12 / 27 / 2015

"That's Not What You Said" - When the Parties Say One Thing, but Write Another

You might already know that an oral contract can be enforced if proven properly. However, it’s obvious that proving the existence of such an agreement, and defining the agreement’s particular terms, is much harder than if you had a written contract in the first place. Clearly, it’s always a good idea to get the agreement in writing. But what happens when you have both a written contract and oral contract?

Imagine you’ve signed a signed a contract to purchase a black sofa. You pay upfront, while the sofa is scheduled for delivery a couple days later. To your surprise, the sofa delivered is actually red. You sue for breach of contract. The Defendant takes the stand and says “I know that the contract specifies a black sofa, but she told me she actually wanted red.”

This is where the parol evidence rule comes in. This rule is a long-established common-law doctrine, which states that a final, “integrated” agreement cannot be contradicted by extrinsic, or outside evidence. In this case, you had a chance to sit down together and talk through exactly the kind of terms you wanted in the contract.  The fact that you both went with a black sofa in contract indicates that that was the color you and the defendant formally negotiated – the color you both “really” wanted at the time.  The parol evidence rule forbids the defendant from using the conversation over the signing of the contract as a way to get out of the contract’s clear requirements.

Evidence outside the contract may also be excluded if it is in writing, as long as that writing does not form part of the contract.  For instance, in the example above, suppose that the defendant testifies that you texted him a day after signing the contract that you really wanted a red sofa. Even if the defendant produces this text, unless there is significant evidence to indicate that this text created a new contract, it will be barred under the parol evidence rule as well.

However, extrinsic evidence can often be used to explain existing terms, or to establish additional terms consistent with the original agreement. Moreover, extrinsic evidence is often admissible to prove the circumstances surrounding the contract. A classic example is fraud; if I sell you a car that has had suffered major damage in the past, but I lie and tell you that the car is like new, that lie is a defense to having to pay under the contract, even if we have an "integrated" written agreement.

A more modern, formal incarnation of the parol evidence rule appears in the Uniform Commercial Code. The UCC specifically governs the sale of goods, and only the sale of goods; for all other transactions, the common law, discussed above, applies. The UCC states that terms for which “the confirmatory memoranda of the parties agree” or which are established “in a writing intended by the parties as a final expression of their agreement with respect to such terms” cannot be contradicted by evidence of any prior agreement, or of a contemporaneous oral agreement.

The UCC continues, however, explaining that such an agreement may be “explained or supplemented” by  the course of dealing or usage of trade, course of performance, or by evidence of consistent additional terms “unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.”

But this discussion forces us to ask - how can we make an agreement “final” or “integrated” for purposes of the parol evidence rule?

Integration is a matter of degrees, especially with the UCC. While written terms in the contract itself trump outside statements, this still leaves the possibility of additional terms. Therefore, we want to make the agreement the “most” integrated it could possibly be. The most popular way to do so is with an integration clause or merger clause. This kind of clause basically says “this contract is the final agreement between the parties.” While the language may vary, the idea is for the contract itself to state that it intends to completely represent the agreement between the parties. This signals the Court that the agreement is complete, and that no additional terms exist in the underlying agreement – one of the terms of the written contract must be that there are no other terms outside the contract!

Moreover, integration clauses can clarify the circumstances into which an agreement is entered. Often a contract will contain a series of “representations” made by the parties to each other. These are essentially a series of mutual promises, which are not terms of the contract, but are the statements the parties have relied upon in making their decision to sign. This helps to clarify the parties’ state of mind in entering this agreement. But just as with regular contractual terms, this still leaves the possibility of one party later arguing that the other communicated a false promise outside of the written agreement. Therefore, it’s important to not only list the representations made by parties to each other, but also to specifically state that these are the only representations made by the parties.

Sounds simple, doesn’t it? In theory it is, but in practice it takes great care and attention to the words used and the particular language of the agreement in order to assure that a court will find the agreement to be a complete representation of the agreement between the parties.

A skilled attorney with an understanding of business, such as the Vethan Law Firm, can help you draft a contract to avoid these issues.

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