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Introduction to the Legal System of the United States 2016

7.1.1.1 Introductory Note

When two people make a contract, they create new law for themselves, new rights and duties that supplement or modify whatever entitlements they already possess. The law of contracts facilitates this process and may therefore aptly be described as an instrument of decentralized lawmaking.[1] There are, of course, limits to the lawmaking powers that private parties enjoy. A rule of criminal law, for example, cannot be displaced by private agreement and many of the nonconsensual duties deriving from the law of torts are similarly immune to contractual alteration.[2] Moreover, even if the subject matter of an agreement is perfectly innocent, the courts may refuse to enforce it if its terms are too one-sided or the agreement was reached by a route that is procedurally tainted through fraud, duress, or "unfair surprise".[3] In these respects, as well, the parties' power of self-rule is limited. Within these constraints, however, contracting parties enjoy a legislative preeminence: the rules they must follow are fixed by the terms of their own agreement and it is to the agreement that a court will look in deciding whether each has given or done all he should. This idea is sometimes expressed by saying "that the parties must be content to perform and to receive performance in accordance with their own agreement,"[4] and that the courts will not make a contract for them.

But even if an agreement is acknowledged to fall within the limits of permissible private lawmaking, its scope and the meaning of its terms may be uncertain. It may be unclear what the parties have agreed to, and where this is the case, even the least interventionist court must resolve a preliminary issue of interpretation before it can enforce the agreement according to its terms.

The need for interpretation can arise in many different ways. For example, the parties may have failed to address, or to even consider, a contingency whose occurrence has dramatically altered their original expectations. In cases of this sort, we speak of a "gap" in the contract, and the question the court must answer is, how shall the gap be filled? There are two possible responses: the court can either supply a term to fill the gap or do nothing, choosing instead to leave any losses where they may already have fallen. The first solution clearly requires an interpretive elaboration of the parties' bargain, typically through the implication of a risk-allocating term the court believes the parties themselves would have accepted had they addressed the matter at hand. Though less obviously, the second solution also represents an interpretation of the parties' agreement for it too is based upon a particular construction (or reconstruction) of their probable intent — why, after all, should losses that may have fallen in a wholly arbitrary way be allowed to remain where they are unless it is assumed this is what the parties would have wanted had they thought about the  problem before it arose? These and related issues are explored more fully in Chapter 8, which deals with the gap-filling doctrines of mistake and impossibility.

Gaps are not, however, the only reason an agreement may require interpretation. What the parties have said, as well as what they have left unsaid, can be a source of confusion and controversy requiring an interpretive resolution. If, for example, the parties have included an ambiguous term in their agreement it may be necessary for the court to decide which of the term's several meanings to adopt. Statements and promises made in the course of negotiations but not explicitly included in the parties' final agreement constitute another fertile source of ambiguity. When are prior statements and promises to be deemed an integral part of the bargain and when should we assume that the parties meant to deny them legal effect through a calculated act of silence or exclusion? A. number of interpretive rules have been devised to help answer this question; often described collectively as the parol evidence rule, they are the subject of the present chapter.

We may begin with a black-letter statement of the rule itself:

When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will  not be admitted for the purpose of varying or contradicting the writing.[5]

The definition is Corbin's and if it seems uncomplicated, we should remember that it is followed by more than two hundred pages of dense commentary. Each clause of the rule shines, deceptively, from innumerable glosses. Indeed, even its name is a deception for the parol evidence rule is not, properly speaking, a rule of evidence at all, nor is its application limited to parol (as distinct from written) agreements.

The rationale for the parol evidence rule was stated, with Elizabethan eloquence, in the Countess of Rutland Case, 5 Co. 26a, 77 Eng. Rep. 89 (1604). "[I]t would be inconvenient," declared Chief Justice Popham,

that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of the parties should be controlled by averment of the parties to be proved by the uncertain testimony of slippery memory. And it would be dangerous to purchasers and farmers, and all others in such cases, if such averments against matter in writing should be admitted.

