Contract Basics

Parol Evidence Rule

The parol evidence rule limits a court's interpretation of the content of a contract to the actual written terms of the contract. The parties must sign the agreement, which must identify the subject matter and set out the terms and conditions. The parol evidence rule comes into play when the contract is final, complete, and unambiguous.

The parol evidence rule is a principle in the law that limits the content and meaning of a contract to what is contained in the actual contract itself. It seeks to limit evidence outside the contract that could be used to interpret what the parties meant by what they agreed to.

To be effective, an agreement must be in writing, contain all required terms, be otherwise binding, and be a fully integrated document. A fully integrated document says on its face that the agreement is the full agreement of the parties.

Often a contract will contain a merger clause. This says the contract contains all the agreements between the parties and that any changes to the document must be in writing and signed by all parties. If a contract contains a merger clause and defines a certain term, then the parties will not be permitted to admit evidence to try to interpret what the parties meant by the term. Its definition will be limited to what is in the contract.

If the parol evidence rule were not in effect, then the parties would be able to introduce outside evidence to the court to interpret the contract. For example, the parties might describe what the parties said at the time of contract or before or after, how the parties have interpreted past contracts, or what industry standards relate to the contract or other evidence on a case-by-case basis.

The parol evidence rule brings finality to the interpretation of a contract. It means that all parties need to be sure the document defines terms and obligations clearly.