A written contract is the centerpiece of most transactions. The saying “get it in writing” is crucial, but why is it important?
Generally, if you have a written contract, you cannot rely on earlier negotiations and verbal statements to change the written contract. Under the “Parol Evidence Rule”, a judge may only look to the “four corners” of the written contract. This is a key issue in many business, real estate, and construction lawsuits.
This article discusses 8 things you should know about the Minnesota Parol Evidence Rule, and then provides tips for avoiding parol evidence problems.
1. The Parol Evidence Rule (a/k/a, the "Four Corner's Rule") is a Rule of Contract Interpretation.
The parol evidence rule requires a judge to look only within the "four corners" of the written contract to find the parties' intent. Outside evidence will be barred, unless an exception applies.
Courts have said that "[t]he primary goal of contract interpretation is to ascertain and enforce the intent of the parties." Valspar Refinish, Inc. v. Gaylord's, Inc., 764 N.W.2d 359, 364 (Minn. 2009). A contract must be interpreted to give effect to all of its terms. Metropolitan Airports Comm'n v. Noble, 763 N.W.2d 639, 645 (Minn. 2009).
The parol evidence rule (a/k/a, the "Four Corner's Rule") is not a rule of evidence, but a substantive rule of contract interpretation. Danielson v. Danielson, 721 N.W.2d 335, 338 (Minn. Ct. App. 2006). The rule governs what information a party can use to establish or interpret the written contract.
The parties' intent is the central focus in many breach-of-contract cases. The intent of the parties is determined from the plain language of the written contract, so long as the agreement is clear and unambiguous. Travertine Corp. v. Lexington-Silverwood, 683 N.W.2d 267, 271 (Minn. 2004). This is often called the “four-corners” rule, where courts focus on the “four corners” of the written contract to understand the parties' intent.
If the parties' intent can be determined from the written contract, no further evidence of the contract is necessary. Courts will not rewrite or modify a contract when the plain meaning is clear and unambiguous. Dorsey & Whitney LLP v. Grossman, 749 N.W.2d 409, 418 (Minn. Ct. App. 2008).
The takeaway is that a party cannot rely on information outside the written contract ("parol" statements) to interpret that contract.
2. The Parol Evidence Rule Bars “Extrinsic Evidence” Used to Contradict a Written Contract.
A written contract is direct evidence of the parties' agreement, and will be the court's focus in any breach-of-contract lawsuit. Any evidence outside of the written contract is considered “extrinsic” or “parol” evidence.
According to Minnesota courts, here is a summary of the parol evidence rule:
[The parol evidence rule] prohibits the admission of extrinsic evidence of prior or contemporaneous oral agreements, or prior written agreements, to explain the meaning of a contract when the parties have reduced their agreement to an unambiguous integrated writing. Accordingly, when parties reduce their agreement to writing, parol evidence is ordinarily inadmissible to vary, contradict, or alter the written agreement.
Danielson v. Danielson, 721 N.W.2d 335, 338 (Minn. Ct. App. 2006) (citing Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 312 (Minn. 2003)).
To break down the legal definition, the parol evidence rule will apply when these things are present:
- There is a written contract between the parties.
- The written contract is the full agreement between the parties.
- The terms of the written contract are clear and unambiguous.
- One party in the lawsuit wants to avoid a strict interpretation of the written contract, and instead wants to add, remove, or change the written terms.
- The party wants to use "parol" (oral or verbal) evidence of contract negotiations, rough drafts of the contract, discussions between the parties, verbal promises, or other extrinsic or parol evidence.
- The opposing party wants the court to apply the parol evidence rule and rely solely on the written contract.
A judge faced with this situation will have to analyze these issues. Sometimes, the decision is clear. Other times, these questions are challenging if the parties were informal or sloppy with their contracting. If so, the case may require an attorney to develop the facts necessary for a parol evidence argument and present it to the judge. As discussed below, there can be exceptions to the rule.
The takeaway? When you create a written contract, it may be the only thing a judge will consider. Do your best to include the full agreement in that written document.
