Has Your Contract Been "Highjacked" by the “Parol Evidence Rule”?

Most every state has adopted a legal principle known as the Parol Evidence Rule. In theory it prohibits the use of prior or contemporaneous agreements and understandings – whether written or oral – when interpreting the meaning of a written contract. In practice this means that all bids, proposals, discussions, agreements, or promises of any kind made before or at the time a contract is executed have no binding effect. Under the Parol Evidence Rule, anything said, written, or promised, of any kind exchanged prior to or contemporaneous with execution of a contract is superseded by the written terms negotiated between the parties. An important exception being, it does not prohibit anything oral or written after the contract is executed, unless the Parol Evidence Rule is asserted once again in the latter agreement.

The Parol Evidence Rule applies to every written contract, but is especially applicable to the construction industry, where there are multiple communications and many contracts. Many an owner and contractor have been “blindsided” when discovering that pre-contract owner requirements or contractor proposals containing material terms no longer apply under the Parol Evidence Rule. Recently, an owner who adopted a standard form AIA Agreement was stunned to learn that the standard owner specifications prepared for its new multi-million Dollar facility were excluded by the Parol Evidence Rule. On the other hand, our contractor client had incorporated its proposal eliminating the more stringent requirements within the Owner specifications into the AIA Contract. The contractor's proposal was binding upon the parties, whereas the owner specifications were not.

In addition to being a “common law" rule, most every contract (including AIA contracts) contains a version in one form or another of the Parol Evidence Rule. Next time you review a contract (in any industry) look for a clause reading something like: “This Contract contains the entire integrated agreement between the parties and supersedes any prior writings, discussions, or other communications exchanged prior to the execution hereof." Such language is simply a private agreement to reinforce application of the Parol Evidence Rule that would otherwise already apply in most States.

There are also a variety of “common law" exceptions to the Parol Evidence Rule as a legal principle, which is why most contracts restate the rule in an attempt to eliminate these exceptions.  One family of exceptions surrounds parol evidence relating to enforceability of the contract, including: fraud, mutual mistake, illegality, lack of consideration, or lack of capacity to contract. Another family of exceptions surrounds parol evidence required to resolve ambiguities within the contract, including the identity of the contracting parties, the meaning of technical or specialized terms, or other terms susceptible to more than one meaning. A final family of exceptions surrounds parol evidence required  to establish collateral agreements, that relate to the contract, but are separate and independent, and do not contradict the terms of the final contract.  While such exception may be available, it is best not to rely upon them unless no other avenues are available.

The best practice and simplest strategy to avoid being “blindsided" by the Parol Evidence Rule is to include and incorporate. Any promises or documents exchanged after execution and upon which your contract is based, otherwise known as material terms, must be included or incorporated into your contract. In contrast, any promises or documents exchanged after contract execution while not barred by the Parol Evidence Rule, might be barred by other terms, including requirements all changes must be in writing and signed by both parties.

The next time you negotiate a contract make certain to include and incorporate all material terms into your final integrated writing. Otherwise your negotiations might be “blindsided” by the Parol Evidence Rule.