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Georgetown University Law Center

Scholarship @ GEORGETOWN LAW

2019

Parol Evidence Rules and the Mechanics of Choice

Gregory Klass

Georgetown University Law Center, [email protected]

This paper can be downloaded free of charge from: https://scholarship.law.georgetown.edu/facpub/2048 https://ssrn.com/abstract=3150616

Gregory Klass, Parol Evidence Rules and the Mechanics of Choice, 20 Theoretical Inq. L. 457 (2019).

This open-access article is brought to you by the Georgetown Law Library. Posted with permission of the author.

Follow this and additional works at: https://scholarship.law.georgetown.edu/facpub
Part of the Contracts Commons, and the Evidence Commons

457

Parol Evidence Rules and the
Mechanics of Choice

Gregory Klass*

Scholars have to date paid relatively little attention to the rules

for deciding when a writing is integrated. These integration rules,

howeve r , a re as dark and full of subtle difficulties as are other parts

of parol evidence rules. As a way of thinking about Hanoch Dagan and Michael Heller’s The Choice Theory of Contracts, this Article suggests we would do better with tailored integration rules for two

transaction types. In negotiated contracts between firms, courts

should apply a hard express integration rule, requiring firms to say when they intend a writing to be integrated. In consumer contracts,

standard terms should automatically be integrated against consumer-

side communications, and never integrated against a business ’ s

communications. The argument for each rule rests on the ways parties

make and express contractual choices in these types of transactions.

Whereas Dagan and Heller emphasize the different values at stake in

different spheres of contracting, differences among parties’capacities

for choice — or the “mechanics of choice” — are at least as important.

IntroductIon

Contractual obligations are chosen obligations. They are chosen in two senses.

First, each party must choose to enter into an agreement that generates the

contractual obligations. Each must assent to the deal. Second, the parties have

the ability to choose the terms of their agreement, and thereby determine the

content of their contractual obligations. The parties can decide what the deal is.

  • *
  • Agnes N. Williams Research Professor, Professor of Law, Georgetown University

Law Center. This Article was presented at the Freedom, Choice, and Contract

Conference, Columbia Law School, October 13-14, 2017, and benefited from

the questions and feedback I received there.

Cite as: Gregory Klass, Parol Evidence Rules and the Mechanics of Choice, 20

TheoreTical inquiries L. 457 (2019).

458

Theoretical Inquiries in Law

[Vol. 20.2:457

Many rules of contract law address how parties make those choices.

Some of those rules are about parties’ choice to enter into a legally binding agreement. These include rules governing offer and acceptance, implied-in-

fact contracts, Statutes of Frauds, and formation defenses. Other rules are

about how parties choose terms. Examples include hierarchies of interpretive

evidence, plain meaning rules, default obligations, and contra proferentem.

Taken as a whole, these rules do two things: they tell adjudicators how to

decide whether and how parties have exercised their power to choose, and

they inform sophisticated parties what they must do to exercise a legally

effective choice.

ThisArticle argues that contract theorists — scholars exploring the normative

basis of contract law — should pay more attention to how contracting parties

make choices and to how the law determines the choices they have made. Or as I put the point below, theorists should pay attention both to the mechanics

of choice and to legal mechanisms for choosing. I make the case by exploring

the relevance of both to Hanoch Dagan and Michael Heller’s choice theory of contracts.1 Dagan and Heller argue that the core value of contract law is to enable party choice. Yet they pay little attention to the mechanics of choice or legal mechanisms for choosing. That neglect, I argue, renders their theory incomplete, and at times Panglossian.

I support that claim through a close examination of one mechanism of

contractual choice: the parol evidence rule. When parties reduce their agreement

to writing, courts sometimes treat that writing as dispositive of the terms in it,

or even of the parties’agreement as a whole. In common law jurisdictions, the

primary rule for determining when a writing is given special evidentiary weight

is the parol evidence rule. The term “parol evidence” refers to evidence of the

parties’ agreement other than the writing at issue. A writing that operates to

exclude parol evidence of terms is “integrated.” Parol evidence rules determine

when writings are integrated and when if ever parol evidence may be used to contradict, supplement, and sometimes interpret the terms contained in an integrated writing.

