Legal Definitions - parol evidence rule

The parol evidence rule is a legal principle in contract law that generally prevents parties from introducing evidence of prior or contemporaneous agreements (oral or written) that contradict, modify, or add to the terms of a written contract that is intended to be the complete and final expression of their agreement.

In simpler terms, if two parties put their entire agreement into a written contract, a court will usually assume that the written document contains all the agreed-upon terms. This rule aims to provide stability and certainty to written contracts, discouraging parties from later claiming that additional or different terms were agreed upon outside of the final written document.

However, there are important exceptions where outside evidence might be allowed, such as:

• To clarify ambiguous terms in the written contract.
• To prove that the contract itself is invalid due to fraud, duress, or a mutual mistake.
• To show a separate, "collateral" agreement that doesn't contradict the main contract and would not ordinarily be expected to be included in the main written document.

Here are some examples to illustrate the parol evidence rule:

• Example 1: Barring an Oral Promise in a Software Contract

  A small business hires a software development firm to create a custom inventory management system. They sign a detailed, 20-page contract that specifies every feature, functionality, timeline, and payment schedule. During initial discussions, the business owner mentioned wanting a "predictive analytics" module, and the developer verbally agreed it could be added later. However, this module was never written into the final contract.

  How it illustrates the rule: After the system is delivered according to the written contract, the business owner demands the predictive analytics module, claiming the developer promised it. The developer refuses, pointing to the written contract. Under the parol evidence rule, a court would likely prevent the business owner from introducing evidence of the developer's earlier verbal promise. The comprehensive written contract is considered the complete and final agreement, and allowing an unwritten, additional term would contradict the principle that the written document is the authoritative record of their deal.

• Example 2: Admitting Evidence to Clarify an Ambiguous Term in a Construction Contract

  A homeowner contracts with a builder to construct a new garage. The written contract states that the garage will have "standard grade insulation." Later, a dispute arises because the homeowner believes "standard grade" means R-19 insulation, while the builder installed R-13, arguing it also falls under "standard grade" in the industry. The contract does not define "standard grade."

  How it illustrates the rule: In this scenario, the term "standard grade insulation" is ambiguous because it could reasonably refer to different insulation values. A court might allow the homeowner to introduce emails or notes from prior discussions where the builder specifically mentioned R-19 insulation. This extrinsic evidence would not be used to contradict the contract but to clarify the parties' original intent regarding the ambiguous term "standard grade," falling under the ambiguity exception to the parol evidence rule.

• Example 3: Allowing a Collateral Agreement for Equipment Rental

  A farmer signs a written contract to purchase a large parcel of land from a landowner. The contract meticulously details the land boundaries, purchase price, closing date, and other standard real estate terms. Separately, during negotiations, the landowner orally agreed to rent their tractor to the farmer for the first planting season at a specific monthly rate, an agreement not mentioned in the land purchase contract.

  How it illustrates the rule: If the landowner later refuses to rent the tractor, the farmer might be able to introduce evidence of this oral agreement. This could be considered a "collateral agreement" because it is a distinct, separate agreement (tractor rental) that does not contradict any terms of the main land purchase contract. It's also the kind of arrangement that parties might not typically include within a formal real estate sales agreement, especially if it involves separate consideration (the monthly rental fee). Therefore, a court might allow evidence of this oral agreement as an exception to the parol evidence rule.