Contract content and meaning - Parol evidence

Learning Outcomes

After reading this article, you will be able to explain the parol evidence rule, identify when extrinsic evidence is excluded or admitted, distinguish between complete and partial incorporation, and apply the key exceptions tested on the MBE. You will also be able to analyze scenarios involving ambiguous terms, collateral agreements, and contract defenses, ensuring you can answer MBE questions on contract content and meaning.

MBE Syllabus

For the MBE, you are required to understand how courts determine the content and meaning of written contracts, especially the rules governing the use of prior or contemporaneous statements. This article covers:

• The parol evidence rule and its application to incorporated writings.
• The distinction between complete and partial incorporation.
• The main exceptions to the parol evidence rule.
• Admissibility of extrinsic evidence for contract interpretation and defenses.
• The effect of merger clauses and collateral agreements.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is most likely to be excluded by the parol evidence rule?
   1. Evidence of a subsequent oral modification.
   2. Evidence of a contemporaneous oral agreement that contradicts a term in the writing.
   3. Evidence of a defense to contract formation.
   4. Evidence explaining an ambiguous term.
2. A contract contains a merger clause stating, "This is the entire agreement between the parties." Which statement is most accurate?
   1. The writing is presumed to be a complete incorporation.
   2. The parol evidence rule does not apply.
   3. Only collateral agreements may be admitted.
   4. The contract cannot be modified.
3. Under the parol evidence rule, extrinsic evidence may be admitted to:
   1. Add a term to a completely incorporated agreement.
   2. Explain a latent ambiguity in the contract.
   3. Contradict an express term in the writing.
   4. Show the parties' subjective intent.

Introduction

The parol evidence rule is a fundamental principle for determining the content and meaning of written contracts. It governs when parties may introduce evidence of prior or contemporaneous agreements to supplement, explain, or contradict a written contract. Understanding when the rule applies, and its exceptions, is essential for MBE success.

Key Term: Parol Evidence Rule
The rule that prevents parties from introducing evidence of prior or contemporaneous agreements that contradict, vary, or add to the terms of a final written contract.

Scope and Purpose

The parol evidence rule applies when parties have reduced their agreement to a writing that they intend as the final expression of their bargain. The rule bars evidence of earlier or contemporaneous oral or written statements that would change the terms of the written contract.

Key Term: Incorporation
A writing that the parties intend as the final expression of their agreement. Incorporation may be complete (fully incorporated) or partial.

Complete vs. Partial Incorporation

A complete incorporation is a writing intended as the full and exclusive statement of the parties' agreement. In this case, the parol evidence rule bars any extrinsic evidence that would add to, vary, or contradict the writing.

A partial incorporation is a writing intended as a final expression of only part of the agreement. Here, parol evidence may be admitted to supplement (but not contradict) the writing.

Key Term: Complete Incorporation
A writing that is intended as the exclusive and final statement of all terms agreed upon by the parties.

Key Term: Partial Incorporation
A writing that is intended as a final statement of only some terms, allowing supplementation by consistent additional terms.

Determining Incorporation

Courts look at the writing itself, the presence of a merger clause, and the circumstances to decide if a contract is incorporated. A merger clause ("This is the entire agreement...") is strong evidence of complete incorporation but not conclusive.

What Parol Evidence Excludes

The rule excludes evidence of prior or contemporaneous agreements that:

• Contradict an express term in the writing.
• Add a term to a completely incorporated agreement.

What Parol Evidence Allows

The rule does not bar evidence that:

• Explains ambiguous or unclear terms.
• Shows a defense to contract formation (e.g., fraud, duress, mistake, illegality).
• Proves a condition precedent to the contract's effectiveness.
• Shows a collateral agreement that would naturally be omitted from the writing.
• Relates to subsequent modifications (agreements made after the writing).

Key Term: Collateral Agreement
A separate agreement that does not conflict with the written contract and would naturally be omitted from the writing.

Worked Example 1.1

A and B sign a written contract for the sale of a car. The contract states the price and delivery date but is silent about a warranty. Before signing, A orally promised B a one-year warranty. After delivery, B seeks to introduce evidence of the oral warranty.

Answer: If the writing is a complete incorporation, the parol evidence rule excludes evidence of the prior oral warranty. If the writing is only a partial incorporation, B may introduce the oral warranty if it is consistent with the writing and does not contradict any term.

Worked Example 1.2

C and D sign a contract for the sale of land. The contract describes the property as "the house at 123 Main Street." C seeks to introduce evidence that the parties actually intended to include the adjacent lot.

Answer: Evidence may be admitted to clarify a latent ambiguity—where the description is clear on its face but uncertain in application. Parol evidence is allowed to show what property was intended.

Exceptions and Defenses

The parol evidence rule does not bar evidence offered to show that:

• The contract is void or voidable due to fraud, duress, mistake, or illegality.
• There was a condition precedent to the contract taking effect.
• The parties agreed to a subsequent modification.

Exam Warning

Evidence of a subsequent oral or written modification is not barred by the parol evidence rule. The rule only applies to prior or contemporaneous agreements.

Revision Tip

Always identify whether the writing is a complete or partial incorporation before deciding if parol evidence is admissible.

Key Point Checklist

This article has covered the following key knowledge points:

• The parol evidence rule excludes evidence of prior or contemporaneous agreements that contradict, vary, or add to a final written contract.
• The rule applies only to incorporated writings—either complete or partial.
• Complete incorporation bars both contradictory and additional terms; partial incorporation bars only contradictory terms.
• Parol evidence is admissible to explain ambiguities, show defenses, prove conditions precedent, or demonstrate collateral agreements.
• Evidence of subsequent modifications is always admissible.
• A merger clause is strong evidence of complete incorporation but not conclusive.
• The rule does not bar evidence of fraud, duress, mistake, or illegality.

Key Terms and Concepts

• Parol Evidence Rule
• Incorporation
• Complete Incorporation
• Partial Incorporation
• Collateral Agreement