My analysis of parol evidence rules starts from Dagan and Heller’s suggestion

that we do better with different laws of contracts for different transaction

types, or “spheres of contract.” Examples of such spheres include agreements

between firms, employment contracts, consumer contracts and intra-family

agreements. I examine how, starting from a clean slate, we might design a

parol evidence rule for each of two such spheres: negotiated contracts between

firms and consumer contracts. Neither of the resulting parol evidence rules corresponds to the rules one finds in the case law or treatises. For negotiated

1

hanoch Dagan & Michael heller, The choice Theory of conTracTs (2017).

2019]

Parol Evidence Rules and the Mechanics of Choice

459

contracts between firms, the analysis suggests a hard, strict integration rule,

requiring firms to say when they intend a writing to be integrated and treating

such expressions as dispositive. For consumer contracts, I argue for automatic

integration of standard terms against consumer-side parol communications together with a mandatory rule that standard terms are not integrated against

a business’s parol representations or promises. The argument for each rule

relies in part on the social values at stake in each sphere. But the differences

between the recommended rules reflect the different mechanics of choice

in each — how in each sphere parties can and do exercise their power to

choose terms. Whereas Dagan and Heller argue that local rules of contract law should be crafted in light of “the normative concerns driving different contract types,”2 this Article demonstrates that the mechanics and available mechanisms of choice are at least as important.

Along the way, this Article makes several other contributions. I reject

the English Law Review Commission’s argument that the parol evidence

rule is not a separate rule of law, but a specific application of the general

principles of contract law. I provide an analysis of parol evidence rules that emphasizes rules for integration, an oft overlooked element of those rules. I argue that contemporary formalist scholars have not been formalist enough

in their thinking about integration in contracts between firms. And I suggest

an argument for a largely choice-independent form of parol evidence rule

for consumer contracts.

Part I introduces Dagan and Heller’s choice theory, together with the ideas

of the mechanics of choice and legal mechanisms for choosing. Part II provides

an overview of existing parol evidence rules and the role of integration by

way of a critical analysis of the English Law Review Commission’s 1986

report on the rule. Part III argues that the mechanics of choice in two types

of transactions, negotiated contracts between firms and consumer contracts,

recommend different integration rules for each. The Conclusion draws a

few lessons, both for Dagan and Heller’s choice theory and contract theory more generally.

I. the choIce theory, the MechanIcs of choIce, and MechanIsMs for choosIng

At least since the Legal Realists’attack on Langdell, English-language legal

theorists have shown an affinity for lapsarian narratives. In The Choice Theory

of Contract, Dagan and Heller blame contract law’s fall from an earlier, more

2

Id. at 7.

460

Theoretical Inquiries in Law

[Vol. 20.2:457

Edenic state on Samuel Williston. Williston’s original sin was to attempt to

construct a unified theory of contract law, taking commercial contracts as the

paradigm and ignoring the many differences in the laws that governed other

types of transactions. “This distinctive, early twentieth-century American

trajectory elevated commercial transactions to the core of contract, and, as a

byproduct, substantially obscured the generative role of diverse contract types.”3

Dagan and Heller suggest that many contracts scholars remain captive to this

Willistonian worldview, seeking out unifying principles and trying to craft

rules of general applicability.4 In fact, Dagan and Heller argue, there are many

different types, or “spheres,” of contractual transactions. Examples include agreements between businesses of various types, employment relationships,

consumer transactions, and agreements among family members. Because

different spheres implicate different values, the law should not treat all

alike. More specifically, the sometimes competing values of community and

efficiency take on different forms and receive different weights depending on

the sphere of contracting. A universal law of contract cannot take account of

the specific mix of values at stake in each sphere. We should not, therefore,

seek one big law of contract, but should construct local contract laws for the various spheres of contracting.

In addition to this intersphere legal pluralism, Dagan and Heller advocate

for intrasphere pluralism of contract types and terms. No matter the social values at stake in one or another sphere, parties’ autonomous choice should remain a guiding principle in all spheres. Party autonomy is valuable for at least two reasons. First, and most familiarly, autonomous choice is a good in

itself. Second, party autonomy addresses the fact that even within a single

  • 3
  • Dagan & heller, supra note 1, at 8. It is worth noting that Book V of the

first edition of Williston’s treatise, which occupies the bulk of Volume Two,

was devoted to “Particular Classes of Contract.” These included chapters on

Contracts for the Sale of Land, Contracts for the Sale of Personal Property,

Contracts of Employment and Contracts to Marry, Contracts of Bailment and of Innkeepers, Contracts of Affreightment, Bills of Exchange and Promissory

Notes, and Contracts of Suretyship. 5 saMuel WillisTon, The laW of conTracTs

§ 633, 1225 (1924).

