A parol contract is a contract that was made orally. Typically, as long as it is relevant, evidence can be submitted to the jury of oral communication between the party. Of course, written agreements are the preference, but there is no reason to exclude oral or other written supplements, unless it violates the parol evidence rule.
This rule simply states that if the parties have agreed to create a final version of their contract in writing, all other communication prior to the agreement is not considered as evidence unless it supports what was actually written down. The purpose here is to exclude evidence, not to determine what is fine evidence. See the following case as an example of its use.
The first thing we need to ask is “is this evidence relevant?” According to FRE 401, it is relevant it it makes a fact more or less probable than it would have been without the evidence. This is a yes or no answer. If it moves the information even slightly, then it is relevant. We want to assume that it is relevant. The question is, when do we want to allow or exclude relevant evidence?
One of the purposes of this rule is to encourage individuals and organizations to write their contracts down. “If you write at all, write it all.” Another purpose is that memories fade and having a clear document that states everything is a good way of following evidence that is already there.
This is a rule of exclusion. Although there is relevant evidence, we exclude some of that evidence.
§209(1): “An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.” This means that an agreement can be integrated to some terms, or all terms. For example, one could sell an object for $10, but does not state how the object will be shipped. This is a partially integrated agreement
§210(1) “A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement. Completely integrated agreements are more efficient and (for goods) the UCC can fill in the gaps for other terms.
Thompson v. Libby
26 N.W. 1 (Minn. 1885).
The plaintiff lost in trial court and appealed.
Did the trial court error by allowing parol evidence regarding the warranty, when there was no mention of the warranty on the written agreement?
When the parties deemed to write down a contract, any parol evidence that attempts to add or vary the contract is not to be admitted.
The parties had formed a complete contract, it was wrong to admit the evidence. Reversed.
The plaintiff had cut down logs and sold them to the defendant. This was done in a written contract. Later, the defendant refused to pay for the logs, claiming that there was a warranty. The plaintiff sued and the defendant countered with the warranty argument.
The warranty had been orally communicated prior to the sale, but was not included on the contract. As such, when the defendant sought to admit this oral evidence in court, the plaintiff objected to the use claiming the parol evidence rule excluded it.
The trial court dismissed the objection and ruled in favor of the defendant.
In the case at hand, the contract was complete. Therefore, any parol evidence that attempts to add or vary to the terms of the contract are inadmissible. Here, the oral warranty falls under that rule and must be barred from admission.
The rule appears to be pretty straightforward: When the contract is complete, any parol evidence that adds or varies the contracts terms will not be allowed in trial. Thus, the kinds of parol evidence that will be included are only those where the material increases understanding as the language of existing terms.
Other exceptions to the rule include:
- Any parol evidence after the contract was formed.
- Parol evidence that shows the contract was not complete.
- Parol evidence to show that the agreement was invalid, such as fraud or duress. §214(d).
- Any evidence that shows a right to an “equitable” remedy or “reformation” of the contract. §214(e).
- Evidence that is used to establish a “collateral” agreement. This must be distinct from the actual agreement. §216(2).
This contract is integrated as to terms of what is being sold, the price, and method of payment. But there was nothing as to a warranty. So, now, the question is, do we allow the oral warranty into the evidence? The rule is that the parol evidence cannot be allowed to attack the terms of the fully integrated agreement.
The best way to ensure that the agreement is complete integrated by including a merger. A merger is a clause that says “everything in this contract has all the necessary terms, no other terms should be added.”
Taylor v. State Farm Mutual Automobile Insurance Co.
854 P.2d 1134 (Arz. 1993).
Plaintiff won in the trial court, lost in the appellate court and appealed to the Supreme Court of Arizona.
Did the appellate court error in determining that the parol evidence could not be admitted? To determine if this is so, the court must decide if the release language was reasonably susceptible to differing interpretations.
When deciding whether material is parol evidence that is to be included or excluded, the judge will first hear all the evidence to determine whether it helps explain the contract. This is true if the contract is “reasonably susceptible” to ambiguity.
The appellate court errored in barring the bad faith claim. Reversed.
