Saturday, August 06, 2005

Parol Evidence Rule

The purpose of the parol evidence rule is to “give legal effect to whatever intention the parties may have had to make their [written contract] a final and perhaps also a complete expression of their agreement.”

If there is evidence in writing (such as a signed contract) the terms of the contract cannot be altered by evidence of oral (parol) agreements purporting to change, explain or contradict the written document.

Contracts and the parol evidence rule

by Timothy A. Vanderver III

As a roofing contractor, you face the possibility of being involved in a contract dispute. Numerous legal issues are involved in such disputes, and the following example should help you become aware of how to avoid certain problems.

The scenario

Imagine that you submit a proposal to install a roof system on a building. In your proposal, you include a clause stating, "This bid is expressly conditioned on the building owner providing storage for roofing materials and equipment at the building owner's cost."

During contract negotiations, you and the building owner discuss the storage issue. The owner says it will not be a problem for you to store materials and equipment on his property.

The next day, you record the conversation in writing and send a letter to the building owner. You write: "As we discussed yesterday, materials for the project will be stored on the owner's property adjacent to the job site at no cost to the roofing company."

As a result of the agreement, you are able to reduce your proposed price and are awarded the contract. However, when materials are delivered to the site, the building owner changes his mind. He tells you he has decided to keep the area reserved for material storage clear to provide access to the site. He suggests you lease off-site storage. You ask the building owner to pay for storage, but he refuses. When you remind the owner about your agreement, he says the contract states you have to pay your storage costs.

You decide to make a claim for the storage costs, and you and the building owner enter into arbitration. During arbitration, you try to explain the contract negotiations you had with the owner, but the arbitrator refuses to listen; he says your testimony is inadmissible. You also attempt to show the arbitrator the letter to the owner memorializing your conversation. Again, you are told this evidence is inadmissible. Finally, you show the proposal that states your offer was contingent on storage being at the owner's cost. Once again, you are told this is evidence the arbitrator cannot consider when rendering his decision.

When the owner presents his case, he points out a clause in the contract that states: "The building owner is not responsible for storage costs. All costs for storage of the contractor's equipment and materials shall be borne by the contractor. This contract and the plans, specifications and any other documents referenced in this contract shall constitute the entire integrated agreement between the parties."

When the arbitrator makes his decision, you are found to be liable for all storage costs for materials, as well the transportation costs from storage areas to the job site.

Why wouldn't you be allowed to explain that despite what the contract indicated, you and the building owner had agreed that materials and equipment could be stored on the owner's property at no cost? Why would an arbitrator refuse to consider the letter or proposal as evidence?

Parol evidence rule

There is a fundamental premise of contract law called the parol evidence rule. Parol evidence is any evidence other than contract documents. Anything outside of a written contract is parol evidence, whether it is testimony about what was said during contract negotiations, proposals or letters memorializing conversations.

The parol evidence rule states that parol evidence is not admissible to alter or explain a written contract's terms (i.e., a contract's terms speak for themselves without regard to any evidence beyond the contract documents). If parties want to form an agreement, a contract is considered to state all the agreement's terms. Parol evidence is not part of a contract. As a result, it is not admissible to explain the meaning of any contract terms or explain what the parties meant or intended to do under a contract.

This especially is true if a contract contains an integration clause. Usually, such a clause lists what is included in the contract documents (e.g., general terms and conditions, plans, specifications) and states that these are the only contract documents.

All the things you would have wanted to explain in the scenario—the proposal, letter and testimony about what the building owner said—would have been considered parol evidence. In addition, you would not have been able to explain that the written contract did not accurately express your agreement with the owner because this testimony also would have been considered parol evidence.

Getting it included

During contract negotiations, what is said is not as important as what ultimately is written in a contract. If you want a proposal's terms to be incorporated into a contract, you must be sure the contract reflects those terms or that the proposal is listed as a contract document.

Including such agreements in a contract can be accomplished in a number of ways. The most direct way is to write an agreement into the contract itself. During a negotiation, you can cross out a phrase (e.g., "material storage costs to be paid by roofing contractor") and write in another (e.g., "building owner will pay material storage costs"). Another way is to write a letter of understanding, being sure the letter is listed as one of the contract documents. In addition, you also may insert a sentence in the contract stating that in the event of conflicting terms, the proposal will govern.

Wrapping it up

In practice, the parol evidence rule can cause harsh consequences for the unwary. It allows building owners to say things to roofing contractors and not be bound by their statements. However, it is a fair rule that allows parties to know their rights and obligations with regard to a contract. You must be careful when negotiating contracts and be sure that favorable terms you negotiate are included in contracts.

Timothy A. Vanderver III is an attorney with the law firm Hendrick, Phillips, Schemm & Salzman, Atlanta.

Copyright © 2002 National Roofing Contractors Association

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