INTERNATIONAL JOURNAL OF RESEARCH AND ANALYSIS VOLUME 4 ISSUE 2 ISSN

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1 APPLICATION OF COMMON LAW PAROL EVIDENCE RULE UNDER VARIOUS INSTRUMENTS *KARAN TIBREWAL 1 INTRODUCTION A valid contract is neither made at one stroke nor are its requisites fulfilled at once. A number of negotiations have to happen before the conclusion of the contract. The parties may talk over phone, meet each other and negotiate regarding what they want and how do they want. During the course of these negotiations, the parties may reach to an agreement which is not final and may or may not be included in the final contract. Moreover, some of the agreements reached to may be discarded permanently whereas some of them would be included in the final contract. The question which arises in these situations is that whether any importance should be given to these agreements prior to the final contract. This research paper will discuss the common law parol evidence rule and the way it has been dealt with by various instruments such as the UN Convention on the International Sale of the Goods, the UNIDROIT Principles of International Commercial Contracts, Article 2 of the Uniform Commercial Code, the Restatement (Second) of Contracts, and the Indian Evidence Act, The parol evidence rule originated in 17 th century English common law. The rule states that when a final written contract is entered between the parties, it signifies the complete understanding of the parties regarding their rights and obligations under the contract. Thus, the rule bars all the prior promises, statements or agreements made by the parties and which would add, vary or conflict with the terms under the final contract 2. 1 This article has been authored by Karan Tibrewal, 5 th year student pursuing BA LLB honors at Jindal Global Law School, O.P. Jindal Global University, Sonepat. 2 Don Mayer, Daniel Warner, George J. Siedel, and Jethro K. Lieberman, The Law, Sales, and Marketing (v. 1.0), (December 29 th, 2012), Pg 504, Available from: Last Accessed on July 15 th, 212

2 The rule basically denies introduction of evidence which will indicate that the parties had agreed to something different from the final contract. It applies to written as well as oral agreements which are not included into the final contract 3. The rule has no application to the subsequent agreements which may transform the terms of an existing contract. EXEMPTIONS TO THE RULE The rule may be successful in not binding the prior agreements however it is subject to various exemptions. The first of the exemption is a situation where the parties never intended their final contract to be integrated i.e. they intended it to be partly oral. In such cases, the parol evidence rule is not applicable. However, if the final contract is intended to be fully integrated, evidence will not be allowed to modify the terms of the contract, even if the modification is an addition to the existing terms instead of being a contradiction 4. On the other hand, if the contract is intended to be partially integrated, prior terms which are consistent with the final contract can be shown. The burden of proof is on the party who wishes to exclude the prior evidence to prove that the contract was intended to be integrated 5. The second exemption relates to situations where prior consistent terms can become admissible when there are grounds which may cause the contract to be void. These grounds include illegality, fraud, mistake, lack of consideration and lack of competency to enter into a contract 6. The third exemption relates to a situation where the parties had previously agreed that the final contract is dependent on the occurrence of an event or any other condition, and the contract is not integrated, this agreement can be admissible as evidence 7. The fourth exemption is related in cases where a fact related to the final contract being false cannot be prevented by the parol evidence rule. For instance, if the contract provides that each party is over eighteen however, one of the parties is a minor; this fact cannot be prevented by the 3 Id. 4 Id. at Pg Don Mayer, Daniel Warner, George J. Siedel, and Jethro K. Lieberman, Supra Note 4 6 4Law School, Contract law: Parol Evidence Rule, Available from: Last Accessed on July 15 th, 7 Id. 213

3 rule 8. The fifth exemption is in cases where in order to implement the contract, the terms in the contract must be clearly understood which means prior terms would be allowed however, a claim which includes ambiguity cannot be used to alter, or change the contract s real intention. Generally, an oral term which is consistent with the contract can be shown if the contract intends partial integration. However, if there is an additional consideration for the oral term, it will not fall under the category of integrated contract and can be introduced as long as it is consistent. This additional consideration is assumed as creating a new contract 9. THE UN CONVENTION ON THE INTERNATIONAL SALE OF THE GOODS (CISG) The parol evidence rule does not allow an oral term as evidence if it contradicts the terms of the final and subsequent contract. Under CISG, a contract is not generally required to be in written form for its enforcement, modification or its termination 10. Article 11 of the CISG clearly states that a contract is not required to be in writing or any other form. It can be proved by including witnesses 11. Thus, the parties are under no obligation as to the requirement of form and also regarding modification and termination of the contract. However, the freedom to do away with the requirement of the form does not really address the issue of the amount of evidence to be weighed to determine the intent of the parties. The issue which arises under CISG regarding the rule is that whether the rule can be used to prove the scope of a contract under Article 11. There exists one more issue regarding the applicability of parol evidence rule which relates to lack of specified circumstances to prove the modification or termination of contract in accordance with Article 29 of CISG. In this regard, Article 8(3) of the CISG provides that the intention of the parties in regard to the contract formation including modification and termination has to be ascertained from the negotiations, 8 Henrik Waersted Bjornstad, Entire Agreement Clauses, (December 2006) Available from: Last Accessed on July 15 th, 9 Don Mayer, Daniel Warner, George J. Siedel, and Jethro K. Lieberman, Supra Note 5 10 Petra Butler, The Doctrines of Parol Evidence Rule and Consideration: A Deterrence to the Common Lawyer, Singapore International Arbitration Centre, (May 31 st, ), Available from: Last Accessed on July 15 th, 11 Id. 214

