What's happening to the parol evidence rule? more holes in the dike.

• Author: Morris, Mark O.

Increasingly and alarmingly, parties face greater risks of losing their contractual bargains, no matter how unambiguous they may seem.

I SAY to-mah-toe; you say to-ma-toe. Do we have a meeting of the minds? Should a court hear evidence to understand what we mean by "tomato?"

It appears the same judicial trends that are making it easier and more lucrative to blame others in tort contexts now are invading the contractual arena to increase an unsatisfied party's chances of avoiding or altering unambiguous contractual obligations.

Sanctity of contract has been a hallmark of American commerce. One of the guardians of this sanctity has been the parol evidence rule, which was developed to prevent contracting parties from trying to offer evidence to vary the terms of an unambiguous contract. Unfortunately, creative lawyers have persuaded some courts to effectively abandon the rule. The result is creating uncertainty in contractual relationships, turning contract interpretation into a sophomoric exercise that undermines expectations of certainty.

CONTEXTUALISM V. TEXTUALISM

1. General

   The rule derives its names from the French word parole, meaning a spoken or an oral word. This term has become a misnomer, however, because the rule now refers not only to oral, but also to written evidence. In addition, commentators agree that the rule is not a rule of evidence because it does not deal with a proper method of proving a question of fact. Rather, it is a rule of substantive law that prohibits the admission of the fact itself.(1)

   The parol evidence rule is not a clean one-owner. More than a century ago, Professor Thayer, speaking to the complexity of the rule, said, "Few things in our law are darker than this, or fuller of subtle difficulties."(2) While the rule is subject to multiple interpretations and formulations, it generally prohibits the admission of extrinsic evidence that contradicts or supplements an integrated written agreement. The rule applies to evidence of prior negotiations and excludes any oral and written agreements made after the written contract was executed. Some commentators agree that the rule is also applicable to contemporaneous agreements.(3)

   Professor Corbin's formulation of the rule is:

   When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing.(4) Professor Williston, the principal drafter of the Restatement (First) of Contracts and the Uniform Sales Act, states the rule similarly:

   This rule requires, in the absence of fraud, duress, mutual mistake, or something of the kind, the exclusion of extrinsic evidence, oral or written, where the parties have reduced their agreement to an integrated writing.(5) The rationale for the Rule was explained as early as the 17th century by English Chief Justice Popham, who said:

   It 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 by the uncertain testimony of slippery memory.(6) B. Issues of Integration

   The first issue in applying the rule is to determine the scope of the written document-that is, whether the parties intended the writing at issue to be the final and complete expression of their agreement. If the parties did not intend to do so, the agreement is not integrated and the rule has no application. Once it is determined that the agreement is integrated, courts examine the parties' intent to decide whether integration is partial or complete.

   Complete integration occurs when parties intended the writing as a "complete and exclusive expression" of the agreement, and no terms can exist beyond those set in the written contract. Traditionally, in such a case neither party can introduce extrinsic evidence that contradicts the written contract. Under the textual, more traditional approach of contract interpretation advocated by Professor Williston, if a written contract appears on its face to be a complete expression of the agreement, the court will consider the writing to be completely integrated and will not permit parol evidence of additional or contradictory terms.(7)

   This approach is illustrated in Gianni v. R. Russel & Co.,(8) a 1924 case in which a tenant agreed in a written lease to operate a store and use the premises only for the sale of soft drinks and candy, and not for sale of tobacco. Later, the tenant alleged that his agreement not to sell tobacco was in consideration of an oral promise of the landlord to give the tenant the exclusive right to sell soft drinks in the building. The court considered the writing on its face and found it was completely integrated, reasoning that the contracting parties would ordinarily and naturally have included a promise for the exclusive sale of soft drinks, if that was were their intention.

   On the other side of the spectrum is Professor Corbin, who supported a contextual approach of contract interpretation. He believed that in determining integration courts should take into consideration all relevant circumstances, including evidence of prior negotiations. Thus, a court following Corbin's view would have considered all evidence surrounding the making of the lease in Gianni, including the alleged oral promise, and could have found that the lease was not completely integrated.

   Some commentators have noticed that Corbin's approach "undercuts the traditional parol evidence rule" because the very evidence whose admissibility is challenged "is admissible on the issue of whether there is a [complete] integration."(9) Precisely. And if Corbin's view were the law in all situations, parties to contracts would have much less incentive to integrate their agreements, knowing they could come in later to supplement the language with other evidence of their intent.

   Partial integration occurs when the parties intended the written contract "to be a final expression of the terms it contains, but not a complete expression of all the terms agreed upon--some terms remaining unwritten."(10) An example would be the following situation. A sends a letter offer to B which contains four provisions. B in the reply letter agrees to three provisions and makes a counteroffer regarding the fourth one. The parties orally agree to revise the fourth provision, but they do not discuss the first three provisions. A's offer would be partially integrated as regards the first three provisions.(11) If the court finds the written contract is only partially integrated, then it will allow the parties to introduce evidence that supplements, but does not contradict, the writing.

3. Issues of Contract Interpretation

   After determining the scope of the writing, courts turn to the interpretation of the language of the agreement. Courts usually allow the introduction of extrinsic evidence when the language of the written contract is ambiguous, but controversy arises when the writing appears to be unambiguous on its face.(12) Under Williston's view, the court will admit evidence of prior negotiations only after first finding as a matter of law that the language of the writing is ambiguous. On the other hand, Corbin thought that the court should admit all relevant evidence without first finding facial ambiguity in the writing.

   Williston believed that a judge should follow the "common or normal meaning" of the language of the writing in searching for the intent of the parties. For him, the language of the writing was the only admissible evidence of the parties' intent. Therefore, if the judge, using common sense and general canons of contract interpretation, finds that the language of the writing is unambiguous as a matter of law, the inquiry of extraneous evidence stops, and Williston would exclude what the parties subjectively believed the written contract means. If the judge finds ambiguity, then evidence of prior negotiations would be admitted to resolve the ambiguity.(13)

   Contrary to Williston, Corbin looks outside the written agreement to understand the intent of the parties. He believed that the writing itself could not be used as the sole evidence of the parties' intent. His approach has been adopted by the Restatement (Second) of Contracts.(14)

   In Corbin's view, there is no need to make a preliminary finding of ambiguity before the judge considers extrinsic evidence. Even if the integrated writing is unambiguous, the court may consider evidence surrounding the agreement to determine its relevance to the parties' intent. That evidence includes evidence of subjective intention, of prior negotiations, and what the parties may have said to each other about the meaning of the writing.

   After purportedly ascertaining the meaning of the writing, the court applies the parol evidence rule to exclude from the fact finder's consideration only the evidence that contradicts or varies the meaning of the agreement. According to Corbin, one may not determine whether a writing can be supplemented or contradicted without knowing the meaning of the writing.(15)

   In response, some commentators have noted "a certain circularity of reasoning in this contention; the content of the contract to be interpreted cannot be known until the parol evidence rule has been consulted."(16) It is doubtful that one can truly determine whether a proffered testimony contradicts a writing when the meaning or intent of the writing has not yet been determined. But even Corbin admits a line must be drawn somewhere--for example, where the asserted meaning of the contract language is so unreasonable it is unlikely...