3. The Parol Evidence Rule Does Not Apply When the Evidence Relates to Contract Performance.
The parol evidence rule bars evidence that undermines the written contract. The parol evidence rule does not prevent a party from showing a breach of contract (i.e., whether a party performed the contract). A party can always present evidence of whether a party breached a contract. The parol evidence rule is more concerned with this question: what is the agreement and what does it mean?
Once the terms of the contract are established (usually by looking at the written contract), the next question is whether a party performed a certain clause in that written contract. To do so, the parties will then have to present evidence about their actions to perform. Usually, the parties can testify about whether they performed on the contract. There may also be written evidence in the form of emails, letters, text messages, check receipts, or other writings. There may be other witnesses or physical evidence.
A key to understanding the rule is knowing the purpose for which evidence is used. If evidence is used to contradict or change the written contract, the parol evidence rule will likely bar it. On the other hand, if the evidence is being used to show whether a party performed, the parole evidence rule will not impact it.
4. The Parol Evidence Rule Often Depends on Whether the Contract has a “Merger” or “Integration” Clause.
In many contract disputes over parol evidence, the key question is whether the written contract was final, complete, and integrated. If so, parol evidence generally cannot be considered. If the written contract was incomplete or was not “integrated”, then the judge will probably allow parol evidence.
Basically, a merger or integration clause tells the judge not to consider any terms outside of the written agreement. Usually, judges must honor these clauses and exclude any parol evidence.
Minnesota courts have said:
an exception to the parol evidence rule exists if it appears from the circumstances that the parties did not intend the document to be a complete and final statement of the whole of the transaction between them, in which case a district court may admit parol evidence concerning the existence of any separate oral agreement as to any matter on which the document is silent, and which is not inconsistent with its terms.
Bussard v. College of St. Thomas, Inc., 294 Minn. 215, 224, 200 N.W.2d 155, 161 (1972) (quotation omitted).
But keep in mind that “[t]he absence of a merger clause in a writing does not necessarily open the door to parol evidence.” Minnesota Teamsters Pub. & Law Enforcement Emps. Union, Local 320 v. County of St. Louis, 726 N.W.2d 843, 848 (Minn. Ct. App. 2007) (quotation and alteration omitted), review denied (Minn. Apr. 25, 2007). A judge could still rule that the written agreement is full and final, even if it lacks a formal integration clause.
What is a Merger or Integration Clause?
Here are a few simple examples of a merger or integration clause (you or your attorney may need to expand the language and tailor it to your situation):
- “This contract is intended to be a full, final, and integrated expression of the parties' agreement and shall not be contradicted by any prior agreement or representation.”
- “This agreement, along with the attached specifications, exhibits, and addendum, is the final agreement of the parties and no other promise or representation shall be relied on by either party.”
- “This contract contains the parties' entire understanding of their agreement. No statement or representation outside this written contract shall be considered part of the parties' agreement.”
How Does a Judge Analyze a Merger or Integration Clause?
The question of whether a contract is completely integrated and not subject to variance by parol evidence is an issue of law for the district court. Apple Valley Red-E-Mix, Inc. v. Mills-Winfield Eng'g Sales, Inc., 436 N.W.2d 121, 123 (Minn. Ct. App. 1989), review denied (Minn. Apr. 26, 1989).
Keep in mind that whether a contract is fully integrated is not determined “solely by an inspection of the writing itself.” Bussard v. Coll. of St. Thomas, Inc., 294 Minn. 215, 224, 200 N.W.2d 155, 161 (1972). The written contract “must be read in light of the situation of the parties, the subject matter and purposes of the transaction, and like attendant circumstances.” Id.
Remember, even you have a valid merger or integration clause, parol evidence could be used for more specific exceptions to the rule, such as ambiguous terms. Apple Valley Red-E-Mix, Inc. v. Mills-Winfield Eng'g Sales, Inc., 436 N.W.2d 121, 123 (Minn. Ct. App. 1989), review denied (Minn. Apr. 26, 1989)).
A judge should start with the merger or integration clause. If the clause is not clear, or there are unique circumstances in the case, the judge may look to other circumstances to answer whether the contract was intended to be full and final.
