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© This chapter is a modification of a work originally authored by Scott J. Burnham & Kristen Juras and published by CALI eLangdell Press under the BY-NC-SA 4. License. Modification by Eric E. Johnson. See “Rights, Licensing, Attribution, and More” at the end of this chapter.
Chapter 8. The Parol Evidence Rule
8.1. The Common Law Parol Evidence Rule 8.1.1. Purpose. The parol evidence rule is based upon two foundational premises:
- Parties who have reduced their agreement to a writing intended to be a final expression of their understanding should not be allowed to introduce evidence of prior oral or written terms or contemporaneous oral terms that contradict or supplement that writing.
- The parol evidence rule gives more evidentiary weight to writings than to non-written statements. 8.1.2. Meaning of “Parol” Evidence. Contrary to common misperceptions, “parol” when used in the context of the parol evidence rule does not mean “oral.” The more accurate definition is “ extrinsic ,” meaning extrinsic to the written agreement between the parties. To be more precise, the parol evidence rule may be used to exclude written or oral agreements made prior to the written agreement, as well as oral (but not written) agreements that are contemporaneous with the written agreement. Generally, contemporaneous written agreements are not excluded by the parol evidence rule, even if they contain contradictory terms. See § 8.2.6.1. Furthermore, the rule is not really a rule of “evidence” – it is a rule of substantive contract law. For example, if objection to its introduction is not timely made, it can still be challenged. And when the trial is in federal court on diversity grounds, the state law of parol evidence will govern.
8.1.3. Exceptions. The common law parol evidence rule does not exclude all types of extrinsic evidence in all situations. Parol evidence is admissible for certain purposes, including (1) the formation of the contract, (2) the existence of a separate enforceable agreement, (3) the interpretation of the agreement, (4) the validity of the contract, and (5) a subsequent modification of the agreement. 8.1.4. Final Written Expression. The common law parol evidence rule applies to written agreements intended to be the final expression of the parties’ agreement. The common law distinguishes between final agreements that are “ completely integrated ” and “ partially integrated .” Some jurisdictions create a rebuttable presumption that a contract reduced to writing is presumed to completely integrated. See, e.g., Mont. Code Ann. § 28 - 2 - 905. A “partially integrated agreement” is a final expression of some of the terms but is not complete or exclusive as to all of the terms. While a party cannot introduce evidence of a consistent additional term to a completely integrated agreement, evidence of a consistent additional terms is admissible when an agreement is partially integrated. Restatement (Second) of Contracts § 216(1) (1981). 8.1.5. Necessary Elements. Because the parol evidence rule entails several elements, all of which must be satisfied before the rule is applied, you should always ask the following questions:
- Is there a written agreement intended to be the final expression of the parties’ agreement?
- If so, is the agreement “completely integrated” or “partially integrated”?
- Does the extrinsic evidence offered fall within one of the categories of evidence excluded by the parol evidence rule?
- If so, is the extrinsic evidence being offered for an admissible purpose and thus is not excluded by the parol evidence rule? 8.2. UCC Parol Evidence Rule. The UCC parol evidence rule is found at UCC § 2 - 202. Read it carefully, keeping in mind the elements of the common law rule: § 2-‐202. Final Written Expression: Parol or Extrinsic Evidence. Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such
___ prior written agreements ___ contemporaneous oral agreements ___ contemporaneous written agreements ___ oral agreements arising after contract formation ___ written agreements arising after contract formation þ Purple Problem 8-‐ 2. A written contract for the sale of a car specifies that payments shall be made on the 1st day of each month for 12 months. By telephone conversations afterwards, the car dealer agrees to accept payments on the 15th of each month. Is evidence of the telephone conversation suppressed by UCC § 2 -‐202? Why or why not? 8.2.5. In addition to the common law exceptions (see 8.1.3), the UCC itself provides two important exceptions to the parol evidence rule at UCC § 2 - 202(a) and (b). Under § 2 - 202(a), the writings of the parties may always be explained or supplemented by course of dealing, usage of trade, or course of performance. This exception does not, at least on its face, allow contradictory terms; it only allows explanation of existing terms or supplementation of existing terms. As illustrated in the following case, it is not always easy to distinguish between terms that “explain or supplement” versus terms that contradict. 8.2.5.1. Case: Columbia Nitrogen Corp. v. Royster Co.
Columbia Nitrogen Corp. v. Royster Co.