  • 4
  • Dagan and Heller are not the first to suggest different contract laws for different

spheres of contracting. See, e.g., William J. Woodward, Jr., “Sale” of Law and

Forum and the Widening Gulf Between “Consumer” and “Nonconsumer”

Contracts in the UCC, 75 Wash. u. l.q. 243 (1997); Ethan J. Leib, On

Collaboration, Organizations, and Conciliation in the General Theory of Contract,

24 quinnipiac l. rev. 1 (2005); Ronald J. Gilson, Charles F. Sabel & Robert

E. Scott, T e xt and Context: Contract Interpretation as Contract Design, 100

cornell l. rev. 23 (2014).
2019]

Parol Evidence Rules and the Mechanics of Choice

461

sphere there is no one right way to balance competing values. Party choice

provides a means of resolving conflicts between our normative commitments.5

Dagan and Heller suggest that the law should enable intrasphere choice in

two ways. First, the law should ensure that within any given sphere there is a

choice among “contract types” — pre-established or off-the-rack transaction

structures.6 Predefined contract types promote efficiency by reducing transaction

costs. But they do more than that. Contract types also enhance autonomy by

providing socially recognized relational forms that embody various mixes

of values and shared cultural meanings, thereby generating new meaningful

forms of acting together.7 Second, autonomy requires also that the parties

be granted the power to make alterations to the off-the-rack contract types

society offers. A commitment to voluntariness “implies that people should

generally be able to choose not only among various contract types, but also terms within each.”8
Although Dagan and Heller say a lot about the value of choice, they do

not say much about how parties make such choices. There are two salient

dimensions to how contracting parties exercise their powers of choice. The

first is parties’ baseline abilities to choose, and the conditions under which

they are able to make informed, autonomous and therefore valuable choices. I will call this the “mechanics of choice.”
Although Dagan and Heller do not spend many pages on the topic, they do not ignore the mechanics of choice. For example:

Sometimes, cognitive, behavioral, structural, and political economy

reasons imply that more choice may actually reduce freedom. But

those circumstances will be local to certain contract types or market structures, not universal to contract as a whole. Frankly, we just don’t

know in which contexts the probable effects of these concerns are

significant enough to justify limiting multiplicity.9

567
Dagan & heller, supra note 1, at 80.

Id. at 3.

Id. at 76 (“[W]hen contract law offers us multiple contract types, it participates in the ongoing social production of stable categories of human interaction by

consolidating people’s expectations of themselves and others. In this, law enlarges

the range of valuable options available to us.”).
8

9

Id. at 109.

Id. at 127. See also id. at 74 (“The impediments to secure contracting often

depend on the specific features of the particular contract type and therefore each

type requires its own legal facilitation.”), 106-07 (suggesting that how people choose and the design of choice mechanisms “should be . . . . a major focus of behavioral and institutional economics studies of contract law”).
462

Theoretical Inquiries in Law

[Vol. 20.2:457

Dagan and Heller also argue that the mechanics of consumer choice suggest

mandatory restrictions on businesses’ ability to include hard-to-read terms

like arbitration clauses or class-action waivers. “[C]hoice theory implies that

[these terms’] inclusion in consumer contracts should not be able to upset

consumers’background expectation of relatively unimpeded access to courts

or to reasonably equivalent procedures for dispute resolution.”10

Dagan and Heller have less to say about a second dimension of how

parties choose, which I will call the “mechanisms of choice.” These are the tools that the law gives parties for exercising their power to choose, which

Ian Ayres has called “altering rules.”11 Consider, for example, Dagan and

Heller’s positive view of section 17.42 of Texas’s Deceptive Trade Practices

and Consumer ProtectionAct, which empowers consumers to waive theAct’s

protections.12 Dagan and Heller favor the opt-out provision, as “people should,

in some circumstances, be able to choose between purchasing a good with

the protections of consumer transaction law or by using sales law.”13 They do

not discuss, however, what a consumer must do to opt out of such protections

— the mechanisms needed to ensure a fully informed and valuable choice.