Taylor was involved in an accident and sued. He lost that case which exceeded his policy limits by 2.1 million dollars. He then brought this bad faith claim against State Farm by arguing that they should have settled within the policy limits. State Farm countered by saying that the bad faith claim was barred because of the release. This release says that the plaintiff released State Farm from all claims of those involving the contract. However, because this is a tort case, the meaning/intention of the parties are in dispute.
There are multiple thought processes of how to handle parol evidence. First, some courts say that there must be ambiguity in the language before the court considers any additional parol evidence. In these instances, if there is no ambiguity, then there is no need to address the evidence.
However, this court realizes that there is a problem with this rule. One court could determine that the claim is ambiguous while another court does not.
So, the court here determines a better rule which follows three steps.
- If the language is so clear, there can be no question, there is no need to examine additional parol evidence.
- Determine, if the language was reasonably susceptible to differing opinions.
- If this is true, then determine if the extrinsic evidence can reasonably support the plaintiff’s evidence.
- Then, if the evidence could support either claim, it is useful to interpret the language and the jury will determine the issue.
This case is a prime example of interpretation. So, Thompson dealt with supplementation (add to) while Taylor dealt with interpretation (explain).
We can use the evidence to interpret the contract, but not challenge. However, this is a very difficult line to draw. When does interpretation become a challenge? A person can question a term with evidence if they use it to understand the term. For instance, there could be a debate about the color of a paint, and previous discussions can be used as evidence. This is because we are trying to understand what “blue” means and not saying “I wanted green, not blue.”
Extrinsic (outside information) evidence does not need to be provided by the parties, it could also come from third-party source.
There are two views about how to admit parol evidence.
- Four corners rule – plain language rule – the document must be ambiguous before we include any parol evidence. If it is clear, no evidence is admitted. For our class, we adopt the four corners rule.
- The Corbin view – First, all evidence is admitted and then exclude anything that varies or contradicts the meaning of the contract. This allows the court to evaluate the meaning of the agreement. This rule is adopted by the court here.
Sherrodd, Inc. v. Morrison-Knudsen Inc.
815 P.2d 1135 (Mont. 1991).
Sherrodd is the plaintiff, who lost and appealed.
Was the summary judgment against the plaintiff proper?
The parol evidence rule restricts the use of any oral or informal written evidence not included in the formal written contract. This is true unless there was a claim of a mistake in the contract or fraud involved in making the contract.
The ruling of the trial court of summary judgment was not in error.
The plaintiff was a subcontractor for the defendant. They agreed that the work to be done was 25,000 cubic yards for 97,000 dollars. Work began before a contract was signed. Once the work was underway, the plaintiff discovered that there was more land to work with than originally anticipated and began discussions regarding the work and payment for it. He was told that he would be paid for the additional work. However in the contract, he signed to be paid for a “Lump Sum” for 97,000. The plaintiff claims that if he did not sign this contract, he would not be paid for the 70,000 dollars of work he had already finished.
In this contract, there was a clause that states all communications prior or after the contract was superseded by the contract signed at that time.
When the plaintiff failed to be paid for the extra work, he sued. The trial court dismissed any additional evidence due to the parol evidence rule.
The majority argues that there are two exceptions to the parol evidence rule of the State. First, mistake of fact. Second, fraud. Mistake of fact is not relevant here because the evidence contradicts that there was a mistake of fact. As for fraud, evidence is not “admissible when the oral promise directly contradicts a provision of the written contract.” (Dissent’s summary of the majority opinion).
The dissent disagrees saying that evidence of fraud should be taken into consideration. The fear here is that by not taking evidence into consideration, all a party would need to do, by cunning or otherwise, ensure that an agreement was signed that releases them from any action.
We see the two points of issue on fraud from this case. The majority says that fraud is only admissible of evidence as long as it does not directly contradict a term in the contract. On the other hand, the dissent argued no provision in the contract should be shielded (or shield) the party from allegations of fraud.
Many courts side with the majority opinion outlined in Sherrod, but the majority prefer the dissent’s approach.
The whole point of this opinion was for the courts to avoid getting into the business of writing the agreement for the parties.
Nanakuli Paving & Rock Co. v. Shell Oil Co.
