If there is an ambiguity in a written contract can additional terms not in the contract be used to supplement the contract and explain the ambiguity? This issue arises frequently in contractual disputes and is governed by a legal doctrine called “the parole evidence rule.”
In late December 2017, the California Court of Appeals in Kanno v. Marwit Capital addressed this issue and explained when the parole evidence will and will not permit the introduction of evidence outside of the contract to interpret a written contract. The question in Kanno was whether or not a Contribution and Purchase Agreement was the final expression of the parties’ agreement. The Court looked at Section 1856 of the California Code of Civil Procedure and explained that it creates two levels of contract integration:

1. Whether the parties intended the writing to be the final expression of their agreement (final expression); and
2. Whether the parties intended the writing to be the complete and exclusive statement of the terms of the agreement (complete and exclusive statement).

If a writing meets the first level, then prior or contemporaneous oral agreements are admissible to explain or supplement a writing so long as they do not contradict the terms contained in the written contract. If the writing falls within the second level, then evidence outside of the contract even if consistent with the terms of the written contract cannot be used to explain or supplement the contract.

In Kanno the Court noted evidence of three contemporaneous agreements between the parties and, thus, determined Agreement was the final expression of the parties’ agreement (level 1) but not the complete and exclusive statement of the parties’ agreement (level 2). Thus, consistent contemporaneous agreements were admissible to explain the ambiguous terms in the Contribution and Purchase Agreement.

Most written contracts contain integration provisions or clauses that state what level of the parole evidence rule the parties intend to adopt. However, we surmise that most contracting parties pay little attention to the scope of the provision or clause. This is just one more reason to assure your contracts have undergone a legal review by a qualified attorney before you sign them.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.