Are Breach of Contract Disputes Governed by Terms of Contract Alone?

You might think so, but generally whether the terms alone govern a dispute depends on the language in the contract.  When a contractual relationship breaks down, parties that previously agreed to terms of a contract suddenly no longer agree on the meaning of key terms. Many times parties to a contract have evidence that supports one meaning versus another.  The question becomes whether any of the evidence is relevant or if the court will simply interpret the terms as written.

I have posted before on the implications of the parol evidence rule in Connecticut.  A recent Appellate Court case serves to highlight some important aspects of the rule.  The case is Sullo Investments LLC v Marci Moreau and will be released for official publication on July 1, 2014.  In Sullo, the defendant signed a guaranty agreement for a commercial note.  The defendant lost at trial.  On appeal, the defendant claimed that the trial court erred because the court went beyond the four corners of the guaranty agreement and considered extrinsic evidence in violation of the parole evidence rule.

The Appellate Court disagreed and pointed out that the parole evidence rule is only implicated where the evidence serves to contradict or vary terms that are actually in the contract.  The rule:

“does not of itself, therefore, forbid the presentation of parol evidence, that is, evidence outside the four corners of the contract concerning matters governed by an integrated contract, but forbids on the use of such evidence to vary or contradict the terms of such a contract.”

The rule of evidence that applies to bar the evidence is relevance.   If the court cannot use the evidence to alter the terms of a complete and clear contract, then the evidence becomes irrelevant.  However, the evidence may be relevant for another purpose or the rule may not apply to the terms of the contract.  For example, extrinsic evidence may be admissible:

  • To explain an ambiguity in the contract
  • To prove a collateral agreement that does not vary the terms of the written
  • To add missing terms to a contract that does not state it is complete
  • To show mistake or fraud

These are all examples where the evidence would not alter the terms of a complete, written contract in clear terms.  As such, to determine whether evidence outside the contract is relevant, you have to consider the nature of the evidence, its purpose, and whether it contradicts the clear terms of a complete contract.  The parol evidence rule also highlights the need to draft clear contracts with clauses that make it clear the contract alone will govern the dispute.  Otherwise, the court will permit each party to introduce evidence outside the four corners of the contract.  This could include conversations, emails, and other documents.

Parol Evidence Rule Can Sting In Court

 Parties to contracts frequently argue over contract terms and the intent behind certain provisions ofbee-sting a contract.  However, if the matter goes to court, these arguments can become meaningless if the contract is clear because of the parol evidence rule.  A recent appellate court case, Connecticut Bank and Trust Co. v. Munsill-Borden Mansion, LLC, serves to highlight how the rule could impact the evidence in a breach of contract case at trial in Connecticut.

In the CT Bank and Trust case, the parties were arguing over whether an individual had personally guaranteed a promissory note.  The individual’s attorney wanted to ask a witness questions concerning the intent behind signing the note.  However, the trial judge sustained objections to all of the questions that strayed from the actual note. The reason cited was the parol evidence rule.

In summary, the parol evidence rule prohibits the use of extrinsic evidence (off the contract) to vary or contradict the terms of an integrated (complete) contract.  There are exceptions.  Exceptions include evidence to explain ambiguity, prove a collateral oral agreement that does not vary the contract, add a missing term that does not set forth the complete agreement, or to show mistake or fraud. 

In this case, application of the rule barred all of the questions that were not related to the note itself.  Therefore, any arguments over terms or intent were irrelevant.  Simply put, the parties were confined to the contract itself.

The take away here is to make sure any specific terms you want in a contract are reduced to writing in the contract, and not in a separate document or conversation.  For example, emails or verbal agreements that alter the terms of a clear and integrated contract may become irrelevant and unenforceable in court.