14 May 2007 - UNSC 242 and the parol evidence rule

I’ve just finished my law exams. For one of them, in contract law, we had to choose a doctrine or rule we disagreed with and explain how we would change it, and why. I chose to propose a change to the rules of interpretation regarding the ambiguity exception to the parol evidence rule, allowing the courts to enforce a deliberately vague agreement and direct the parties to continue their negotiations. My inspiration was U.N Security Council Resolution 242; I’ve provided my answer below and hope it is more interesting than opaque!

On November 22, 1967, in the wake of Israel’s victory in the Six-Day War, the United Nations Security Council (UNSC) passed Resolution 242, which called for “withdrawal of Israeli armed forces from occupied territories.” [Danielle R. Sassoon, The Unmaking of U.N. Resolution 242, 1 New Society 51 (2007).] The resolution was immediately accepted by Israel, and rejected by her Arab neighbors, but in 1988 it was finally accepted by Palestinian leader Yasser Arafat as a basis for negotiations. Yet a problem immediately arose: what did “territories” mean? Israel and the U.S. believed it meant some, but not all, of the territories captured—perhaps most, with minor border adjustments. But the USSR and the Arab bloc insisted that it meant all of the territories, a withdrawal to the pre-war borders. The dispute continues: the recent Saudi peace plan, for example, is conditioned on the Arab reading of 242. Adding to the ambiguity is the fact that the French text of 242 refers to “des territoires,” which could be construed as “[all] the territories.” Though the English text is the official text, the French version—endorsed as “equally authentic” by the French UN representative, supports the Arab reading. The only way to resolve the dispute would be to refer to earlier discussions of what the parties actually meant.

UNSC 242 is not a sales contract, and was not drafted under U.S. law, but it is a good illustration of how a strict application of the parol evidence rule can be an obstacle to the implementation of agreements. The rule limits the admission of evidence of prior discussions or writings that might contradict—or support, in some cases—the terms of a final, integrated, written agreement between the parties. There is an exception to the parol evidence rule that allows for such evidence to be introduced in the case of “ambiguity”—where a term in the contract is unclear. The judge must decide whether a term is ambiguous, and then let the jury decide what it means. But what if the parties intended the term to remain ambiguous? The parol evidence rule and its exceptions do not provide sufficient guidance in this regard.

Were it a sales contract under U.S. law, 242 would be governed by the Uniform Commercial Code (UCC) § 2-201, according to which a contract for goods valued at $5,000 or more is “not enforceable by way of action or defense unless there is some record sufficient to indicate that a contract has been made.” Critically, it adds that a record “is not insufficient because it omits or incorrectly states a term agreed upon.” That opens the door to interpretation, but strict rules apply. UCC § 2-202, which codifies the parol evidence rule, states that terms in a final contract “. . . may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.” Evidence from a “course of performance, course of dealing, or usage of trade” may be used, but such evidence would be irrelevant in the case of UNSC 242.

Much depends on whether a contract is “integrated.” According to the Restatement (Second) of Contracts § 209, an “integrated” agreement is “a writing or writings constituting a final expression of one or more terms of an agreement.” In other words, an integrated agreement includes and replaces all prior oral and written understandings. It is left to the judge to decide if a contract is “integrated” or not. There are also two different kinds of integrated agreements. Restatement (Second) § 210(1) defines a “completely integrated” agreement as one “adopted by the parties as a complete and exclusive statement of the terms of the agreement,” and § 210(2) defines a “partially integrated” agreement as one “other than a completely integrated agreement,” with the court left to decide the difference in § 210(3). Whether an agreement is partially or completely integrated, the parol evidence rule excludes evidence of prior or contemporaneous agreements or negotiations if it would contradict the final agreement, according to § 215. Evidence to supplement the final contract is admissible, according to § 216, but only if the agreement is partially integrated; if it is completely integrated, such evidence must be excluded.

However, a number of exceptions to the parol evidence rule have been adopted. For example, evidence that would normally be excluded may be admitted, according to § 214, to show that the agreement is integrated—and, if so, whether partially or completely; to prove “illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause”; or to show that a contract is void. Another key exception, provided for in § 214(c), allows evidence to be admitted to establish “the meaning of the writing, whether or not integrated.” This “ambiguity” exception applies to all contracts. But there are different ways to determine whether a term is ambiguous, and whether courts will allow evidence of the parties’ prior negotiations, as well as “extrinsic” or contextual evidence, to clarify terms that are capable of more than one meaning.

One is the “four corners” rule, according to which the judge is limited to the contract itself and extrinsic evidence must be excluded. That was the approach followed by the New York Court of Appeals in Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456 (1957), in a dispute over a price clause in a contract. The court granted the plaintiff summary judgment, over the dissent’s claim that the clause demanded “full opportunity for inquiry into the context in which the words . . . were used.” Another approach is the “plain meaning” rule, which allows evidence of “facts and circumstances” surrounding a contract, though not evidence of the actual intent of the parties, in order to determine whether terms in a contract are ambiguous. That was the method applied in Robert Indus. v. Spence, 362 Mass. 751 (1973), where Justice Braucher decided “all the circumstances of the parties” might be considered. Braucher insisted, however, that “the words themselves remain the most important evidence of intention,” thereby limiting extrinsic evidence to that which established the context in which the disputed terms was used. Finally, the “liberal” or so-called “Corbin Lite” approach allows the court to consider the prior and contemporaneous oral and written statements during their negotiations to determine ambiguity. Justice Traynor of the Supreme Court of California applied this approach in Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33 (1969), ruling that “rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the interpretation of the parties.”

But none of these approaches is of much use if the parties intended there to be ambiguity. According to some accounts, vague and contradictory language may have been intentionally adopted in UNSC 242 simply to gain unanimous passage, or to facilitate future negotiations. Sassoon, supra. There are sales contracts with such built-in ambiguities, and here the above approaches fail. Other approaches, outside the ambiguity exception to the parol evidence rule, would not solve the problem, either. A court could decide a contract is a partial integration according to § 214(b), but this would not, in itself resolve the ambiguity. The Restatement (Second) § 204 allows courts to supply terms, but that rule generally applies to omitted terms. The contract could be voided under § 214(e), as in the case of Raffles v. Wickelhaus, 2 Hurlstone & Coltman 906 (U.K. 1864), but that might not be in the public interest. On the other hand, the “knock-out rule” of UCC § 2-207 might find that a contract existed despite the disputed terms—but only if both parties behave as if there were a contract, which they barely do.

What would be most helpful in such cases is a specific provision that would allow the court to hear evidence of prior written or oral negotiations and agreements in order to determine whether ambiguous terms are deliberately ambiguous—and, upon so finding, to direct the parties to re-negotiate those terms while upholding those parts of the agreement about which there is no ambiguity or dispute, much as the court did in the case of Joseph Martin, Jr. Delicatessen v. Schumacher, 52 N.Y.2d (1981). In the case of UNSC 242, this would uphold the agreed principle of “land for peace,” while directing the parties to continue negotiations toward a final agreement.