Author: LegalEase Solutions

QUESTION PRESENTED

Under Michigan’s Parole Evidence Rule, what is required to allow the court to look outside the “four corners” of the contract?

 SHORT ANSWER

The primary goal of contract interpretation is to honor the intention of the parties. When the intent of the parties is clear and unambiguous, courts will not go beyond the four corners of the contract. In such situations, evidence of prior or contemporaneous negotiations or agreements that contradict or vary from the written contract is not admissible in evidence. This is termed as parole evidence rule. But there are certain exceptions to this rule – (1) contract is a sham (2) it has no efficacy or effect because of fraud, illegality, or mistake, (3) the parties did not integrate their agreement as the final embodiment of their understanding, or (4) agreement was only partially integrated because essential elements were not reduced to writing.

RESEARCH FINDINGS

The basic rule of interpreting a contract is to give effect to the intention of the parties. “The primary goal in the construction or interpretation of any contract is to honor the intent of the parties.”UAW-GM Human Res Ctr v KSL Recreation Corp, 228 Mich App 486, 491; 579 NW2d 411, 414 (1998) (citing  Rasheed v. Chrysler Corp., 445 Mich. 109, 127, n. 28, 517 N.W.2d 19 (1994)).When a party raises the question of ambiguity, the courts consider if “‘its words may reasonably be understood in different ways.’”Id., at 491-92; 579 NW2d 411, 414 (1998) (quoting Raska v. Farm Bureau Ins. Co., 412 Mich. 355, 362, 314 N.W.2d 440 (1982). Generally, the rule is that “evidence of contract negotiations, or of prior or contemporaneous agreements that contradict or vary the written contract, is not admissible to vary the terms of a contract which is clear and unambiguous.”Schmude Oil Co. v. Omar Operating Co., 184 Mich.App. 574, 580, 458 N.W.2d 659 (1990).

But courts have recognized certain exceptions to parole evidence rule. “First, it is a prerequisite to application of the parole evidence rule that there be a finding that the parties intended the written instrument to be a complete expression of their agreement with regard to the matters covered.”Hamade v Sunoco Inc (R & M), 271 Mich App 145, 167-68; 721 NW2d 233, 248 (2006). So, “[e]xtrinsic evidence of prior or contemporaneous agreements or negotiations is admissible as it bears on this threshold question of whether the written instrument is such an ‘integrated’ agreement.”NAG Enterprises, Inc. v. All State Industries, Inc., 407 Mich. 407, 410, 285 N.W.2d 770 (1979).  “Second, extrinsic evidence may be presented to attack the validity of the contract as a whole.”Hamade, supra,at167-68; 721 NW2d 233, 248 (2006).

The exceptions to parol evidence rule are summarized as:

(1) that the writing was a sham, not intended to create legal relations, (2) that the contract has no efficacy or effect because of fraud, illegality, or mistake, (3) that the parties did not integrate their agreement or assent to it as the final embodiment of their understanding, or (4) that the agreement was only partially integrated because essential elements were not reduced to writing.

NAG,supra, at 410-411, 285 N.W.2d 770.

An exception allowing evidence of  collateral agreements has long been recognized in Michigan. If the parties “[h]ave entered into a collateral parol agreement concerning some matter on which the written instrument is silent, … the rule does not preclude the proof of such collateral agreement, provided no attempt is made to vary or contradict the writing.” Clare Co Sav Bank v Featherly, 173 Mich 292, 301-02; 139 NW 61, 65 (1912). “It is well-established in Michigan that extrinsic evidence may be used to supplement, but not contradict, the terms of a written agreement, including lost documents.” Zander v Ogihara Corp, 213 Mich App 438, 443-44; 540 NW2d 702, 705 (1995) (citing Opdyke Inv Co v Norris Grain Co, 413 Mich 354, 367; 320 NW2d 836, 841 (1982)).

CONCLUSION

Assuming the agreement is deemed to be totally integrated, then clause B on page five and exhibit F would both be part of the contract and not subject to the parol evidence rule.  Further, any POAs signed after the agreement was made are similarly not subject to the parole evidence rule.  Only the notes of clients’ intent to go with FB and POAs inexistence prior to the agreement would be subject to the rule.  However, under the above exception, these POAs and notes would be collateral agreements with non-parties that are not inconsistent with and do not contradict the plain wording of the agreement.  Therefore, they would be admissible evidence to show the intent of the parties forming the agreement.