The key is to put your intent into writing. If the parties want to strictly abide by the written contract, they should include a proper merger or integration clause.
If parties want to be more flexible or loose, then they could choose not to include the clause (or even state that certain types of representations are considered part of the contract). Such a party must understand, however, that it could be messy to reconstruct the contract later using parol evidence.
5. Parol Evidence Can Be Used to Explain an Ambiguous Contract Term.
The Parol Evidence Rule allows a party to present extrinsic evidence when the contract is vague or ambiguous.
What is Ambiguous Contract?
Minnesota courts have said that “[a] contract is ambiguous if, based upon its language alone, it is reasonably susceptible of more than one interpretation.” Denelsbeck v. Wells Fargo , 666 N.W.2d 339, 346 (Minn. 2003). The determination of whether a contract is ambiguous “depends on the meaning assigned to the words and phrases in accordance with the apparent purpose of the contract as a whole.” Halla Nursery, Inc. v. City of Chanhassen, 781 N.W.2d 880, 884 (Minn. 2010).
Examples of Ambiguous Language
Example 1: A contract says that a person “must deliver the golf balls to the pro shop by 7:00”. Does that mean in the morning or at night? This contract term is ambiguous and the parties could testify about the intended timing, and how it impacts the overall purpose of the contract.
Example 2: A contract says that the lawn company “will mow and take care of Scott's land.” Assume that Scott has several parcels of land with grass to be mowed. Which land does it cover? The contract is ambiguous and a court would likely allow extrinsic evidence (testimony about what land was intended to be mowed by the company).
Example 3: A contract says that a painter will “install countertops at Scott's home.” What kind of countertops? The prices can vary a lot, as can the colors and styles. This contract term is ambiguous. If there is a dispute, the parties could testify about what countertops were intended. Perhaps the homeowner circled the countertops in a catalog and gave the picture to the contractor. That would be strong evidence to resolve the ambiguity.
These are clear examples of ambiguity. Some situations involve complicated contracts and harder questions about whether a term is ambiguous. It is important to remember that the parties' competing interpretations must be reasonable. If only one party has a reasonable interpretation, then there may not be an ambiguity and no reason for extrinsic evidence.
Note that a judge must read the written language before deciding on whether to allow extrinsic/parol evidence. If the judge thinks the contract is ambiguous, the judge will allow evidence to explain the meaning of the ambiguous contract term. If there is a jury trial, the parol evidence will then be presented to the jury. Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979) (once extrinsic evidence is allowed, the interpretation of ambiguous terms becomes a question of fact for the jury).
6. There are Exceptions to the Parol Evidence Rule.
Remember that the parol evidence rule has exceptions. If you're trying to present evidence of discussions prior to the written contract, it simply depends on the purpose for the evidence.
Here are some recognized exceptions to the parol evidence rule in Minnesota:
- Fraud: A party can generally use parol evidence to show that the other party fraudulently “induced” him to sign the contract. Nygard v. Minneapolis St. Ry. Co.,147 Minn. 109, 113, 179 N.W. 642, 644 (1920) (parol evidence may be considered to prove the existence of surprise, fraud, accident, or mistake).When a contract is the result of fraud or misrepresentation, the contract is generally voidable. Since parol evidence of fraud goes to the heart of whether there is a contract, it can generally be presented in a breach-of-contract lawsuit.
- Mistake: If a written contract has a mistake that fails to accurately represent the parties' agreement, parol evidence can be used to correct the mistake. A mutual mistake occurs where the parties are in agreement as to the content of the document, but through a scrivener's error the document does not reflect the parties' understanding. Alpha Real Estate Co. v. Delta Dental Plan of Minn.,664 N.W.2d 303, 314 (Minn. 2003). A “unilateral” mistake by one party might be enough to use parol evidence if it involves fraud or inequitable conduct by the other party. Id. at n.3 (citing SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795 N.W.2d 855, 865 (Minn. 2011)). Generally, a party trying to correct a mistake makes a claim for “reformation” of the written contract so that it reflects the parties' true intent. A plaintiff's evidence must be “clear and consistent, unequivocal and convincing." Id. The elements of a reformation claim are:
(1) there was a valid agreement between the parties expressing their real intentions;
(2) the written instrument failed to express the real intentions of the parties; and
(3) this failure was due to a mutual mistake of the parties, or a unilateral mistake accompanied by fraud or inequitable conduct by the other party.