U.S. Court of Appeals for the Fourth Circuit 1971 451 F.2d 3 (4th Cir. 1971). Argued April 6, 1971. Decided Oct. 26, 1971. Before HAYNSWORTH, Chief Judge, and WINTER and BUTZNER, Circuit Judges. BUTZNER, Circuit Judge: [Columbia Nitrogen Corp. entered into a contract to purchase minimum quantities of phosphate from Royster Co. over a period of several years at specified prices. The market price of phosphate dropped precipitously, and Columbia refused to purchase the phosphate in the quantities that it had agreed to in the written agreement. When Royster brought a claim for
breach of contract against Columbia, Columbia defended on the grounds that the contract, when construed in light of the usage of the trade and course of dealing between the parties, imposed no responsibility on Columbia to accept at the quoted prices the minimum quantities stated in the contract. The district court rejected Columbia’s argument, determined that Columbia had breached its agreement, and entered judgment in favor of the seller, Royster.] …. Columbia assigns error to the pretrial ruling of the district court excluding all evidence on usage of the trade and course of dealing between the parties. It offered the testimony of witnesses with long experience in the trade that because of uncertain crop and weather conditions, farming practices, and government agricultural programs, express price and quantity terms in contracts for materials in the mixed fertilizer industry are mere projections to be adjusted according to market forces. Columbia also offered proof of its business dealings with Royster over the six-year period preceding the phosphate contract [during which Columbia, which produces nitrogen and other fertilizers, had repeatedly and substantially deviated from the prices and quantities at which it had agreed to sell nitrogen to Royster when market prices for nitrogen changed significantly]. This experience, a Columbia officer offered to testify, formed the basis of an understanding on which he depended in conducting negotiations with Royster. The district court held that the evidence should be excluded. It ruled that “custom and usage or course of dealing are not admissible to contradict the express, plain, unambiguous language of a valid written contract, which by virtue of its detail negates the proposition that the contract is open to variances in its terms[.]” A number of Virginia cases have held that extrinsic evidence may not be received to explain or supplement a written contract unless the court finds the writing is ambiguous. E. g., Mathieson Alkali Works v. Virginia Banner Coal Corp ., 147 Va. 125, 136 S.E. 673 (1927). This rule, however, has been changed by the Uniform Commercial Code which Virginia has adopted. The Code expressly states that it “shall be liberally construed and applied to promote its underlying purposes and policies,” which include “the continued expansion of commercial practices through custom, usage and agreement of the parties[.]” [UCC § 1 - 103(a)(2)]. The importance of usage of trade and course of dealing between the parties is shown by [UCC § 1 - 303], which authorizes their use to explain or supplement a contract. The
The contract does not expressly state that course of dealing and usage of trade cannot be used to explain or supplement the written contract. The contract is silent about adjusting prices and quantities to reflect a declining market. It neither permits nor prohibits adjustment, and this neutrality provides a fitting occasion for recourse to usage of trade and prior dealing to supplement the contract and explain its terms. Minimum tonnages and additional quantities are expressed in terms of “Products Supplied Under Contract.” Significantly, they are not expressed as just “Products” or as “Products Purchased Under Contract.” The description used by the parties is consistent with the proffered testimony. Finally, the default clause of the contract refers only to the failure of the buyer to pay for delivered phosphate. During the contract negotiations, Columbia rejected a Royster proposal for liquidated damages of $10 for each ton Columbia declined to accept. On the other hand, Royster rejected a Columbia proposal for a clause that tied the price to the market by obligating Royster to conform its price to offers Columbia received from other phosphate producers. The parties, having rejected both proposals, failed to state any consequences of Columbia's refusal to take delivery -- the kind of default Royster alleges in this case. Royster insists that we span this hiatus by applying the general law of contracts permitting recovery of damages upon the buyer's refusal to take delivery according to the written provisions of the contract. This solution is not what the Uniform Commercial Code prescribes. Before allowing damages, a court must first determine whether the buyer has in fact defaulted. It must do this by supplementing and explaining the agreement with evidence of trade usage and course of dealing that is consistent with the contract's express terms. [UCC §§ 1 - 303(e), 2-202]. Faithful adherence to this mandate reflects the reality of the marketplace and avoids the overly legalistic interpretations which the Code seeks to abolish. Royster also contends that Columbia's proffered testimony was properly rejected because it dealt with mutual willingness of buyer and seller to adjust contract terms to the market. Columbia, Royster protests, seeks unilateral adjustment. This argument misses the point. What Columbia seeks to show is a practice of mutual adjustments so prevalent in the industry and in prior dealings between the parties that it formed a part of the agreement governing this transaction. It is not insisting on a unilateral right to modify the contract.
