What is the Parol Evidence Rule?

The Parol Evidence Rule Excludes Evidence to Contradict or Alter an Integrated Contract

The parol Evidence Rule and Complete vs. Full Integration

The Parol Evidence Rule, as a general matter, excludes outside (extrinsic) evidence that would contradict or change the terms of a contract.

Remember, contracts are usually negotiated over time. For that reason, aside from the written contract there may be evidence from negotiations or earlier agreements that could potentially supplement, contradict, or explain the written terms in the contract.

When the terms of a contract are “completely integrated”, this means that the terms of the contract are the exclusive terms of the contract. Outside evidence (extrinsic evidence) cannot be used to alter, contradict or even supplement the terms of the contract. The terms in the contract are final and nothing can be added or changed.

When the terms of a contract are “fully integrated”, then the terms in the contract are final, but courts are willing to allow evidence of negotiations or other agreements to supplement (add to) the terms of the contract. Still. outside evidence cannot be used to alter or contradict the terms of a fully integrated contract.

Exception: The Uniform Commercial Code Always Allows Certain Extrinsic Evidence

The UCC always allows extrinsic evidence from trade usage or course of dealing to supplement the terms of a contract. That is, even in a completely integrated contract, if the parties are missing certain terms in their contract, a court can rely on the prior business dealings of these parties or others in that industry to supply missing terms.

Example: But you said $20,000 would be fine!

Let’s say there is an integrated contract that provides a payment term of $25,000. This is an integrated term, meaning that it is a final term that has been written in the contract.

But perhaps one party want to introduce evidence that they earlier agreed that the price would really be $20,000. Is his evidence admissible? No, because the prior oral negotiation or agreement would alter the contract as written, the parol evidence rule would exclude this evidence for purposes of changing the contract.

The Parol Evidence Rule Does Not Apply to Certain Types of Evidence

Of course, the parol evidence rule does not exclude all evidence. Other kinds of evidence to which the parol evidence rule does not apply include:

Evidence to explain ambiguous terms. If the terms of a contract could reasonably be read in a different ways then extrinsic evidence should be allowed to explain the ambiguous terms.
Failue to perform under the contract. If a party breaches a contract or fails to provide consideration as required by the contract, evidence of this breach is admissible and not excluded by the parol evidence rule.
Subsequent and collateral agreements. Let’s say the parties enter into another agreement after the contract at issue was signed. The parol evidence rule would not exclude evidence regarding the agreement that came after the contract at issue. Likewise, the parol evidence rule does not exclude evidence of separate agreement into which the parties entered.
Evidence as to contract formation and conditions to performance. The parol evidence rule will not exclude evidence regarding whether or not the parties entered into a valid agreement. For example, if one party defrauded the other party or coerced the party into the contact, the parol evidence rule would not apply to that type of evidence. In addition, if a party’s oblgiation to perform under the contract is subject to a condition (e.g., performance is subject to the other party receiving a bank loan), then evidence that the condition failed is admissible.