The parol evidence rule, the plain meaning rule, and the principles of contractual interpretation.

AuthorPosner, Eric A.


Most commentators believe that when a contract's terms specify the obligations of the parties in the case of some contingency, and that contingency occurs, a court should, barring procedural irregularities, enforce the terms. Much scholarship has focused on what courts should do when the terms are silent with respect to a contingency. When such a "gap" in the contract exists, this scholarship argues that the court should enforce a "gap-filling rule" or "default rule," which allocates obligations in such a way that either maximizes the contract's ex ante value or provides appropriate ex ante incentives to disclose information. Little work, however, deals with how the court should decide whether a gap exists in the first place.

Analysis of this issue requires consideration of the ways that courts can weigh different kinds of evidence, such as the final writing (if any), earlier oral or written negotiations, trade custom, and course of dealing after the contract is signed. In theory, courts could weigh evidence in whichever way seems to produce the most plausible result, or general rules could direct courts to put more weight on some kinds of evidence than on others. In fact, such general rules do exist. This Essay focuses on these rules of contractual interpretation, and the parol evidence rule in particular.

The parol evidence rule deals with a common contractual situation: where initial negotiations, in which preliminary oral or written promises are exchanged, conclude with a writing that appears to embody the entire agreement. The question is whether the court's interpretation of the contract should rely at all on evidence related to the earlier negotiations, known as "extrinsic evidence," or should rely entirely on the writing.

Two stylized, polar positions can be distinguished. Under what I will call the "hard-PER," the court generally excludes extrinsic evidence and relies entirely on the writing. Under the "soft-PER," the court gives weight both to the writing and to the extrinsic evidence. There is a division among courts between those whose approaches resemble hard-PER and those whose approaches resemble soft-PER. Part I of this Essay discusses these approaches. Part II provides an analysis of the stylized hard- and soft-PERs, and discusses the ways in which these approaches may be implemented as legal rules both separately and in combination. Part II also discusses the plain meaning rule and other rules of interpretation as they relate to recurrent transactions, such as form contracts, consumer transactions, collective bargaining agreements, and long-term contracts. Part III examines Corbin's influential argument about the parol evidence rule.

The Essay lays out systematically the arguments in favor of the two different conceptions of the parol evidence rule. These arguments stress the costs to the parties of using a writing to inform courts of their contract, and the danger of judicial error. The hard- and soft-PERs respond to these problems in complex ways, and with varying degrees of success.


    Most courts would subscribe to something close to the following statement of the parol evidence rule: A court will refuse to use evidence of the parties' prior negotiations in order to interpret a written contract unless the writing is (1) incomplete, (2) ambiguous, or (3) the product of fraud, mistake, or a similar bargaining defect.(1)

    The rule is susceptible to hard and soft interpretations in several ways, each of which turns on the use of extrinsic evidence to determine whether any of the exceptions apply. First, consider the completeness exception. The harder courts declare a writing complete if it looks complete "on its face." Writings generally look complete if they are long and detailed, or at least contain unconditional language, cover many contingencies, or at least the most important contingencies, and contain a clause, such as a merger clause, which says that the contract is complete.(2) The softer courts declare a writing complete only if the extrinsic evidence supports that determination. In theory, this means that a court looks for extrinsic evidence that suggests that the writing is not complete, such as an oral statement that the writing is just a memorandum. If the court finds no such evidence, no extrinsic evidence is admitted. In some cases, this procedure may result in the exclusion of relevant extrinsic evidence. In practice, however, courts adopting this soft version of the completeness exception generally admit all relevant extrinsic evidence, be cause any inconsistent extrinsic evidence suggests (however indirectly) that the contract is incomplete, and any consistent extrinsic evidence that might be excluded would not affect the interpretation of the contract anyway.(3)

