Contradicting written terms. Typically, parol evidence, often offered in the form of agreements or negotiations prior to or contemporaneous with execution, is not admissible to contradict a term of a totally or partially integrated written agreement. This rule is set forth in the Restatement:
Except as stated in the preceding Section, where there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing.
Restatement (Second) of Contracts § 215 (1981).
There are, however, some exceptions to this general rule. For example, agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish that the writing is or is not an integrated agreement, or that the integrated agreement is completely or partially integrated. Such evidence is also admissible to establish the meaning of the writing, whether or not integrated. Notably, this exception applies to interpreting the plain meaning of the terms of, not the parties’ subjective intent. Parol evidence is also admissible to establish illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause, as well as grounds for granting or denying rescission, reformation, specific performance, or other remedy. Each of these exceptions is set forth in the Restatement (Second) of Contracts § 214 (1981).
Explanatory or contradictory? Distinguishing explanatory evidence from supplemental or contradictory evidence is often difficult. Skilled advocates on either side of a dispute may be able to take a term outside a written agreement and make equally convincing cases that the term is admissible to explain a term or terms of the agreement and that the evidence should be excluded as contradicting the terms.
“The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether [the writing] appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.” Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641, 644 (Cal. 1968) (emphasis added). Cf. Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564 (9th Cir. 1988) (criticizing but nevertheless applying this rule). In determining whether there is a contradiction, a court must decide whether the terms at issue are consistent or inconsistent. This question often cannot be answered from the face of the writing.
To aid in this analysis, the court must apply the writing to its subject matter and place it in context. The court then must answer the question of contradiction as part of its interpretation of the agreement. The asserted meaning of the term at issue must be one to which the language of the writing, read in context, is reasonably susceptible. If no other meaning is reasonable, the court should rule as a matter of law that the meaning is established.
Resolving ambiguity. Ambiguity is often regarded as a predicate to the admission of extrinsic evidence. Generally, extrinsic evidence of the parties’ intentions is admissible if the contract is ambiguous, and is not admissible if the contract is unambiguous. Eagle Indus., Inc. v. Devilibiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997); Louisiana Mun. Police v. J.P. Morgan Chase & Co., 2013 WL 3357173 (S.D.N.Y. July 3, 2013). Whether a contract term is ambiguous is a threshold question of law for the court to decide. Rhone-Poulenc Basic Chemicals Co. v. Am. Motorists. Ins. Co., 616 A.2d 1192, 1195 (Del. 1992); W.W.W. Assocs. v. Giancontieri, 566 N.E.2d 639 (N.Y. 1990); Duane Reade Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384, 390 (2d Cir. 2005). A party seeking to offer extrinsic evidence will almost always argue the contract term at issue is ambiguous. But a provision is not ambiguous simply because the parties offer different readings of its language. GMG Capital Inv., LLC v. Athenian Venture Partners I, LP, 36 A.3d 776 (Del. 2012); Mount Vernon Fire Ins. Co. v. Creative Hous., 668 N.E.2d 404 (N.Y. 1996). Rather, a contract is ambiguous, so that extrinsic evidence may be offered as to its interpretation, only if the language is reasonably susceptible of more than one meaning. This is ascertained from the perspective of a reasonable person in the position of the parties, not the parties’ own subjective interpretations. GMG Capital,36 A.3d at 780; Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir.1997).
An important aspect of the ambiguity inquiry is contextual evidence, such as the parties’ course of dealing to the trade usage of a certain term. Lightfoot, 110 F.3d at 906; Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1192 (2d Cir. 1996). To be sure, trade usage or other contextual evidence may not be admissible in every case. A court may treat such evidence as parol evidence and exclude it if the agreement at issue is integrated or, even if it is not, if the contextual evidence cannot be squared with the written terms of the agreement. However, a court could elect to admit the evidence. Trade usage and other contextual evidence differs materially from other extrinsic evidence, such as the parties’ discussions leading up to their execution of the agreement. Trade usage can be established by more reliable and objective evidence, and courts are more likely to admit it.
Both the Restatement and the UCC give guidance on how trade usage is to be considered and applied and permit an integrated agreement to be supplemented by evidence of course of dealing and trade usage:
Restatement (Second) of Contracts § 222: Usage of Trade
(1) A usage of trade is a usage having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to a particular agreement. It may include a system of rules regularly observed even though particular rules are changed from time to time.
(2) The existence and scope of a usage of trade are to be determined as questions of fact. If a usage is embodied in a written trade code or similar writing the interpretation of the writing is to be determined by the court as a question of law.
(3) Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement.
Uniform Commercial Code § 2-202(a)
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208)
The UCC provision makes clear such evidence should be admitted even where the writing is integrated and represents the final expression of the parties’ agreement. In other words, § 2-202(a) embodies a strong presumption that parties intend to contract in light of their own and the market’s customary practices. Thus, the parties might reasonably assume the writing’s terms arise from these sources, and they may not refer to the sources expressly in the agreement. This should compel parties to use clear, explicit language in the writing if they intend to exclude trade usage or similar contextual evidence from their contract.