It is worth paying attention to those details. Section 17.42 requires that

“(1) the waiver is in writing and is signed by the consumer; (2) the consumer

is not in a significantly disparate bargaining position; and (3) the consumer is

represented by legal counsel in seeking or acquiring the goods or services.”14

It requires that the consumer’s counsel be independent of the business. And it requires that the waiver be:

(1) conspicuous and in bold-face type of at least 10 points in size; (2)

identified by the heading “Waiver of Consumer Rights,” or words of

similar meaning; and (3) in substantially the following form: “I waive my rights under the Deceptive Trade Practices-Consumer Protection

Act, Section 17.41 et seq., Business & Commerce Code, a law that

gives consumers special rights and protections. After consultation with

an attorney of my own selection, I voluntarily consent to this waiver.”15

10 Id. at 112.

11 Ian Ayres, Regulating Opt-Out: An Economic Theory of Altering Rules, 121

yale l.J. 2032 (2012).
12 Tex. Bus. coM. coDe ann. § 17.42 (West 2017).

13 Dagan & heller, supra note 1, at 71. See also id. at 82 (advocating that consumers

be able to “make their own (individual) choices between the ‘souk’ or ‘bazaar’

mode of ‘as is’contracting and the ‘errands’model of consumer protection law”).

14 Tex. Bus. coM. coDe ann. § 17.42(a) (West 2017). 15 Id. at §§ 17.42(b) & (c).
2019]

Parol Evidence Rules and the Mechanics of Choice

463

This choice mechanism makes perfect sense given the mechanics of consumer

choice — the difficulty of ensuring informed consumer agreement to a term such

as this. The Texas legislature appears to have been concerned that a consumer

might assent to waive theAct’s protections without fully understanding what

she was giving up, as consumers regularly assent to unread standard terms.

The resulting mechanism of choice, however, is enormously expensive to use.

One might guess that few if any Texans will exercise this power of choice the Texas legislature has granted them.

The remainder of thisArticle examines one of the most important mechanisms

of choice in U.S. contract law: parol evidence rules. A parol evidence rule

provides mechanisms of contractual choice in two ways. First, if a writing is integrated, the rule limits the evidence an adjudicator may consider when deciding what terms parties have chosen. In this way, parol evidence rules

determine how parties can exercise their legal power to choose terms: sometimes

they must express that choice in a writing. Second, modern parol evidence rules treat integration as itself a matter of choice:Awriting is integrated only

if the parties have agreed that it shall be a final statement of some or all terms

of their agreement. U.S. courts have crafted several rules for deciding when

parties have made that choice. That is, they have provided parties with various

mechanisms for exercising the choice to integrate a writing.
It is widely recognized that different U.S. jurisdictions employ different

parol evidence rules. Most accounts of those rules, however, describe one parol

evidence rule for all contracts. Dagan and Heller’s choice theory suggests a

different approach. Perhaps there is not, or should not be, one big parol evidence

rule, but local parol evidence rules for distinct spheres of contracting. Part III

explores that idea, focusing on two spheres of contracting: negotiated contracts

between firms and consumer contracts. Before getting there, however, it is

necessary to say a few words about parol evidence rules generally.

II. Parol evIdence rules: the BasIcs

It is no easy thing to summarize the parol evidence rules found in the common

law of contracts. The reasons are manifold. Parol evidence rules are complex,

with multiple moving parts. Judicial articulations of the rules often bear traces

of older doctrines modern rules were meant to supplant. There are important differences between parol evidence rules in different jurisdictions, and often

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  • Interpretation of Words and the Parol Evidence Rule Arthur L

    Interpretation of Words and the Parol Evidence Rule Arthur L

    Cornell Law Review Volume 50 Article 3 Issue 2 Winter 1965 Interpretation of Words and the Parol Evidence Rule Arthur L. Corbin Follow this and additional works at: http://scholarship.law.cornell.edu/clr Part of the Law Commons Recommended Citation Arthur L. Corbin, Interpretation of Words and the Parol Evidence Rule , 50 Cornell L. Rev. 161 (1965) Available at: http://scholarship.law.cornell.edu/clr/vol50/iss2/3 This Article is brought to you for free and open access by the Journals at Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell Law Review by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contact [email protected]. THE INTERPRETATION OF WORDS AND THE PAROL EVIDENCE RULE* Arthur L. Corbint GROWTH OF THE LAW, IN SPITE OF LONG REPETITION OF FORMALISTic RULES At an earlier date, this author warned that "in advising clients and in predicting court decisions, it must always be borne in mind that the assumption of uniformity and certainty in the meaning of language, however erroneous, has been made so often and so long that it will be repeated many times in the future."1 This prediction has been fully borne out in the court opinions that have been published in the fourteen years since it was made. It is still being said, sometimes as the ratio decidendi but more often as a dictum representing established law, that extrinsic evidence is not admissible to aid the court in the interpretation of a written contract (an integration) if the written words are them- selves plain and clear and unambiguous.
  • Contents EXAM STRUCTURE

