Ideally, the terms of an agreement will be found in one-concise writing, where the parties’ intentions and responsibilities are clear. However, ideal situations do not always occur, and sometimes (either by necessity or convenience) the parties will refer to other documents in their agreement. In these common, yet less-than-ideal situations, several documents may encompass the “complete expression of [the parties’] agreement.”
Where other documents are referred to as part of the agreement, it is important that the terms in all of these documents be consistent. Consistency is important where a legal dispute under a contract arises because the Court will have to construe the writings together and determine the intention of the parties based on all the referenced documents.
If the agreement and the referenced documents are all consistent, the intentions of the parties are more likely to be protected. This is because where an agreement is unambiguous, verbal or written statements made prior to or contemporaneous with the final agreement will not be admitted to vary the terms of the final agreement. The courts refer to the prohibition on admitting evidence of prior verbal or written agreements to vary the terms of an unambiguous contract as the Parol Evidence Rule.
However, the Parol Evidence Rule only applies to unambiguous contracts. Therefore, where the terms of a contract are unclear, the court may decide to allow outside evidence of prior verbal or written statements by the parties in order to determine what their intentions were. Where an agreement references several documents, the risk of ambiguity may be higher because several documents allow more opportunities for inconsistency.
In Clous v. Vickery, the Court of Appeals found that the terms in the documents referenced in the parties’ agreement were consistent and that the Plaintiff was correctly prohibited from admitting outside evidence to vary the terms of the agreement.
In Clous v. Vickery, the Plaintiff had contracted with the Defendant contractor for the construction of a house. The final agreement between the two parties included a Proposal and three other documents that were referenced in the Proposal. The agreement and all the referenced documents provided that the Defendant would be paid for the cost of building the house, plus 10%.
However, the Plaintiff argued that the agreement was not to pay the Defendant the cost of building the house and 10%, and that the terms in the documents were inconsistent. In support of their position, Plaintiffs pointed to a provision in one of the documents that provided an estimate that the house would cost $325,000 and the fee to Defendant would be $20,000. The Plaintiff argued that since the fee to Defendant was estimated at less than 10% of the cost to build the house, the terms were necessarily in conflict and outside evidence should be admitted to vary the “cost plus 10%” agreement.
The Court dismissed Plaintiffs’ argument by stating that the 10% fee only applied to work that was charged through the Defendant. Therefore, the estimate to build the house included fees that were not charged by Defendant and were not part of Defendant’s 10% recovery.
Although the Court eventually ruled in favor of the Defendant and the consistency of the documents, litigation prevention should be key in drafting contracts. By simply having clarified the fee estimate and reconciled it with the “cost plus 10%” provision, the Defendant may have avoided any litigation on this issue.
