Parol Evidence Rule

BY JAY AND ARTHUR WINSTON, WINSTON & WINSTON, P.C.

Parole evidence is a rule of evidence that bestows a preferred status on final written agreements. The rule is designed to provide stability in business transactions. The rule protects the agreement from the risk of perjured testimony and the risk of uncertain testimony of a party with a “slippery” and “self-serving” memory. At trial, the rule excludes earlier oral agreements or any contemporaneous oral agreements. The basis of the rule is that these earlier agreements were not intended to survive, but to be merged into the final agreement.

The Parole Evidence Rule holds that where an agreement has been reduced to writing and is intended to be the final and complete expression of the agreement between the parties, any evidence of earlier oral or written agreements or any contemporaneous oral agreements are not admissible in a court of law to vary, add to, or contradict the terms of the written agreement.

When Does The Parole Evidence Apply? There are two key issues: First, one must determine whether the parties intended the writing to be the final written agreement. Second, one must determine whether there is partial or total integration of the prior oral or written agreements. If a court determines that only partial integration exists, the agreement may be supplemented by additional terms. Seems simple, right? Well, five different tests have been developed to apply this rule.

Four Corners Rule In applying the first test, the trial judge actually examines only the written agreement and makes a determination if the agreement represents the final intent of the parties. This test is not widely accepted due to the limited information provided. The drafter of the agreement is subject to the subjective interpretation of the judge hearing the case. This test usually favors the drafter of the agreement unless the agreement is too specific or too vague. If the agreement is poorly drafted, the drafter of the agreement suffers, especially if this interpretation is beneficial to the other party. Although many creditors desire the courts to apply this test, it rarely occurs, especially in consumer credit transactions.

Any Relevant Evidence Test The second test directs the court to seek out the actual intention of the parties to determine if the document was partially or totally integrated. Under this test, a judge would admit evidence of all relevant prior negotiations and treat the document as partially integrated. This test is increasingly applied by judges, because it permits the court wide latitude in making its determination to admit evidence, since anything may be relevant.

Collateral Contract Rule This test is subject to two interpretations. Under one version, (A) all written agreements are deemed to be partially integrated. Additional terms in prior or contemporaneous agreements that do not contradict the writing are admissible. The key point is that the additional terms may not contradict the terms in the main agreement. Additional writings explaining the original writing would be admissible.

Under the relevant evident test, (B) if the additional terms are covered in the original written agreement, the evidence is excluded. However, if the additional terms are not covered by the original agreement, the document is treated as partially integrated, and the additional terms are considered by the court. The test is applied only by a few courts and is open to subjective interpretation.

The Modern Test This test holds that if the written agreement includes a merger clause, expressly and conspicuously stating that this writing is intended to be the final and complete version of the agreement, the agreement is held to be completely integrated. Only if it is obvious that the agreement is incomplete, or that the merger clause was included as a result of fraud or mistake, will a court consider additional evidence. In the absence of the merger clause, the court will examine the writing. Additional terms may be provided if the writing is obviously incomplete, or if the additional terms are of the type that would naturally appear in a separate writing.

U.C.C. Test The fifth test is set forth in Section 2-202 of the Uniform Commercial Code, which applies to contracts for the sale of goods. Section 2-202 states:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in the writing intended by the parties as a final expression of the agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement, but may be explained or supplemented

(a) by course of dealing or usage of trade… or by course of performance…; and

(b) by evidence of consistent terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of agreement.

The U.C.C. test is a liberal test because evidence of a separate agreement is admissible unless the matters covered in the alleged agreement “certainly would have been included” in the writing.

Depending on which test is used, a different result may occur. Judges usually consider fairness, equity, and who benefits from the interpretation of the agreement. For example, a liberal judge is more likely to use a test that favors a consumer against a large corporation. However, in a situation between two corporations, the same test might lead to a different outcome.

This rule only prohibits the allegations from being offered into evidence. If the allegations are not in evidence, the trier of fact (jury) will never hear the evidence. In a trial by a judge, the judge makes the ruling of admissibility as well as being the trier of fact. Once the document is offered, and the judge has seen the document, the issue of admissibility may no longer be relevant.

Even if the allegedly damaging allegations are admitted into evidence, what weight the trier of the fact (judge or jury) assesses to the prior negotiations is another story. Many judges believe that the evidence should be excluded. To prevent being overturned on appeal, the judge, nevertheless, admits the documents into evidence, but then assesses little credibility to the evidence when rendering a decision. Appellate courts have discretion to determine if evidence was excluded, but rarely overrule a judge or jury on assessing the credibility of the evidence.