Nor can we accept Royster's contention that the testimony should be excluded under the contract clause: “No verbal understanding will be recognized by either party hereto; this contract expresses all the terms and conditions of the agreement, shall be signed in duplicate, and shall not become operative until approved in writing by the Seller.” Course of dealing and trade usage are not synonymous with verbal understandings, terms and conditions. [UCC § 2 - 202] draws a distinction between supplementing a written contract by consistent additional terms and supplementing it by course of dealing or usage of trade. Evidence of additional terms must be excluded when “the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.” Significantly, no similar limitation is placed on the introduction of evidence of course of dealing or usage of trade. Indeed the official comment notes that course of dealing and usage of trade, unless carefully negated, are admissible to supplement the terms of any writing, and that contracts are to be read on the assumption that these elements were taken for granted when the document was phrased. Since the Code assigns course of dealing and trade usage unique and important roles, they should not be conclusively rejected by reading them into stereotyped language that makes no specific reference to them. ... Indeed, the Code's official commentators urge that overly simplistic and overly legalistic interpretation of a contract should be shunned. We conclude, therefore, that Columbia's evidence about course of dealing and usage of trade should have been admitted. Its exclusion requires that the judgment against Columbia must be set aside and the case retried[.] ±±± 8.2.5.2. Various Questions and Notes about Columbia Nitrogen Corp. v. Royster Co
- Many commentators criticize the results of this case, particularly in view of the hierarchy of UCC § 1 - 303(e), which provides that express contract terms prevail if express terms cannot reasonably be construed as consistent with course of performance, course of dealing, usage of trade. One court, refusing to apply course or dealing or usage of trade to negate a particular contract term, stated:
from Sawmill. The agreement provides that Betty must pay the purchase price within 30 days of delivery. The written agreement says nothing about the packaging of the various sizes of lumber. The truck arrives and the lumber is not packaged in any orderly form; various sizes of lumber are all intermixed. It requires a sizeable amount of effort (and employee hours) on Betty’s part to sort and stack the lumber into respective piles according to size. (1) In an action against Sawmill, may Betty present evidence that it is customary in the lumber industry to deliver an order of a truckload of lumber consisting of various sizes by stacking each size of lumber on a separate pallet banded by wire? Or is such evidence barred under § 2 -‐202? (2) Will Betty be able to present evidence that it is customary in the lumber industry for sawmills to allow a 5% discount if orders are paid for within 30 days of delivery, which Betty did? 8.2.6 UCC § 2 - 202(b) provides an exception allowing evidence of prior oral or written agreements, or contemporaneous oral agreements, to provide consistent additional terms. However, there is an important exception to the exception. If the parties intended their agreement to be a “complete and exclusive statement of the terms of the agreement ,” evidence of prior oral or written agreements or contemporaneous oral agreements is not admissible to introduce any additional terms, whether consistent or not. In other words, if you have a writing (or writings) which set forth some, but not all, of the terms of the agreement, you can introduce evidence establishing consistent (but not contradictory) additional terms. This is consistent with the “partial integration” rule of common law. On the other hand, if you have a comprehensive document which the parties intended to be the “complete and exclusive” expression of the terms of their agreement, you are not allowed to introduce evidence establishing additional terms, whether consistent or not. This rule is consistent with the “complete integration” rule of common law. For a summary of the “partial integration” and “complete integration” rules at common law, see Restatement (Second) of Contracts § 210 (1981). 8.2.6.1. What factors should you consider in determining if a writing is “intended also as a complete and exclusive statement of the terms of the agreement?” The formality of the agreement, whether lawyers drafted the agreement, its comprehensiveness, the sophistication of the parties involved, and the length of negotiations are factors mentioned by various courts. Another important (but not conclusive) fact is whether the document itself purports to be the “complete and