    Contents EXAM STRUCTURE

    Laws1075 --- Contracts Contents EXAM STRUCTURE ........................................................................................................................................................................... 2 CONTRACT ............................................................................................................................................................................................ 3 I. Identify term ................................................................................................................................................................................. 3 II. Incorporation ................................................................................................................................................................................ 3 III. Wholly in writing OR Partly oral or partly written ............................................................................................................. 5 IV. Construing term ........................................................................................................................................................................... 6 V. Terminate ...................................................................................................................................................................................... 6 A. Terminate by agreement ....................................................................................................................................................... 7 B. Terminate
  • Defense Counsel Journal April, 2000

    Defense Counsel Journal April, 2000

    Defense Counsel Journal April, 2000 Feature *209 WHAT'S HAPPENING TO THE PAROL EVIDENCE RULE? MORE HOLES IN THE DIKE Increasingly and alarmingly, parties face greater risks of losing their contractual bargains, no matter how unambiguous they may seem. Copyright © 2000 International Association of Defense Counsel; Mark O. Morris, Elizabeth Evensen I SAY to-mah-toe; you say to-ma-toe. Do we have a meeting of the minds? Should a court hear evidence to understand what we mean by "tomato?" It appears the same judicial trends that are making it easier and more lucrative to blame others in tort contexts now are invading the contractual arena to increase an unsatisfied party's chances of avoiding or altering unambiguous contractual obligations. Sanctity of contract has been a hallmark of American commerce. One of the guardians of this sanctity has been the parol evidence rule, which was developed to prevent contracting parties from trying to offer evidence to vary the terms of an unambiguous contract. Unfortunately, creative lawyers have persuaded some courts to effectively abandon the rule. The result is creating uncertainty in contractual relationships, turning contract interpretation into a sophomoric exercise that undermines expectations of certainty. CONTEXTUALISM V. TEXTUALISM A. General The rule derives its names from the French word parole, meaning a spoken or an oral word. This term has become a misnomer, however, because the rule now refers not only to oral, but also to written evidence. In addition, commentators agree that the rule is not a rule of evidence because it does not deal with a proper method of proving a question of fact.
  • Los Angeles Lawyer November 2013

    Los Angeles Lawyer November 2013

    practice tips BY RYAN J. BARNCASTLE AND KENNETH E. MOORE The Fraud Exception to the Parol Evidence Rule after Riverisland THE PAROL EVIDENCE RULE, subject to certain exceptions, limits the interpretation of a contract to its “four corners” and excludes such extrinsic evidence as oral statements that conflict with the terms of the signed writing. The parol evidence rule and its exceptions are codified in California in Code of Civil Procedure section 1856. One well-estab- lished exception is fraud in the inducement of the agreement, but in 1935 the California Supreme Court, in Bank of America v. Pendergrass,1 held that the alleged false promise was inadmissible if it was directly at vari- ance with what was in the written contract. Since then, with regard to allegations of false promises, parties to written contracts have been able to rely on the signed agreement as a defense. However, earlier this year the supreme court reversed course and retired the Pendergrass rule. The court’s decision in Riverisland Cold Storage, Inc. v. Fresno- Madera Production Credit Association2 overruled this long-standing principle of law and may not only increase and prolong litigation but also may reshape the procedures for entering into valid and enforce- able written agreements. By overruling Pendergrass, the supreme court opened the door to challenges of written contracts with evidence of oral statements that conflict with the promises of performance set forth in the executed agreements. The significance of Riverisland is corroborated by the subsequent court of appeal decision in Julius Castle Restaurant, Inc. v. James Frederick Payne,3 which gave Riverisland an expansive interpretation.