Chapter 6

PAROL EVIDENCE AND INTERPRETATION

ChapterScope

This chapter focuses on two areas dealing with the judicial construction of contracts: the parol evidence rule, and the interpretation of contract terms.

• Parol evidence rule: The parol evidence rule governs the effect of a written agreement on any prior oral or written agreements between the parties. Simplifying somewhat, the rule provides that a writing intended by the parties to be a full and final expression of their agreement may not be supplemented or contradicted by any oral or written agreements made prior to the writing.
  • Subsequent oral agreement: The parol evidence rule does not bar admission of evidence of oral agreements made after the writing.
  • Interpretation: The parol evidence rule does not bar admission of evidence about the meaning the parties intended to give to particular contract terms.
• Rules of interpretation: There are a number of general rules or “maxims” for interpreting the meaning of ambiguous contractual terms. For instance:
  • Ambiguous terms: Generally, an ambiguous term will be construed against the draftsman.
  • Custom: Evidence of “custom” may be admitted to show that the parties intended for a contract term to have a particular meaning. Sources of custom include “course of performance” (how the parties have interpreted the term during the life of the present contract), “course of dealing” (how the parties have interpreted the same term in prior contracts between them) and “trade usage” (the meaning attached to a term within a particular industry).
• Omitted terms: The court may supply a reasonable term in a situation where the contract is silent. (Example: Courts in contract cases frequently supply a duty to act in good faith.)

I. THE PAROL EVIDENCE RULE GENERALLY

A. How the rule applies: Before signing a written agreement, the parties typically engage in preliminary oral negotiations. Furthermore, they may exchange pieces of paper (e.g., letters, lists of items for discussion, etc.) that are not intended to be contracts in themselves. When the written contract is finally signed, it may fail to include any treatment of some of the issues raised in these preliminary oral discussions or written documents, or it may deal with these issues in a way that is different from their treatment in the earlier discussions. When this occurs, to what extent may one party later try to prove in court that these earlier oral or written discussions are part of the contract, despite their absence from the writing?