- Condition Precedent: “A condition precedent is an event that must occur before a party is required to perform a certain contractual duty.” Minnwest Bank Cent. v. Flagship Properties LLC, 689 N.W.2d 295, 299 (Minn. Ct. App. 2004). Parol evidence is admissible to show agreements regarding conditions precedent, “the theory being that such evidence merely goes to show that the writing never became operative as a valid agreement.” Craigmile v. Sorenson, 239 Minn. 383, 394, 58 N.W.2d 865, 872-73 (1953) (quotation omitted).
- Subsequent Conduct: The parties' conduct after the written agreement was signed can sometimes be used to shed light on what the agreement means. “Parol evidence may be admitted to explain the parties' conduct subsequent to the written agreement.” Alexander v. Holmberg,410 N.W.2d 900, 901 (Minn. Ct. App. 1987). Also “[p]arol evidence of subsequent conversations which alter the terms of a contract may be considered,” but “such evidence must be clear and convincing to justify setting aside a written contract and holding it as abandoned or substituted by a subsequent parol contract at variance with its terms.” Norwest Bank Minn., N.A. v. Midwestern Mach. Co., 481 N.W.2d 875, 881 (Minn. Ct. App. 1992), review denied (Minn. May 15, 1992).
- Subsequent conversations: In very limited circumstances, a court may allow evidence of post-contract conversations that alter or modify the contract. But if allowed, “such evidence must be clear and convincing to justify setting aside a written contract and holding it as abandoned or substituted by a subsequent parol contract at variance with its terms.” Norwest Bank Minn., N.A. v. Midwestern Mach. Co.,481 N.W.2d 875, 881 (Minn. Ct. App. 1992), review denied (Minn. May 15, 1992).
- Related Agreement: While it should be fairly obvious, the parties can present parol evidence to show a related agreement (as long as it does not contradict or change the written contract at issue).
7. The Parol Evidence Rule is More Flexible for “Sale of Goods” Contracts.
Parol evidence is more likely to be admitted when there is a contract for the sale of “goods”. This could include a contract between a consumer and business (a “merchant”), or between two businesses.
The Minnesota Uniform Commercial Code (UCC) applies to the sale of goods. There is a specific UCC rule that allows parol evidence for “sale of goods” contracts. Minn. Stat. § 336.2-202 states:
FINAL WRITTEN EXPRESSION; PAROL OR EXTRINSIC EVIDENCE.
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
(a) by course of performance, course of dealing, or usage of trade (section 336.1-303); and
(b) 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.
As you can see, UCC has the same the general rule (parol evidence cannot be used to show prior or contemporaneous agreements).
But importantly, the statute then allows parol evidence to explain the parties' “course of performance, course of dealing, or usage of trade.” The UCC has looser rules for businesses to create a contract. How they perform the contract can show their intent for the contract. “The test for the admissibility of parol evidence for custom and trade is not whether a term is ambiguous, but rather, whether the proffered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.” Apple Valley Red-E-Mix, Inc. v. Mills-Winfield Eng'g Sales, Inc., 436 N.W.2d 121, 124 (Minn. Ct. App. 1989), review denied (Minn. Apr. 26, 1989) (quotation omitted).
What is “course of performance, course of dealing, or usage of trade”?
The UCC defines them for us at Minn. Stat. § 336.1-303, which states:
336.1-303 COURSE OF PERFORMANCE, COURSE OF DEALING, AND USAGE OF TRADE.
(a) A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if:
(1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
(2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.
(b) A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
(c) A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.
(d) A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.
(e) Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:
(1) express terms prevail over course of performance, course of dealing, and usage of trade;
(2) course of performance prevails over course of dealing and usage of trade; and
(3) course of dealing prevails over usage of trade.
(f) Subject to section 336.2-209, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
(g) Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.
