When two parties enter into a contract, they often heavily negotiate the terms. In some circumstances, the parties may take weeks or months to carefully craft the wording of their contracts. In other circumstances, language gaps may leave much to be desired.
What happens if the parties later disagree about the meaning of certain words or language in the contract? How will a court approach the contract’s interpretation if there is a lawsuit? Enter the parol evidence rule.
The parol evidence rule is a rule applicable to contract disputes, generally prohibiting the admission evidence that is outside the parties’ written contract. Parol evidence may be admissible, however, to show collateral, contemporaneous agreements that are consistent with the underlying agreement or provisions in dispute.
Typically, parties are bound by the terms in their contract. A court will generally interpret those terms according to their plain and common meaning. Courts will generally not allow information or evidence outside of the contract to affect its interpretation. That is, courts will “stay within the four corners of the document.”
However, if a court determines that a contract is ambiguous, or unclear, it may allow the parties to use parol evidence to help interpret the contract. Parol evidence is extraneous information — or information that is outside the “four corners” of the contract. In a contract dispute, parol evidence usually includes information regarding the parties’ understanding or interpretation of the contract’s terms, such as writings from the parties’ negotiations, like letters or emails. It may include evidence of the circumstances under which the contract was negotiated and executed. This information may provide evidence of the parties’ intent.