Sunday, February 23, 2014

How "The Parole Evidence Rule" Can Help Micro Cap Companies Close Big Contracts

In the world of growing micro cap companies, validity of contracts for orders or services can make or break a small cap companies quarter or even life.  Smaller growing public companies rely on one or two big contracts, depending on their business model, to keep them afloat or profitable.

In New York, as well as many other States, The Law helps.  The "Parole Evidence Rule" is a standard of contract law that makes sure that two parties entering into a contract that they intend to be final, stays that way.

The Parole Evidence Rule....
Keeps out evidence of a prior or contemporaneous agreement, either oral or in writing, that contradicts a later writing.
This rule, like most rules in Law, has exceptions.  In general, you can not admit into evidence prior or contemporaneous agreements, whether they were prior contracts, words written or spoken, that contradict a later writing.  But there are four exceptions to this rule:

  1.  To Correct a Clerical Error: Evidence or a prior or contemporaneous agreement may be admitted to correct a clerical error on the face of the contract or agreement.
  2. Interpret Vague and/or Ambiguous Terms: If a contract or agreement has undefinable or uncertain terms, the courts may admits evidence or a prior writing to interpret these terms.
  3. To Establish a Defense Against Formation:  If the contract or agreement has made it before a court and the plaintiff is arguing that there was in fact "no contract" to begin with, evidence is admissible to show that a contract was never formed.  This evidence is for defense against formation, again, not to contradict a later writing.  
  4. To Add or Supplements to a Partially Integrated Writing: A partially integrated writing is one that does not include all the terms of the intended contract.  If certain terms where left out and intended to be filled in later, the courts will admit evidence to add or supplement to the meaning of the terms.  The courts generally look at (1) course of performance (how the parties have acted before in this transaction) (2) course of dealing (how the parties have acted in prior dealings) and (3) usage of trade (how parties in the industry act).  
The Parole Evidence Rule helps a party to finalize his terms and not worry about evidence of other dealing with a party, as long as the contract is complete and none of the four exceptions apply.  The valid formation and defense of a contract, whether a company is selling services or goods, is critical to making quarterly results a success.

The MicroCapCompany Team
by: Nicholas Coriano  

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