As you can see, the UCC has very detailed rules about things that supplement a “goods” contract. Obviously, it helps to know your industry and the contracts in them. If you are unsure or don't want to risk things changing your contract, then you should write your definition or understanding into the contract.
It is also important to understand your past dealings with the other party and performance so far in the current contract. These dealings can impact how a court might view the contract if there is a future dispute.
The takeaway is that a dispute over “sale of goods” contracts can potentially involve a lot of evidence outside the written contract. That outside evidence may be used by a judge to interpret the contract and see if the parties performed the contract. Therefore, parties to “goods” contracts must be careful (1) in drafting the written contract, and (2) in their actions after the contract is signed.
8. The Parol Evidence Rule Comes Up At Different Times in a Breach-of-Contract Case.
The parol evidence is a rule of contract interpretation, not simply a rule of evidence. As such, it comes up at different times in a civil dispute or lawsuit.
Often, the issue first arises when the parties have a dispute over the written language of a contract. One party strictly interprets the written language, while the other party argues that some oral agreement or promise should be considered part of the contract. While an understanding of the parol evidence rule would be helpful to sort out their legal rights, the parties can often resolve the issue amicably without having to take legal positions.
The parol evidence rule also comes up when a party makes a “dispositive” or “summary judgment” motion to the court. In these types of motions, the party is trying to win the case when the facts are clear and there is no need for a trial (if there's a material dispute of fact, the case goes to trial). This type of motion might be made by a plaintiff with a favorable argument under the written contract who wants to exclude all parol evidence. Or, it could be a motion by a defendant with a favorable argument under the written contract seeking to dismiss the plaintiff's claim. The parties' will use the parol evidence to focus the judge's attention to the written contract and to show that there are no material facts that would force a trial.
Motions in Limine
The parol evidence issue commonly arises prior to or at a trial. Usually, the parties to a breach-of-contract case make what's called a “motion in limine” to prohibit (or to allow) parol evidence at trial. Because it can be a crucial issue, judges generally require the parties to submit written briefs on the issue. This is often better, in a judge's view, because it avoids having to make a significant decision in the middle of trial or in front of the jury.
The takeaway is that the parol evidence rule impacts the trajectory of a breach-of-contract case. As such, it is important to develop a strategy early in the case to assess your legal position.
Practical Tips for Avoiding Parol Evidence Issues
- Make sure your written contracts contain all of the important terms you negotiated with the other party.
- For any important words or phrases that could be seen as ambiguous, use contract definitions to define the meaning.
- Use an appropriate merger or integration clause that properly addresses whether the written contract is a full and final agreement.
- Make sure that important negotiated terms make it into the written contract.
- If you have a contract for the “sale of goods”, make sure you understand industry norms and your past course of dealing with the other party. If you need to deviate from industry norms, make sure you use clear customized language that reflects your intent.
- Incorporate and attach any relevant documents (specifications, building plan, addenda, related agreements, etc.) to the written contract.
- Review and understand the written contract before you sign it. If necessary, have an attorney review it for you.
- Build flexibility as needed into your written contract, but understand that it will create uncertainty if there is a future dispute.
- If you are defending a breach-of-contract claim, be prepared to use the parol evidence rule to your advantage.
The parol evidence rule can lead to harsh results for a party that relies on verbal statements that are not in the written contract. If there is a later breach-of-contract lawsuit, a judge will likely bar that evidence and rely only on the “four corners” of the contract. Once the evidence is barred, the party may lose the case.
While a party can take advantage of exceptions to the rule (i.e., ambiguous terms, fraud, mistake, UCC exceptions), those exceptions can be limited. If the party is trying to avoid a strict interpretation of the written contract, it can be an uphill battle.
The best way to avoid the problem is to ensure that the full agreement is set forth in writing from the beginning. If you truly have to build flexibility into the written contract with general terms, make sure the written contract reflects that intent.
If you need legal advice or representation on a contract dispute or lawsuit, Contact Us for a free consultation. With offices in Shakopee (Scott County) and Litchfield (Meeker County), we serve clients throughout the Twin Cities and Greater Minnesota.