Contract Interpretation

Parole Evidence Rule

The parol evidence rule enacts a principle of the common law of contracts that presumes that a written contract embodies the complete agreement between the parties involved; the document is the sole repository of the terms of the contract . The rule therefore generally forbids the introduction of extrinsic evidence (i.e., evidence of communications between the parties which is not contained in the language of the contract itself) which would add or change terms of a later written contract.

In order for the rule to be effective, the contract in question must be a fully integrated writing; it must, in the judgment of the court, be the final agreement between the parties (as opposed to a mere draft, for example). One way to ensure that the contract will be found fully integrated is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties. However, many modern cases have found merger clauses to be only a rebuttable presumption.

An integrated agreement is either a partial or complete integration. If it contains some, but not all, of the terms as to which the parties have agreed then it is a partial integration. This means that the writing was a final agreement between the parties (and not mere preliminary negotiations) as to some terms, but not as to others. On the other hand, if the writing were to contain all of the terms as to which the parties agreed, then it would be a complete integration. The importance of this distinction is relevant to what evidence is excluded under the parol evidence rule. For both complete and partial integrations, any evidence contradicting the writing is excluded under the parol evidence rule. However, for a partial integration, terms that do not contradict the writing but merely add to it are not excluded.

There are a number of exceptions to the parol evidence rule. Extrinsic evidence can always be admitted for the following purposes:

1. To work out the subject matter of the contract.
2. To resolve an ambiguity in the contract (California law) .
3. To show that an unambiguous term in the contract is in fact a mistaken transcription of a prior valid agreement. Such a claim must be established by clear and convincing evidence, and not merely by the preponderance of the evidence.
4. To show fraud, duress, mistake, or illegal purpose on the part of one or both parties.
5. To show that consideration has not actually been paid. For example, if the contract states that A has paid B $1,000 in exchange for a painting, B can introduce evidence that A had never actually conveyed the $1,000.
6. To identify the parties, especially if the parties have changed names.
7. To imply or incorporate a term of the contract.

In order for evidence to fall within this rule, it must involve either (1) a written or oral communication made prior to execution of the written contract; or (2) an oral communication made contemporaneous with execution of the written contract. Evidence of a later communication will not be barred by this rule, as it is admissible to show a later modification of the contract (although it might be inadmissible for some other reason, such as the Statute of Frauds. Similarly, evidence of a collateral agreement - one that would naturally and normally be included in a separate writing - will not be barred. For example, if A contracts with B to paint B's house for $1,000, B can introduce extrinsic evidence to show that A also contracted to paint B's storage shed for $100. The agreement to paint the shed would logically be in a separate document from the agreement to paint the house.

Adhesion Contract

A standard form contract (sometimes referred to as an adhesion contract or boilerplate contract) is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. It is often a contract that is entered into between unequal bargaining partners, such as when an individual is given a contract by the salesperson of a multinational corporation. The consumer is in no position to negotiate the standard terms of such contracts and the company's representative often does not have the authority to do so.  For a contract to be treated as a contract of adhesion, it must be presented on a standard form on a ‘take it or leave it’ basis, and give the purchaser no ability to negotiate because of their unequal bargaining position. The special scrutiny given to contracts of adhesion can be performed in a number of ways:

1. If the term was outside of the reasonable expectations of the person who did not write the contract, and if the parties were contracting on an unequal basis, then it will not be enforceable. The reasonable expectation is assessed objectively, looking at the prominence of the term, the purpose of the term and the circumstances surrounding acceptance of the contract.
2. Section 211 of the American Law Institute's Restatement (Second) of Contracts, which has persuasive though non-binding force in courts, provides where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement. This is a subjective test focusing on the mind of the seller and has been adopted by only a few state courts.
3. The doctrine of unconscionability which is a fact-specific doctrine arising from equitable principles. Unconscionability in standard form contracts usually arises where there is an "absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms which are so oppressive that no reasonable person would make them and no fair and honest person would accept them."

Integration Clause

In the contract law, an integration clause, or merger clause is a term in the language of the contract that declares it to be the complete and final agreement between the parties. The existence of such a term is conclusive proof that no varied or additional conditions exist with respect to the performance of the contract beyond those that are in the writing. A contract that has such a clause is deemed an integrated contract, and any previous negotiations in which the parties to the contract had considered different terms will be deemed superseded by the final writing. Sometimes is also known as "Entire Agreement" Clause, and, in its case, it is usually drafted at the end of the contract.

Contra Proferentem

Contra proferentem is a rule of contractual interpretation which provides that a term which is found to be ambiguous should be construed against the party which imposed its inclusion in the contract. That is, the preferred interpretation will be the one most favourable to the party upon whom its inclusion was imposed. Or, more accurately against (the interests of) the party who imposed it. The rule only applies if, and to the extent that, the clause was included at the unilateral insistence of one party without having been subject to negotiation by the counter-party.  It translates from the Latin literally to mean "against (contra) the one bringing forth (the proferens)."

The reasoning behind this rule is to encourage the drafter of a contract to be as clear and explicit as possible and to take into account as many foreseeable situations as he can.  Additionally, the rule reflects the court's inherent dislike of standard-form take-it-or-leave-it contracts also known as contracts of adhesion (e.g., standard form insurance contracts for individual consumers, residential leases, etc.). The court perceives such contracts to be the product of bargaining between parties in unfair or uneven positions. To mitigate this perceived unfairness, legal systems apply the doctrine of contra proferentem; giving the benefit of any doubt in favour of the party upon whom the contract was foisted. Some courts when seeking a particular result will use contra proferentem to take a strict approach against insurers and other powerful contracting parties and go so far as to interpret terms of the contract in favor of the other party, even where the meaning of a term would appear clear and unambiguous on its face, although this application is disfavored.  Contra proferentem also places the cost of losses on the party who was in the best position to avoid the harm. This is generally the person who drafted the contract.

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*Please note that the Sample Business Contracts are provided as a reference only to assist you in better understanding the types of business and commercial agreements.  These samples should not be utilized as templates to "draft" your own agreement because such the agreement or provisions thereof may be invalid, illegal, or not comply with the laws and regulations of a particular jurisdiction and therefore may be invalidated or unenforced by a court of competent jurisdiction.