Contractor entered into a contract with the government for the installation of improvements in a Canal Lining Project which was intended to eliminate flood damage caused by severe rainstorms.  All...

  1. Contractor entered into a contract with the government for the installation of improvements in a Canal Lining Project which was intended to eliminate flood damage caused by severe rainstorms.  All rainwater was to be collected and channeled it through the city and into a nearby river.  The contractor sought reimbursement for damages and repairs to part of the work caused by severe rain during the construction.  The Permits and responsibility Clause of the General Provisions placed the risk of loss for all pre-completion damage to permanent work on the contractor with the exception of damage caused by “flood or earthquake.”  In addition, the contract contained a very specific definition of “flood.”  Unfortunately for the contractor, the high water that caused the damage to the project before completion did not meet this specific definition, but did comply with a definition of flood in Procurement regulations which were issued as general information by the government prior to this particular contract.  When the contractor attempted to introduce this other definition of flood and thus support its claim for reimbursement, the government objected on the grounds that this was parol evidence and thus inadmissible.  Discuss.

Asked on by fsekiteri

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Stephen Holliday | College Teacher | (Level 1) Distinguished Educator

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The Parol Evidence Rule (U. C. C. Section 2-202) is designed to prevent one party to an agreement from introducing evidence from prior agreements that modify the contractual terms of a contract:

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.

Based on this language, evidence from prior existing agreements (extrinsic or outside agreements) can only be used to explain or supplement the contract at issue, not to change the terms of the contract. 

In addition to the limitation on parol evidence, another clause, which is likely to be in any contract with a governmental entity, may affect the contractor's ability to use extrinsic agreements.  If the contract contains a merger clause, which usually states that the two parties agree that the contract contains the complete understanding of the parties, then the contractor would have an additional burden to prove that the terms of the contract could be changed by an agreement outside the contract--that is, by the definition of a flood in the general information section of the Procurement Regulations you mention in your question.  Because a merger clause explicitly states that the parties agree that the contract contains the complete agreement of the parties, the clause prohibits an outside agreement from influencing the interpretation of the contract's terms.  It would be very unusual for a contract like the one at issue not to have a merger clause.

The Parol Evidence Rule contains several exceptions, which include things like a defective contract (fraud, mistake, illegality); the parties' intent regarding ambiguous terms in the contract; a related agreement (if it does not modify the terms of the contract).  Based on your question, the contractor did not raise any issue that may have been considered a defect in the contract, so the exceptions to the Parol Evidence Rule are not applicable.

Because there is a specific definition of flood in the contract, and both parties agreed to the contract's terms, there is no legal justification for allowing any terms of the Procurement Regulations to modify the terms of the contract between the contractor and the governmental entity.  The only element that might support the contractor's position is an ambiguous definition of flood, but, again, based on the terms as outlined in your question, the specific definition of flood in the contract appears not to have been ambiguous, so the exception to the Parol Evidence Rule (for an ambiguous interpretation) cannot be invoked by the contractor.

Based on the facts you have outlined, if this issue were litigated, the governmental entity would most likely be successful in its contention that the contractor's evidence is parol evidence and, with no applicable exception proven, not admissable.

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