664 F.2d 772 (9th Cir. 1981).
Nanakuli is the plaintiff. In trial, they obtained a jury verdict in their favor. However, the judge set aside the verdict and ruled in favor of Shell. Nanakuli appealed.
This case is an example of trade usage and how it can be used to help interpret the terms of an agreement.
Did the trial court error in finding judgment despite the jury verdict? What influence does trade usage have in interpreting a contract?
Performance is more important than the terms written down.
There was extensive evidence of performance utilizing the trade usage of the time. Reversed and Remanded to provide a ruling in favor of Nanakuli.
Nanakuli is a paving company that obtains asphalt from Shell for the purposes of paving. At this time, federal contracts refused to escalate the price of the contract to accommodate for price increases of the goods. So, if an asphalt provider was required to increase the price of the asphalt, they would “protect” the receiver by selling the asphalt at the old price for a set period of time. This protection was to allow current contracts to run and new contracts to be established adjusted with the new price of asphalt.
After a change in management, Shell refused to price protect Nanakuli. Previously, Shell had protected Nanakuli, even though it was not in the contract. Because price protection was not in the contract, Shell said that they did not need to do so on this occasion. So, Nanakuli sued for damages caused between the difference of prices.
Although the term of price protection is not stated in the contract, the words of the contract can extend off the piece of paper. How? If a party can show that actual performance and usage of trade is significant and followed, those terms could be incorporated.
Here, several other companies would price protect. Additionally, Shell had price protected Nanakuli whenever the price increased, previous to the breach. This performance is an indicator of the practice and could be incorporated into the agreement.
Nanakuli would buy asphalt from Shell in 1963 to 1974 under two long-term supply contracts. This just means that the contracts lasted about 5 years. However, price is an issue. Over time, price can change over time due to the industry. So, you do not want to have a fixed price in a long-term contract.
UCC 2-306 Requirement Contracts
A term which measures the quantity by the requirements of the buyer means such actual requirements as may occur in good faith.
This means that you can measure the terms based on the market and protects both the buyer and seller. It protects the interests of the seller from buying a lot when the market goes up and protects the seller when the market price goes down. These protections come from the enforcement of “good faith.”
This case is an example of a requirement contract. How? Nanakuli would have to pay for asphalt at the posted price, as long as the change in price was done in good faith. So, if Shell raises the price, they would lose for lack of good faith, and they would lose any purchases where are not locked in a requirement contract.
UCC 2-305(1) Price Terms
Parties are allowed to contract even though they have not decided on the price. If it is not agreed, then a reasonable price can be determined at the time of delivery if certain elements are met.
A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
This refers to the requirement that Shell has to set the price in good faith.
Trade Usage, Course of Dealing, Course of Performance
Trade usage are the actions of industry participants.
Course of dealing are actions of these parties on prior contracts.
Course of performance is action of parties on the current contract. This is the strongest argument of the three terms.
Nanakuli claims that everybody has a price protection, even if it was not in the contract. The purpose of price protection was to protect builders.
There are a few ways to protect the price:
- Set a fixed price and if any decreases benefit the buyer
- Most favored nation clause – You will sell asphalt to me at lower price than you sell to anyone else.
- Set a high bar and a low bar of how much the price can vary.
- Prevent the price from changing after project bids have been made.
Shell argues that there was no price protection clause in their agreements. Nanakuli argues that this is the usage of the trade overrides that, everyone does this.
- Trade usage, everyone does it.
- But not only that, Shell had price protected in the past. Course of dealings.
- Needed the defendant to act in good faith.
- The trade referenced incorporated all suppliers (aggregate, water, asphalt), not just asphalt. This is prejudicial (because the price of oil is more variable than gravel). So, they want the court to look at just the asphalt.
- The price protection was only a waiver and not a course of performance. A waiver would be say, “this is a one time deal” not something that we would do normally.
- Price protection is inconsistent with the posted price as required by the contract.
One question here is whether there was a course of performance. Here, there were at least two circumstances and so it was left for the jury to decide.
The UCC allows the court to use trade usage, course of dealings, and course of performance.
As for the good faith, the posting had to be done in good faith. Was it done in good faith? The court says no because of the lack of advance notice. Vestal disagrees saying that the 2-305 comment says that a posted price satisfied the good faith requirement.
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