Since the days of Chief Justice Popham, if not earlier, the parol evidence rule has been defended as a device to preserve the security of transactions. Its policy goal has found its most forceful articulation in a well-known Minnesota case.[6] The defendants, when sued on a written instrument guaranteeing the payment of "any and all sums of money" requested by a milling company in which they were interested, pleaded an oral agreement limiting their liability. Since, in the court's view, the instrument was the "final expression of the contractual assent of the parties," it could not be varied or contradicted by parol evidence of preceding or contemporaneous agreement. Absent fraud or mistake, the court declared, the negotiations preceding the written contract were not its concern.

Were it otherwise, written contracts would be enforced not according to the plain effect of their language, but pursuant to the story of their negotiations as told by the litigant having at the time being the greater power of persuading the trier of fact. So far as contracts are concerned, the rule of law would give way to the mere notions of man as to who should win law suits. [Without the parol evidence rule] there would be no assurance of the enforceability of a written contract. If such assurance were removed today from our law, general disaster would result because of the consequent destruction of confidence, for the tremendous but closely adjusted machinery of modern business cannot function at all without confidence in the enforceability of contracts.[7]

In justification of its conclusion that the instrument sued on was the final and complete integration of the understanding of the parties, the court in the Cargill case invoked the doctrine, often repeated, that the test of completeness of a written contract is the document itself: if the document "appears to be complete, that ends the inquiry and parol evidence is inadmissible to prove first the fact, and then the purport, of the alleged omission."[8] The court conceded, however, that incompleteness need not "appear on the face of the document from mere inspection" and added a significant qualification: "it is enough that the omission appear when the court, aided if necessary, and only if necessary, by extrinsic evidence, comes to apply the contract to the designated subject matter."[9]

The modern history of the parol evidence rule has been marked by a growing appreciation of the consequences of this last observation and its implications for our view not only of the rule but of contract interpretation in general. The parol evidence rule bars the proof of prior agreements where the parties have embodied their contract in a writing that is meant to be a complete and accurate statement of its terms. Application of the rule in any particular case clearly requires, therefore, a preliminary judgment concerning the parties' intentions with regard to the writing itself: did they mean it to be an exclusive source of contractual liability or something less than this, a partial statement of the terms of their agreement requiring supplementation from other sources? To determine what the writing means, or meant, to the parties, it must be viewed against the background of their attitudes and expectations, and while the writing serves an important evidentiary function in the reconstruction of this background, it cannot provide its own interpretive framework (any more than a literary text can criticize itself). An object is never the same as a person's attitude toward it, though the object may provide evidence as to what that attitude is and help to make it interpretively accessible to us. No matter how complete and authoritative it appears to be, a written agreement is only a sign pointing to something it is not and logically can never be — the matrix of intentions in which it has its own place and meaning. It is from the standpoint of this invisible web of expectations that we must always take our bearings in attempting to determine what agreement the parties have made. A writing cannot provide the standpoint from which its own meaning may be assessed, and the skills of draftsmanship are as useless in this regard as speed in the effort to jump over one's shadow.

But to say that a writing can never be more than evidence of the parties' intentions is not to say that all writings should be treated equally: some provide better evidence of the parties' intentions than others do, and should be given greater weight in the court's interpretive deliberations. Where it seems obvious from an inspection of the writing that the parties did in fact assent to it as an integrated statement of their agreement, it may seem like a metaphysical quibble to insist that a writing can only have greater or lesser evidentiary weight and can never be self- validating. But quibbles of this sort, though of seemingly little practical consequence, can help us to a deeper philosophical understanding of the law and to a more realistic appraisal of its rules. Corbin's discussion of the parol evidence rule is exemplary in both respects.

[1] Max Weber, On Law in Economy and Society 89 (M. Rheinstein & E. Shils trans. 1954).

[2] For a discussion of when a promisor may and may not disclaim responsibility for losses resulting from his own negligence, see 6A Corbin §1472.

[3] See pp. 554-564 supra.

[4] 3 Corbin §541.

[5] 3 Corbin §573.

[6] Cargill Commn. Co. v. Swartwood, 159 Minn. 1, 198 N.W. 536 (1924).

[7] Id. at 6, 7, 198 N.W. at 538.

[8] Id. at 8, 198 N.W. at 538.

[9] Id. at 9, 198 N.W. at 539.