4 practices established among the parties, usages and subsequent conduct of the parties 12. However, the amount of evidence to be admitted can only decided by the procedural rule of the forum rather than the principle of formality freedom 13. If the international private law principle which states that admission of evidence will be dependent on the procedural law of the forum, is accepted it might lead to a clear path for the member states in the common law jurisdiction. The case of Beijing Metals and Minerals v American Business Centre Inc. 14 qualifies as an noteworthy judgment as it recognized the common law parol evidence rule under section of the Uniform Commercial Code. A claim was made by a Chinese Corporation against a Texas Corporation which was resisted by the defendant by relying upon the evidence of oral terms which was not included in the written agreement. The Fifth Circuit Court of Appeals held that the principle of parol evidence rule would apply irrespective of the domestic laws or CISG. Therefore, evidence of negotiated oral terms was barred from admission. The case of MCC-Marble Ceramic Center Inc. v Ceramica Nuova D Agostino Spa 15 is one of the landmark judgments in determining the intent of the parties under CISG. In this case, the D Agostino under the contract was supposed to sell ceramic tiles to MCC- Marble. MCC Marble failed to make the monthly payments. The seller produced the prior terms which gave a right to the seller to cancel the agreement if MCC-Marble failed to make the payments. The 11 th Circuit Court of Appeals observed that parole evidence rule is considered a substantive rule of law and not a rule of evidence. The rule cannot be invoked as a procedural rule of the forum. The Court also observed that the CISG did not contain a parol evidence rule however; the Convention permitted the parties to rely on oral contracts because the CISG does not have any connection with the statutes of fraud provision and provided for enforcement of oral contracts under Article 11 of the CISG 16. The Court also held that Article 8(3) of CISG expressly gave permission to the courts to give due consideration to all relevant circumstances including the negotiations to determine the intent. 12 Id. 13 Id. 14 Beijing Metals and Minerals v American Business Centre Inc. 993 F2d 1178 (5 th Cir. CA, 1993) 15 MCC-Marble Ceramic Center Inc. v Ceramica Nuova d Agostino Spa 144 F.3D 1384 (1998) 16 Bruno Zellar, The Parol Evidence Rule and the CISG a comparative analysis, (February 19 th, 2004), Available from: Last Accessed on July 15 th, 215

5 Thus, Article 8(3) gave express permission to use the parol evidence regarding the negotiations provided they disclose the parties subjective intent 17. INDIAN EVIDENCE ACT, 1872 The various provisions of the Indian Evidence Act preserve various aspects of the parol evidence rule. The relevance part of the Act is where the evidence can be admissible to prove relevant facts under Part II of the Indian Evidence Act and aspects of parol evidence rule founding its existence in Chapter VI of the Act. There are ten provisions under the Act relating to the parol evidence rule 18. The first rule (Section 91) under the Act is regarding the contents of certain documents must be proved by production of the document except where secondary evidence is available and permitted. The second rule is regarding the external evidence which is not permitted as admissible to contradict, vary or add the terms of a written document. Lastly, the third rule is regarding the admissibility of specific facts which can be done in aid of the interpretation of certain documents 19. Section 91 of the Act provides that the document must be considered the best proof of the agreement between the parties. On the other hand, Section 92 allows oral evidence to be admissible by way of exception. Thus, under the Act, the documentary evidence is considered superior to oral evidence for proving the intent of the parties. Section 92 is subject to six provisos which are exactly the same as the exceptions to the parol evidence rule 20. Therefore, the Indian Evidence Act is basically concerned with two aspects of the parol evidence rule. The first aspect relates to the evidence which can be admissible to prove the terms and 17 Id. 18 Goh-Yihan, Contractual Interpretation in Indian Evidence Act Jurisdictions: Compatibility with Modern Contextual Approach? Oxford University Commonwealth Law Journal, (2013), Pg 20, Available from: Last Accessed on July 15 th, 19 Id. 20 Id. at Pg