exclusive” agreement of the parties. This is usually accomplished by the insertion of a “merger” or “integration” clause into the agreement. A merger clause might look like this: This agreement signed by both parties constitutes a final written expression of all the terms of this agreement and is a complete and exclusive statement of those terms. Unfortunately, courts sometimes regard a merger clause as relevant for a completely different purpose: to determine whether a written agreement is to be treated separately from other agreements executed at the same time by the same parties. As a result, a traditionally drafted merger clause can have some unintended and undesirable consequences. For example, in Schron v. Grunstein , 917 N.Y.S.2d 820 (N.Y. Sup. Ct. 2011), the court ruled that a credit agreement and a stock purchase option agreement were to be regarded as separate agreements in part because of the existence of a merger clause in the option agreement. On the other hand, in In re Clements Manufacturing Liquidation Co., LLC, 521 B.R. 231, (E.D. Mich. 2014), the court ruled that, despite the merger clause, the asset purchase agreement was an integral part of a larger transaction, thus helping to insulate the asset purchase from avoidance as a fraudulent transfer. Practice tip: Draft the merger clause so that it makes clear that evidence of other parts of the transaction is admissible. For example: This agreement and [list other agreements] collectively contain the complete and exclusive understanding of the parties with respect to their subject matter. There are no promises or representations of the parties not included in one or more of these documents. 8.2.6.2. In Intershoe, Inc. v. Bankers Trust Co ., 571 N.E.2d 641 (N.Y. 1991), Intershoe placed a telephone order with defendant concerning a foreign currency futures transaction involving the exchange of Italian lira for United States dollars. Bankers Trust Company sent a confirmation slip to Intershoe including, among others, the following terms: “we [Bankers] have bought from you [Intershoe] ITL 537,750,000" and "we have sold to you USD 250,000.00.” The confirmation slip specified a rate of 2,151 lira per dollar and called for delivery of the lira approximately 7 months later, between October 1 and October 31. Intershoe’s treasurer signed the slip and returned it to the bank. In mid-October, the bank sent a reminder to Intershoe about the pending transaction, and asked for delivery of the lira. At that point in time, Intershoe said “this is a mistake; we meant to buy lira, not deliver lira,” and it sought to present evidence of that mistake. Although the writing was only a few sentences in length, the court found
(2) Can the buyer introduce evidence that seller said he would throw in a new spare tire as part of the deal? (3) Can the buyer introduce evidence that in previous dealings between them, they had established a practice of payment within a week of delivery? 8.2.6.3. 1 Case: Sierra Diesel Injection Service v. Burroughs Corp
Sierra Diesel Injection Service
v. Burroughs Corp., Inc.
U.S. District Court for the District of Nevada January 28, 1987 SIERRA DIESEL INJECTION SERVICE, a Nevada corporation, Plaintiff, v. BURROUGHS CORPORATION, INC., a Delaware corporation, Defendant. No. CV-R- 84 - 535 - ECR.. EDWARD C. REED, JR., Judge: [The defendant Burroughs Corporation negotiated with plaintiff Sierra Diesel Injection Service to provide a computer system to meet Sierra’s accounting needs. In the course of negotiations, Burroughs made both oral and written representations to Sierra regarding its systems, including a written representation contained in a letter that the system “can put your inventory, receivables, and invoicing under complete control.” Sierra, which did not have extensive knowledge or experience regarding computer systems, alleged that it relied upon these representations in entering into a purchase agreement with Burroughs. The agreement, a standardized agreement prepared by Burroughs, contained an integration clause stating that the agreement constituted the entire agreement between the parties and superseded all prior communications. The warranties contained in the final agreement were limited, and the agreement disclaimed all other express and implied warranties.] …. Defendant further argues that the plaintiff's allegations regarding any oral warranties or promises made before the contracts were signed must be disregarded by virtue of the parol evidence rule, codified at [UCC § 2 - 202]. This section of the U.C.C. provides that
[t]erms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in writing intended by the parties as a final expression of their 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 performance, course of dealing, or usage of trade (Section 1-303); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.] This section of the Code contemplates a multifactor analysis. First, the court must determine whether the writing presented to the court is “intended by the parties as a final expression of their agreement to such terms as are included therein.” Id., see Norwest Bank Billings v. Murnion, 210 Mont. 417, 684 P.2d 1067, 1071 (1984); see also Amoco Production Co. v. Western Slope Gas Co., 754 F.2d 303, 308 (10th Cir.1985), S.M. Wilson & Co. v. Smith International, Inc., 587 F.2d 1363, 1370 (9th Cir.1978); Interform Co. v. Mitchell, 575 F.2d 1270, 1274-78 (9th Cir.1978). If the court determines that the parties did not intend the writing to be a final expression of their agreement with respect to the terms contained therein, then parol evidence of prior and contemporaneous agreements may be considered by the court. Id. The defendant argues that the merger clause contained in the contracts in this case establishes as a matter of law that the writings are the final