    A similar point can be made about the ambiguity exception. The harder courts consider a writing ambiguous if it looks ambiguous "on its face." A contract is facially ambiguous when the writing has conflicting terms or no provision relating to the contingency under which the dispute arises. In contrast, the softer courts decide whether a writing is ambiguous by looking at extrinsic evidence. Even if the writing has no apparently conflicting terms, extrinsic evidence may indicate that the parties agreed on terms that conflict with the written terms. This conflict creates an ambiguity that requires admission of the extrinsic evidence. In contrast, if the extrinsic evidence does not conflict with the writing, it is not admissible, but its admission would make no difference, anyway. Again, the soft version of the ambiguity exception for the most part allows courts to consider any relevant extrinsic evidence.(4)

    The fraud exception presents a difficulty for the harder courts because one cannot read fraud off a contract's face; one must look at extrinsic evidence in response to an allegation of fraud. Once one looks at extrinsic evidence for fraud, however, it is easy for a party to gain admission of all extrinsic evidence. The party alleges that the promisor fraudulently violated a pre-writing promise, which induced him or her to sign the writing. Although in theory it is harder to prove promissory fraud than to prove breach of contract,(5) in practice the distinctions between the two causes-of action break down. The fraud exception swallows the parol evidence rule.(6) Harder courts resist this outcome by distinguishing two sorts of promissory fraud, "fraud in the inducement," which refers to the use of fraudulent promises, and "fraud in the execution," which refers to the use of a false writing such as a forgery, and admitting extrinsic evidence only to show fraud in the execution. Hard courts also sometimes limit the fraud exception by restricting its use to cases where the allegedly fraudulent promise does not directly contradict a promise contained in the writing.

    An example will clarify the relationship between the different versions of the parol evidence rule. Suppose that Seller and Buyer sign a written contract for sale of a used automobile, that is detailed and looks complete, but does not contain a merger clause. Before the writing is signed, Seller states in response to Buyer's query that the carburetor is in fine shape. The writing contains many provisions describing the parties' obligations, but does not contain a provision that guarantees the quality of the carburetor. In fact, the carburetor is in poor shape.

    Under hard-PER, Buyer would have difficulty convincing a court to take account of the oral representation for the following reasons: First, the contract appears complete "on its face" because it is detailed and refers to the most probable contingencies; second, the contract appears unambiguous "on its face" because (we assume) it contains no gaps or conflicting terms; third, the fraud claim could not plausibly allege fraud in the execution, but only fraud in the inducement. As no exceptions apply, the extrinsic evidence cannot be used to interpret the contract.

    Under soft-PER, the court would more likely admit evidence of the oral representation, for any of three reasons. First, the oral representation suggests that the contract's failure to stipulate or disclaim the quality of the carburetor means that the parties failed to put a crucial part of their contract in the writing. As the writing is incomplete, the oral representation can be used to interpret the contract. Second, the oral representation conflicts with (let us suppose) a rather vague written disclaimer in the contract. Was the disclaimer intended to extend to the carburetor? The oral representation may be considered in order to resolve this ambiguity. Third, the oral representation may be considered as evidence of fraud in the inducement. Under any of the three exceptions, the extrinsic evidence of the oral representation will be admitted for the purpose of interpreting the contract.(7)

    As noted earlier, parties can, in principle, contract out of the parol evidence rule by including a "merger" or "integration" clause. This clause typically states that courts should treat the writing as a complete embodiment of the agreement. Soft-PER and hard-PER courts approach the merger clause differently. Hard-PER directs courts to defer to the clause except when the extrinsic evidence refers to an entirely different contract--as courts sometimes say, a contract that would not naturally be joined to the contract in dispute. Soft-PER directs courts to admit extrinsic evidence for the purpose of determining whether the merger clause was intended to cover the terms at issue. In the example above, a soft court could evade a merger clause by holding that the oral representation shows that the merger clause was not intended to extend to the question of warranty, that the merger clause is ambiguous (as to whether it covers only some terms or all terms), or that the oral representation fraudulently induced...

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