6 intention of the parties. The second aspect is regarding the various provisions under the Act which lays down the procedure clearly for the admissibility of prior evidence. ARTICLE 2 OF THE UNIFORM COMMERCIAL CODE Article 2 of the Uniform Commercial Code is commonly referred to as the parol evidence rule which states that the terms of the agreement cannot be contradicted by evidence of any prior agreement or of an oral agreement. However, it can be explained or supplemented by course of performance and by evidence of consistent additional terms 21. UCC s parol evidence rule is much more than the parol evidence rule at common law. However, there is a similarity between the rule at common law and the UCC s evidence rule. Both the rules prevent the courts to consider the prior agreements to contradict the terms of a final contract or to add terms to a final contract if the written contract is intended to be final expression of the parties 22. UCC does not expressly address the issue of how a court has to determine whether final contract was intended to be final expression. One of the tests applied by the courts in order to determine it is the four corners test which states that the trial court will look only to the words within the four corners of the final writing to determine whether or not it is complete 23. There are no disputes till now where UCC may have been cited to either accept or reject the four corners test. Thus, under UCC, the parol agreements can be used to add terms to a written contract in order to determine whether the written contract is complete. 21 David G. Epstein, Adam L. Tate, and William Yaris, fifty: Shades of Grey--Uncertainty About Extrinsic Evidence and Parol Evidence After All These UCC Years, Arizona State Law Journal, (2013), Pg 933 Available from: Last Accessed on July 15 th, 22 Id. at Pg Id. 217

7 THE RESTATEMENT (SECOND) OF CONTRACTS Section 213(1) of the Restatement (Second) of Contracts provides the parol evidence rule and is stated as a binding integrated agreement which does not include prior agreements which are inconsistent with the agreement or to the extent that they are within its scope. The parol evidence rule is applicable only when the final agreement is written irrespective of whether the prior agreement was oral or written 24. Moreover, the written agreement must be enforceable. Thus, the Act allows several types of evidence which will prove the final agreement to be non-enforceable on grounds of fraud, mistake, illegality or accident. If the terms of the final agreement do not reflect the final understanding of the parties, the parol evidence rule would not apply since the agreement will become non-enforceable. The rule basically serves two purposes namely, determining the terms which are to be included under the contract as final and whether the terms can be used for interpretation 25. Lastly, the Restatement allows the prior agreements or negotiations in order to prove that the final agreement does not contain the final expression of the terms as intended by the parties 26. THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS The UNIDROIT Principles of International Commercial Contracts does not expressly recognize the parol evidence rule. It has adopted the same approach as adopted by CISG. Article 1.2 of it allows a contract to be proved by any means including witnesses 27. Moreover, Article 4.3 permits the court to give due consideration to preliminary negotiations between the parties, practices which have been established by the parties, the conduct of the parties subsequent to the 24 Frank L. Schiavo, An Alternative Approach to the Parol Evidence Rule: A Rejection of the Restatement (Second) of Contracts, Capital University Law Review, Volume 41, (2013) Available at: Last Accessed on July 15 th, 25 Frank L. Schiavo, Supra Note Alberto Luis, The Parol Evidence Rule: A Comparative Study of the Common law, the Civil Law Tradition and Lex Mercatoria, Georgia Journal of International and Comparative Law, Volume 35 No 2, (2007), Pg 240 Available from: Last Accessed on July 15 th, 27 Jeffrey T. Ferriell, Understanding Contracts, Library of Congress Cataloging-in-Publication Data, 2 nd Edition, Lexis Nexis (2009). 218

8 contract, the nature and purpose of the contract and the meaning which is commonly given to terms and expressions 28. Therefore, despite the non-recognition of parol evidence rule, a merger clause has been accepted by the Principles which states that an agreement containing a clause that the terms expresses the clear expression of the parties cannot be contradicted by using evidence consisting of prior agreements or negotiations 29. Nevertheless, the prior agreements or negotiations can be used for interpretation of the terms of the final agreement. CONCLUSION As a whole, the common law parol evidence rule rightly bars all the prior promises, offers, statements or agreements to determine the real intention of the parties under the contract. Since the prior agreed terms may contradict the final contract or may even be the same as the final contract, the real intent must be ascertained only by the final terms agreed in the contract. The prior negotiations can be considered as the initial steps which are necessary for the purpose of reaching the negotiated terms under the final contract. Without the negotiations, the parties would not be able to meet what they really want under the agreement. Thus, negotiations and prior terms are necessary in order to make a fair and just contract but it does not lead to the conclusion that the real intention of the parties can be ascertained by taking them into consideration. It is only a means to an end. Even though there are instruments which have only partially recognized the rule or have not recognized it at all, the importance of it cannot be over-emphasized. The court must uphold the rule in all the possible circumstances and should not give any more regard to the prior terms than required despite non-recognition of it under several instruments. Moreover, the court may take into account the prior negotiations between the parties for reference to determine the line of thinking of the parties but it must not solely rely on them to determine the true intention of the parties under the contract. The contract itself must be relied upon in order to do the same. 28 Id. 29 Id. 219