Tuesday, March 3, 2009

Contracts - The 'Parol Evidence' Rule

One of the foundations of a capitalist society like ours is the legal enforceabilty of contracts [editorial aside: insert your joke here about whether America, in 2009, can still accurately be described as capitalist, in light of the federal government's ever-increasing ownership stake in various sectors of the economy].

A "contract" is, at the most basic level, any agreement between two or more parties. Contracts can be written or oral, and in a subsequent post we will examine Virginia's law regarding when a contract must be in writing in order to be enforceable.

Today, though, we highlight an issue about which we are often asked by clients: if an agreement between two parties is represented by a written contract, and the meaning of the written contract becomes the matter of a dispute between the contracting-parties, can the parties use evidence outside the scope of the written document in order to convince a judge as to the contract's true meaning?

The legal doctrine that provides the answer is called the "parol evidence rule," and it can be summarized as follows: if the meaning of a contract is unambiguous "on its face" (in other words, if the words in the contract document can only reasonably be interpreted one way) then a court may not consider the contracting-parties' "extrinsic" statements or actions (including oral statements or other writings) in determining the rights and obligations of the parties under the contract.

Stated this way, the parol evidence rule seems both logical and fair: if two people enter into a written agreement, then they each should be held to the "terms of the deal." However, there are a host of exceptions to the parol evidence rule.

The biggest exception is that parol evidence can be considered if the language on "the face" of the contract is ambiguous. Of course, "ambiguity" (often) lies in the eyes of the beholder, and therefore many contract disputes will hinge on one party's being able to convince a judge to look beyond the face of the document to the other, extrinsic (or "parol") evidence that might give the judge additional guidance as to the parties' intent.

How might the parol evidence rule come into play in a real life legal dispute? Consider these facts:

Suppose that Amy and Bob enter into a written lease for Amy to rent her house to Bob. The lease states that Bob will pay rent of $1,000.00 a month and that Bob will also be responsible for reimbursing Amy for all utility bills

Bob moves in and does not send reimbursements to Amy for the first several utility bills. This leads to tension. Ultimately, Amy sues Bob.

In court, Bob argues that Amy told him, the day that they got together and signed the lease, that she would be responsible for the utilities.

Bob never bothered to read the "fine print" in the lease.

Bob acknowledges that the lease clearly states that he is responsible for reimbursing Amy for the utilities, but he thinks the judge should consider his evidence that Amy told him she would pay the utility bills.

Among other issues that a judge might consider in evaluating the arguments of Amy and Bob, she would consider the parol evidence rule and -- importantly -- whether any of the exceptions to the rule apply.

Earlier, I mentioned that one exception to the rule is when the language in the contract itself is ambiguous -- therefore, if Bob could establish that the lease's language about payment of utilities were ambiguous, he might convince the judge not to apply the parol evidence rule.

Another exception to the parol evidence rule is to allow extrinsic evidence for the purpose of showing a fraud by one of the parties; Bob might, therefore, argue that Amy committed a fraud by saying that she would pay for the utilities even though she knew the lease said differently.
A lesson here is that you should be very careful, prior to putting "pen to paper," that a written contract accurately reflects what you believe to be the agreement between the parties. If the person or business with whom you are signing a contract has told you one thing, but the contract says another, then the contract needs to be revised prior to signing.

A second lesson is that once the meaning of a contract becomes a matter of dispute, you should talk to an attorney about the parol evidence rule and other rules of contract interpretation that may affect your rights and obligations.