Often, a court will rule that a written contract represents the entire agreement between the parties. Other contract evidence won’t be permitted or enforced. This is called the parol evidence rule. This lesson explains the rule and how it works.

Making a Contract

Ideally, when two parties make a contract, the complete and final agreement will be memorialized in the written document. Contracts don’t have to be written, but when they are, the written contract should fully represent the parties’ agreement. The written contract is legally enforceable. If one party fails to fulfill the terms of the contract, the other party may sue for compliance, or performance. This type of lawsuit is called a breach of contract.

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When a court considers the breach of contract case, the court will look to the written contract. The written contract is the only evidence the court has in order to determine whether or not the parties complied with the terms of the agreement. Any extra evidence will complicate the court’s task of enforcing the written contract.

Parol Evidence Rule

The parol evidence rule is a legal rule that applies to written contracts. Parol evidence is evidence pertaining to the agreement that isn’t included in a written contract. Courts generally don’t allow this extra evidence, because the court must determine the parties’ intentions. The written contract is considered to be the best description of the parties’ intentions.

The rule works like this:

  1. The parol evidence rule applies after the parties put their final agreement in writing.
  2. The parties have to intend that the written contract is complete and final.
  3. No parol, or extra evidence, will be allowed to contradict or modify the written contract.

For example, let’s say that you and I agree that I’m going to build three custom birdhouses for you, and deliver them to you on March 1. You’re going to pay me $50 per birdhouse. We sign and execute a written contract.

I deliver the birdhouses, but you don’t pay me. I take you to court, and ask for my $150, plus I want an additional $50 penalty fee since you didn’t pay me on time. The court will likely grant me the $150 you owe me, but our agreement didn’t mention a penalty fee. Any evidence of a penalty fee is parol evidence. The court will only enforce the exact terms of our contract.

Four Corners

Courts generally apply the four corners rule. This is also sometimes referred to as the plain meaning rule. This means that the court will enforce the written contract just as it appears, as long as the contract appears to be complete and final. All contract terms must appear within the four corners of the paper on which the contract is written. Otherwise, a court won’t enforce those contract terms.

Merger Clause

Many written contracts include a merger clause. This is a clause that declares that the written contract is the complete and final representation of the parties’ agreement. A merger clause simply ensures that a court will follow the parol evidence rule.

For example, let’s say that you and I execute a written contract that includes a merger agreement. Our contract actually says ‘this agreement constitutes the entire agreement between the parties’. I’m going to build three custom birdhouses for you, and deliver them to you on March 1. You’re going to pay me $50 per birdhouse.

After we execute this agreement, I realize I can’t purchase the wood you want. I’m going to need a few extra weeks. You say that’s fine, and we make a side agreement where we orally decide to change the terms of the contract. We decide that I’ll deliver the birdhouses on March 15. Our side agreement wasn’t included in the original written contract. Because this agreement contradicts the terms of the written contract, a court won’t enforce it. A court will only enforce the exact terms of our written contract.

Exceptions

There are certain times when a court won’t enforce the parol evidence rule. Sometimes a court will allow extra evidence that pertains to the contract. Some of these exceptions include:

  1. When there is evidence of an invalid contract made through fraud, duress, or mistake.
  2. When the parties need to clarify an ambiguous contract term.
  3. When there was no consideration for the contract.
  4. When evidence simply supplements, rather than modifies or contradicts, the written contract, if the parties didn’t intend the contract to be final, and
  5. When there is a completely separate, subsequent agreement, made after the contract.

For example, let’s say that you and I execute a written contract. I’m going to build three custom birdhouses for you, and deliver them to you next Tuesday. You’re going to pay me $50 per birdhouse. After we execute this agreement, I fail to build and deliver the birdhouses. You take me to court. In order to prove that I’m late on the delivery of the birdhouses, you’ll have to explain the term next Tuesday. The court will need to know the delivery date. This is parol evidence, but the court will allow it.

Lesson Summary

Let’s review. Ideally, when two parties make a contract, the complete and final agreement will be memorialized in a written document. This written contract is legally enforceable. If one party fails to fulfill the terms of the contract, the other party may sue for performance. The parol evidence rule applies to written contracts. This rule prohibits courts from considering evidence pertaining to the agreement that isn’t included in a written contract. Instead, courts will generally apply the four corners rule. This means that, as long as the contract appears to be complete and final, the court will enforce the written contract just as it appears.

Many written contracts include a merger clause. This clause declares that the written contract is the complete and final representation of the parties’ agreement and ensures that the court follows the parol evidence rule. However, there are some exceptions. Courts will allow parol evidence in instances when fraud, duress, or mistake would invalidate a contract, when the parties need to clarify an ambiguous contract term, or when there is a completely separate, subsequent agreement, made after the written contract.

Learning Outcomes

Finishing this lesson should prepare you to:

  • Summarize how the parol evidence rule works
  • Define four corners rule and merger clause
  • Explain when a court may accept parol evidence