Parties often have lengthy negotiations before they enter into a final written contract. Various promises and representations are made and relied on during those negotiations.
“Be sure to incorporate all important terms and promises into the final written contract,” says Shelby Drury, of counsel with Novack and Macey LLP. “Later, if there is a dispute that results in litigation about the contract, the court is unlikely to allow either party to introduce evidence of promises or representations that are not stated in the written contract.”
Smart Business spoke with Drury about the admissibility of promises or agreements that are not stated in the final, written contract, and how to draft a contract in a way that makes it clear whether or not the parties intend to incorporate prior or contemporaneous agreements.
How do courts determine the contracting parties’ intent?
Illinois courts generally follow the ‘four corners rule,’ which provides that a written contract speaks for itself and the intent of the parties is to be determined from the language used in the contract without looking at outside evidence.
What if a party relied on earlier promises or agreements that are not expressly stated in the final, written contract?
Generally, parties are bound by the contract as written and may not bring in evidence of additional promises or agreements. The ‘parol evidence rule’ bars evidence of prior or contemporaneous oral or written agreements and discussions or promises offered to explain or contradict the plain, unambiguous terms of a written contract. Significantly, the rule bars evidence of promises or agreements that contradict a written contract as well as evidence of additional consistent terms. The reason for this was explained by the Illinois Supreme Court, which stated, ‘when parties sign a memorandum expressing all the terms essential to a complete agreement, they are to be protected against the doubtful veracity of the interested witnesses and the uncertain memory of disinterested witnesses’ concerning its terms.
Are there exceptions to the parol evidence rule?
Yes. If the court finds that the contract is unclear or ambiguous because its language is susceptible to more than one meaning, then the court may allow parol evidence to help resolve the ambiguity. Also, if the contract is incomplete, the court may allow evidence of additional consistent terms to supplement or explain it. Additional exceptions apply to contracts that are covered by the Uniform Commercial Code.
Is there anything that contracting parties can do for extra assurance that prior agreements or promises will not be admissible in a lawsuit concerning the contract?
It is wise to include an ‘integration clause’ in the final contract to make clear that the parties agree that:
1) The contract is complete.
2) Negotiations and representations made prior to the written contract are not part of the agreement.
3) The parties intend that the contract be interpreted solely based on its plain language.
A typical integration clause provides: ‘This agreement constitutes the entire understanding between the parties hereto and supersedes and cancels all prior written and oral negotiations, understandings, representations or agreements with respect to the subject matter of this agreement.’
What if the parties want to include terms not included in the contract?
In that case, the parties should expressly incorporate such other agreements by reference in the final, written contract. They should do this by identifying the title and date of such agreements and expressly stating in the final, written contract that such agreements are incorporated by reference.
Shelby Drury is of counsel at Novack and Macey LLP. Reach her at (312) 419-6900 or email@example.com.
Social media: Follow us on Twitter @Novack_Macey.
Insights Legal Affairs is brought to you by Novack and Macey LLP
When business owners run into a potential legal issue, too often, they call an attorney, get an answer and move on. But developing a closer, long-term relationship with outside counsel can put a client in a stronger position when the need for services arises, says Michael P. Wippler, recently appointed managing member for Dykema Gossett LLP’s Los Angeles office.
“Too often, businesses and individuals view lawyers like the dentist — they wait until their tooth hurts before they seek advice,” says Wippler. “There’s a complacency. Nine times out of 10, you’re not going to have a problem, but there is that one time when getting early advice can prevent you from making a really big mistake.”
Smart Business spoke with Wippler about what to look for in outside counsel to ensure you receive high-quality service at a fair price.
How can you find the right attorney to meet your needs?
Referrals are the best way to find the right person for your needs. Who do you know and respect in business that has had success with an attorney they like?
Once you’ve identified potential counsel, start asking questions. First, make sure they have the experience and expertise to properly handle your matter. If someone is a jack-of-all-trades, you have to wonder about his or her expertise for your specific area.
Then, ask the lawyer about the level of service you can expect. How quickly do they respond to requests and phone calls? In the past, it was OK to respond within 24 hours. But today, if you call or e-mail your attorney, you should receive a response right away. You should never have to call twice.
Ask the lawyer how they will keep you informed of matters pertaining to your case or transaction. Too often, outside counsel will know about an important issue for weeks or months but not notify the client until the last minute.
As part of these conversations, determine if you personally like and trust the attorney. Is the attorney someone you can work with? The relationship between an attorney and client is fundamentally one of trust. Without trust, it’s very difficult to obtain what the client really needs from their attorney.
How can a client get a good price and create predictability in billing?
You should expect quality legal services at a fair price.
Ask what the rates are, what the billing procedures are and what you can expect to pay for a given matter. A client should never be surprised by the bill.
Ask what the attorney can do to give you certainty and some control over expenses. Today’s consumers of legal services can be more aggressive and ask for pricing models beyond the typical hourly rate. Asking for — and getting — pricing models such as flat fees, blended rates and volume discounts can provide increased predictability.
For matters such as a real estate lease or a patent application, an attorney may agree to a flat fee. If you have a mix of timekeepers from a senior partner to a paralegal working on a matter, you can request a blended rate in which you would be charged the same hourly rate for all people working on the matter. And with certain hybrid models, the attorney’s compensation varies depending on whether there is a successful outcome.
Other models include contingencies and partial contingencies. Clients can also request volume discounts and early payment discounts.
Should every business have outside counsel?
In today’s legal environment it is important to have a good lawyer that you can call on short notice. Anyone dealing with employees, contracts, financing and/or products will eventually have legal issues.
Before you have a problem, it’s a good idea to retain a lawyer you can trust. It is typically less expensive to pay for advice and guidance up front than for litigation or some other problem later on.
You may only need an attorney once in a while, but it’s good to know that attorney before you need him or her, and for the attorney to know you and your business.
Every business has issues that are particular and important to it. If the attorney knows what is important to your business, it’s easier for the attorney to give you advice that benefits you. However, this type of knowledge about you and your business can only be learned over time by working together on different matters.
Always consider your potential exposure on the downside. Not everything goes as planned.
Michael P. Wippler is managing member for Dykema Gossett LLP’s Los Angeles office. Reach him at (213) 457-1717 or MWippler@dykema.com.