Contracts 101: The Parole Evidence Rule | Dave Albo Law

If you’re not a lawyer, chances are you’ve heard of contracts, but you’ve never heard of the “Parol Evidence Rule.”  As a contract attorney Memphis, TN routinely trusts, we have seen many cases in which this legal rule applies, and it has been our experience that most clients are shocked to learn that in some cases, a court or jury will never have the chance to hear “their side of the story” about the case. Here’s how the rule works:

Hypothetical:  Alice and Bob have a written contract. Alice sues Bob for breach of contract. The case goes to trial.  Any evidence at trial about the negotiations, conversations, or agreements on terms which led up to the final written contract executed by Alice and Bob would be parol evidence.

The rule applies only where there is a written contract: It does not apply to cases involving oral agreements. The rule prohibits any proof at trial of agreements, conversations, or negotiations which happened before or at the same time as the execution of the final written contract. Even though “parol evidence” technically refers to oral testimony, the rule also applies to letters, emails and other writings created before or at the same time as the contract was signed.

The parol evidence rule is a rule of substantive law intended to protect the integrity of written contracts by putting a limit on what people can testify about at trial when the testimony is related to the terms of a written contract. Since courts should not look beyond a written contract when its terms are clear, the parol evidence rule provides that contracting parties cannot use extraneous evidence to change, vary, or qualify the plain meaning of an unambiguous written contract. The policy behind the rule is that it is not a good idea to allow people who have entered into a written contract to present evidence that contradicts what they agreed to in writing. As usual, there are exceptions to the rule, and a contract attorney can advise you on whether any of the exceptions might apply to your case. But you shouldn’t count on it.

A Tennessee court case which examines the parol evidence rule is First Tennessee Bank v. Bad Toys, Inc. (Tenn. Ct. App. 2005).  In that bank loan case, the borrower signed loan papers with the bank. The bank made it clear in all of the papers that, if the borrower defaulted, the bank could sell the assets the borrower put up as collateral in whatever order it wanted to. In addition, the bank made it clear that it had no obligation to sell pledged assets before it tried to collect from the borrower.  The loan papers also contained standard language reciting that they contained all of the terms of the parties’ agreements. The borrower, who had pledged stock as collateral, eventually defaulted. The bank filed suit against the borrower. The borrower alleged that, at the time the loans were made, a bank officer had verbally promised to sell the stock before trying to collect from the borrower if the borrower ever defaulted. The borrower alleged that if the bank had sold the pledged stock before the value of the stock fell, the borrower’s obligation to the bank would have been reduced. The court ruled that the parol evidence rule prevented the admission of the testimony of the borrower about the alleged oral agreement made by the bank officer. As you can see, the parol evidence rule can be outcome determinative. Because of the rule, the bank in this case never had to worry about whether the jury would believe the borrower and find for the borrower instead of the bank.

Because of the parol evidence rule, it is extremely important that any written contract you enter into contain all of the understandings and promises between the parties.  If you need help putting an agreement into proper contract form so that your rights are protected, call the contract attorney with contract drafting and litigation.

Thanks to our friends and contributors at Patterson Bray who have significant experience in contract formation and litigation.