclusion of extrinsic evidence offered to

prove the intent of the parties. According to Corbin, the dangers “of excluding all extrinsic

evidence on the ground that the express words are so ‘plain and clear’ that their meaning as

used by the parties must be determined solely by what is within the four corners of

the instrument” should be recognized by the courts. 5 ARTHUR LINTON CORBIN,CORBIN ON

CONTRACTS 34 (2012 Supp.).

4RESTATEMENT (SECOND)CONTRACTS § 213 (1981). For a recent summary of the parol evidence

rule, see Mark K. Glasser & Keith A. Rowley, On Parol: The Construction and Interpretation of

Written Agreements and the Roleof Extrinsic Evidence in Contract Litigation,49B

AYLOR L. REV. 657,

660 (1997), which states that

As a general rule, extrinsic evidence, whether written or oral, is not admissible to prove

either the intent of the parties to a contract or the meaning of contractual terms when

the parties have executed an unambiguous, fully-integrated (i.e., final and all-inclusive)

written agreement. The trial court may consider various types of extrinsic evidence,

however, in determining whether a particular agreement is fully integrated or ambigu-

ous, and even in choosing among rival interpretations of an agreement where ambiguity

is not present. If the trial court determines that an agreement is not fully integrated,

then the trier of fact may consider extrinsic proof that supplements it. If the trial court

determines that an agreement is ambiguous, then the trier of fact may consider extrinsic

proof of the parties’ contractual intent.

The fine distinctions here relate, in part, to “integration,” the superseding of other agree-

ments, and “merger,” the folding of previous agreements into the cur rent contract. See infra

note 11 (discussing integration and merger clauses).

5Professor Williston spoke of these challenges:

660 Vol. 50 / American Business Law Journal

voice an opinion on mendacity think that swindlers should not thrive. We

may be too cynical to believe in the truth of the childhood aphorism

“cheaters never prosper,” but we feel, often fervently, that it ought to be

so.6On the other hand, most people have learned, again at an early age,

that we should honor our promises; even if we make a foolish bargain, the

other side ordinarily has a right to its bargain from us.7These heuristics—

fraud is wrong; a “deal” is to be enforced—sometimes conflict, a problem

that often manifests in contract disputes involving franchises.8Repeatedly,

[A]s has been seen, the facially simple rule states that, absent fraud, mistake or other

invalidating cause, the parties’ final written integrating of their agreement may not be

varied, contradicted or supplemented by evidence of prior or contemporaneous oral

agreements, or prior written agreements. Beneath this facial simplicity, however, is, as

one federal court has declared, a “morass”: “[t]o even the most courageous Pickwickian,

the parol evidence rule must seem a treacherous bog in the field of contract law.

Interspersed in this quagmire are quicksand-like state court decisions, which appear

equitable in specific situations but remain perilous for legal precedent. Federal courts,

attempting to clarify, have sometimes but confused and compounded muddled inter-

pretation of the axiom.”

11 SAMUEL WILLISTON &RICHARD A. LORD,ATREATISE ON THE LAW OF CONTRACTS § 33:4 (4th ed.

1993 & Supp. 2011) (quoting Chase Manhattan Bank v. First Marion Bank, 437 F.2d 1040,

1045 (5th Cir. 1971)).

6As children’s author Dr.Seuss said in one of his early classics, where a highly improbable, but

morally satisfying outcome does occur for a 100 percent faithful elephant, “It should be, it

should be, it SHOULD be that way! Because Horton was faithful....Hemeant what he said

and said what he meant....”D

R.SEUSS (THEODOR SEUSS GEISEL), HORTON HATCHES THE EGG

(1940).

7Certainly, there are exceptions, such as mistake. See generally E. ALLAN FARNSWORTH,ALLEVI-

ATING MISTAKES:REVERSAL AND FORGIVENESS FOR FLAWED PERCEPTIONS (2004) (discussing how a

mistake may justify the reversal of a contract, and comparing to the role of mistakes in

forgiveness for crimes or torts). But, ordinarily the point holds: a contract binds the parties

to a bundle of rights and duties.

8In general, a franchise entails a continuing contractual relationship in which the franchisor

grants the franchisee a right to conduct business or sell products according to the franchisor’s

marketing plan and in conjunction with the franchisor’s trademark. See, e.g., N.J. STAT.ANN.

§ 56:10-3.a. (West 2013); WASH.REV.CODE ANN. § 19.100.010(6) (West 2013). Greater preci-

sion in defining the concept has proven to be a demanding challenge.

[T]he courts and commentators have had a great deal of difficulty in formulating

definitions for the terms “franchise” and “franchising”; a good deal of the problem

results from the fact that the term “franchise” has been used to designate an almost

infinite number of marketing systems. To a large extent, defining the term “franchise”

involves distinguishing between a “true franchise” and a mere distributorship arrange-

ment. As a general matter,it may be said that a franchise involves the licensing of a right

not only to market a particular service or product but to conduct all or most aspects of

a business under the tradename of the franchisor, while a distributorship merely

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