expression of the parties' agreements, and that the restrictions of the rule therefore come into play. The authorities hold that merger clauses such as this one are strong evidence of integration, but that they are not necessarily conclusive. In O'Neil v. International Harvester Co., 40 Colo. App. 369, 575 P.2d 862 (1978), for example, the buyer of a truck brought an action against the seller and assignee for rescission of the installment purchase contract, for damages for breach of express and implied warranties, and for fraud. The defendants argued that all of the plaintiff's causes of action were barred by the terms of the contract itself which conspicuously disclaimed all warranties not stated in the agreement, and which contained a merger clause which purported to make that writing the final agreement of the parties. Because of the conspicuous disclaimer clause and the express merger clause, the defendants argued that the
contract. Id. The plaintiff must therefore be allowed to present evidence of fraud regardless of the possible integration of the writing. [Defendants sought summary judgment on the fraud claim, asserting that its alleged misrepresentations to the plaintiff were opinions and “puffery” rather than statements of fact, and thus could not support a claim of fraud. The court determined that a genuine issue of material fact existed regarding the factual nature of these statements, and denied Burroughs’ motion for summary judgment.] ±±± 8.2.6.3. 2 Various Questions and Notes about Sierra Diesel Injection Service v. Burroughs Corp
- Upon reconsideration, the federal district court determined that the purchaser’s owner was unsophisticated, had little knowledge of computers, and did not understand that the integration clause would preclude prior representations upon which the purchaser had relied. The court concluded that there was no “mutual intent of the parties in this case that the agreement be integrated.” Sierra Diesel Injection Serv., Inc. v. Burroughs Corp ., 656 F. Supp. 426, 428 - 429 (D. Nev. 1987). Review the factors set forth in Section 8.2.6.1; do you agree with the court’s conclusion? The district court’s ruling was affirmed. Sierra Diesel Injection Serv., Inc. v. Burroughs Corp ., 890 F.2d 108 (9th Cir. 1989).
- The integration clause contained in the agreement provided: “This Agreement constitutes the entire agreement, understanding and representations, express or implied between the Customer and Burroughs with respect to the equipment and/or related services to be furnished and this Agreement supersedes all prior communications between the parties including all oral and written proposals.” What additional language or actions might you have added to establish the parties’ mutual intent that the agreement was, in fact, the final expression of the parties’ agreement regarding warranty terms?
þ Purple Problem 8-‐ 6. Review Problem. ABC and XYZ sign the following written agreement: ABC Widget Corporation agrees to sell 1,000 Type B widgets to XYZ Corporation. Terms: $10,000 payable 30 days after delivery. Delivery date: To be determined by the parties. This writing represents the complete and exclusive agreement of the parties. allkiri podpis ABC Widget Corp. XYZ Corp. (1) Can the parties agree on a delivery date? (2) Did ABC give XYZ a warranty of merchantability? (3) Can XYZ introduce evidence that prior to signing the contract, ABC promised that it would deliver the widgets to XYZ at no additional cost? (4) Can XYZ introduce evidence that in their four prior transactions, ABC delivered the widgets to XYZ at no additional cost? © RIGHTS, LICENSING, ATTRIBUTION, AND MORE: This chapter is a derivative prepared by Eric E. Johnson of Chapter 9 of SALES AND LEASES: A Problem-based Approach , authored by Scott J. Burnham & Kristen Juras, published by CALI eLangdell Press in 2016, © 2016 CALI, licensed under the Creative Commons BY-NC-SA 4.0 License, available at: https://creativecommons.org/licenses/by-nc-sa/4.0/. That license contains a disclaimer of warranties. The original work is available at https://www.cali.org/books/sales-and-leases- problem-based-approach. Among the changes in this derivative work: this derivative has different typography and formatting, numbered portions have been renumbered, some numbering has been added, some material was removed and some added in, and text may have been rewritten. Other changes include that the word “Purple” has been used to denote problems. A comparison with the original will show the full nature of modifications. This derivative is not endorsed by CALI. The book from which the original chapter came contains this notice: “This material does not contain nor is intended to be legal advice. Users seeking legal advice should consult with a licensed attorney in their jurisdiction. The editors have endeavored to provide complete and accurate information in this book. However, CALI does not warrant that the information provided is complete and accurate. CALI disclaims all liability to any person for any loss caused by errors or omissions in this collection of information.” Those disclaimers and admonitions should be construed to apply vis-à-vis individual persons involved in the creation and preparation of the text. The suggested attribution from the original work is this: Scott J. Burnham & Kristen Juras, SALES
