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The Parol Evidence Rule in Tennessee Breach of Contract Cases

What are we talking about when we talk about parol evidence in breach of contract cases?  Assume A and B have a written contract. A sues B for not fulfilling its obligations. The case of A v. B goes to trial.  Any evidence at trial about the negotiations, discussions or agreements on contract terms which led up to the final written contract between A and B would be parol evidence. What would not be parol evidence would be the written contract in its final form (which would certainly be entered into evidence at the trial).

The parol evidence rule is designed to protect the integrity and sanctity of written agreements by limiting what parties and witnesses can testify about at trial when their testimony relates to the terms of the written contract. The policy behind the parol evidence rule is that it would not be good to allow people who have entered into a written contract to come into court and present evidence that contradicts what they agreed to in writing.

The parol evidence rule applies only where there is a written contract: It does not apply to breach of contract cases involving verbal contracts. The parol evidence rule prohibits any evidence at trial of agreements, discussions or negotiations which happened prior to or contemporaneous with the execution of the written contract. Even though “parol evidence” technically refers to oral testimony, the parol evidence rule also applies to letters, emails and other writings created before or at the same time that the written contract was signed.

As with just about all legal principles and rules in Tennessee, there are many exceptions to the parol evidence rule. To make matters more difficult, as the Supreme Court of Tennessee has stated: “It is often difficult to decide when a case falls within one of the exceptions.”  That is an understatement. The parol evidence rule is one of the most malleable rules in Tennessee contract law in my opinion, but for lawyers who try breach of contract cases, it is important to understand the rule and how it has been applied by
Tennessee courts.

So what are some of the exceptions to the parol evidence rule? Here they are:

1.  Any evidence of alleged statements, or discussions, as well as writings such as emails, contract modifications, etc. which happened after the written contract was entered into are not barred by the parol evidence rule even if they directly contradict the written agreement.  (Technically, this category is not an exception to the rule; it is not even covered by the rule).

2.  If the written agreement is missing a term, parol evidence may be introduced for the purpose of determining what the parties intended to include in the written agreement, but failed to include.

3.  If terms in the written agreement are ambiguous, parol evidence may be introduced to try to determine which meaning the parties’ intended.

4.  Evidence of the terms of a collateral and distinct contract to the written contract involved in the dispute, which are not in conflict with it, may be admissible.

A case which is a good example of facts which fit squarely within the parol evidence rule is First Tennessee Bank v. Bad Toys, Inc. (Tenn. Ct. App. 2005).  In that case, the lenders signed several documents with the bank including loan documents, personal guarantees and a security agreement. The bank, as banks do when they lend money and take collateral, made it crystal clear in all of those documents that, if the borrowers defaulted, it could sell whatever assets the borrowers put up as collateral in whatever order it wanted to sell them. In those written agreements, the bank also made it clear that it had no obligation to sell pledged assets before it sought to collect from the borrowers.  Those written agreements also contained the standard language reciting that they contained all of the terms of the parties’ agreements.

In the Bad Toys, Inc. case, the borrowers defaulted. The borrowers had pledged stock as well as other assets to secure the loans made by the bank. The bank filed a breach of contract case against the borrowers. The borrowers defended by alleging that, at the time the loans were made, a bank officer had verbally promised to sell the stock before trying to collect from the borrowers if, in fact, the borrowers ever defaulted. The borrowers alleged that, had the bank sold the pledged stock before the value of the stock fell, their obligation to the bank would have been reduced.

The court held that the parol evidence rule prevented the admission of the testimony of the borrowers about the alleged oral agreement made by the bank officer. This case shows how outcome determinative the parol evidence rule can be in breach of contract cases. Because of the rule, the bank never had to worry about whether a jury might just believe the borrowers and find for them instead of the bank.  And that could have happened if not for the parol evidence rule.