What is the “parol evidence rule?”

Negotiating a business-to-business contract can, depending on the subject matter, be a drawn-out process that can take considerable time before the final, signature-ready agreement is ready. During this negotiation period, both sides will frequently exchange information in the form of in-person and telephone conversations, letters, emails, non-disclosure agreements, memoranda of understanding and draft agreements.

Assuming that this negotiating and drafting process has been thorough and the parties to the contract have done their due diligence, the final agreement should be largely complete and require no additional documentation to clarify its subject matter or its terms and conditions. But sometimes either or both sides to the contract will find that their understanding of a particular provision differs from what the other party thought, and in more serious situations these differences can lead to disputes.

When this happens, the thought may occur to a party attempting to prove that its interpretation is the correct one to go back through the history of the negotiations to look for evidence supporting its reading. This kind of evidence outside of the contract document itself is known as “parol evidence,” and whether it can be used in a legal action depends on a number of circumstances.

In a business setting, there is a good chance that the Uniform Commercial Code as it has been adopted by the state of Illinois will apply to the agreement. Section 2-202 of the UCC sets forth the commercial version of the parol evidence rule by restricting the use of external documentation to contradict the contract, save for some narrow exceptions. Another strong possibility is that your agreement will contain what is known as an “integration clause,” which will specifically prohibit the use of means outside of the contract document to interpret its terms.

Drafting a commercial agreement requires careful attention to areas that the parties anticipate may create misunderstandings later on. Definitions, precise terms and where appropriate addenda incorporated into the agreement can help to minimize the rise of such problems, and an experienced business attorney can help you to identify and avoid such potential difficulties.

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