This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The parol evidence rule applies only between the parties to the contract and those claiming under them, and is limited to actions upon the contract.1 In many cases where the rule is not applied, as between a party to a written contract and a stranger thereto, the contract was so drawn as to operate as a fraud against such stranger, and it has been suggested that this is the case in which the rule should not be applied.2 While cases of this sort present the best illustrations of the evils that would result from applying the parol evidence rule against a stranger to the contract, the reasons for refusing to apply the rule to a stranger are by no means limited to fraud. Since the stranger did not assent to the contract and since he does not claim under it, there is no reason for applying the rule as against him, and, accordingly, there is no reason for applying the rule in his favor.3
4Le Pichard v. George N. Thurber Co., 84 N. J. L. 193, 86 Atl. 053. See to the same effect, O'Hanlon v. Grubb, 38 D. C. App. 251, 37 L. R. A. (N.S.) 1213.
5 Dean v. Nichols & Shepard Co., 05 Ia. 89, 63 N. W. 582.
6 Gwathmey v. Burgiss, 104 S. Car. 280, 88 S. E. 816.
7 Elliott v. Chicago, M. & St. P. Ry. Co.. 38 S. D. 371, 161 N. W. 347.
1 United States. Central, etc., Co. v. Good, 120 Fed. 703, 57 C. C. A. 161.
Alabama. Coleman v. Pike County, 83 Ala. 326, 3 Am. St. Rep. 746, 3 So. 755; Walker v. State, 117 Ala. 42, 23
So. 140; British, etc., Co. v. Cody, 135 Ala. 662, 33 So. 832.
California. Dunn v. Price, 112 Cal. 46, 44 Pac. 354; Budd v. Hughes, - Cal. - , 171 Pac. 287.
Georgia. Dickey v. Grice, 110 Ga. 315, 35 S. E. 291.
Indiana. White v. Woods, 183 Ind. 500, 100 N. E. 761.
Iowa. Hamlin v. Simpson, 105 Ia. 125, 44 L. R. A. 307, 74 N. W. 906; Livingston v. Stevens, 122 Ia. 62, 94 N. W. 025; Livingston v. Heck, 122 Ia. 74, 04 N. W. 1008; In re Shields, 134 Ia. 559, 10 L. R. A. (N.S.) 1061, 111 N. W. 963; In re Lamb, 140 Ia. 89, 18
Accordingly, a stranger to the instrument may introduce extrinsic evidence to contradict it, or to show the real intention of the parties,4 and so may a party to the contract in an action between himself and a stranger thereto.5 A stranger to the instrument can not invoke the rule to prevent the other party to the action from introducing extrinsic evidence to contradict the written contract.6 If A and B enter into a contract by which B is to act as an independent contractor, B may contradict the provisions of a written contract between A and X.7 In like manner, X is not bound by the written contract between A and B,8 and X may show that B is the agent of A and not an independent contractor.9 If A enters into a written contract to sell property to B, and B purchases material from X for the improvement of such property, X is not bound by the written contract between A and B,10 and X may show that B was authorized to incur liabilities on behalf of A for the improvement of such property.11 A third person suing for personal injuries due to negligence may show by extrinsic evidence that the relation between the parties to a written contract is that of master and servant, though on the face of the written contract the latter is an independent contractor.12 Thus as between a bank and an attaching sheriff, the bank may show an oral agreement with the depositor, whose funds are sought to be attached, that such deposits should be applied to the payment of a note of the depositor's not yet due.13 In a suit to set aside a conveyance on the ground that it is in fraud of creditors, extrinsic evidence is admissible to vary or contradict the consideration expressed in the conveyance.14 In an action for fraud in which the exchange of realty for certain property is involved, extrinsic evidence is admissible to contradict a conveyance of such realty to the party who was injured by such fraud and to show that one of the grantees named therein had in fact no interest.15 In an action between a party to an instrument which purports to be a sale and a stranger thereto, extrinsic evidence is admissible to show that such instrument was intended as an assignment of a tax lien and not as a sale.16 One who has purchased a negotiable instrument and has accepted it with an endorsement that indicates that it is paid; may show in an action against the maker thereof, that the transaction was really a sale and not a payment of such instrument.17 If A has leased certain jewelry to B under a written contract, and B pledges such jewelry to 0, 0 may show an oral agreement between A and B, by which B was empowered to pledge such jewelry.18 As between an execution creditor of grantor and the grantee, evidence of the real character of the consideration may be . received.19 If A has executed and delivered a written bill of sale to B, under which he has transferred certain property to B, extrinsic evidence to the effect that such bill of sale was executed and delivered in order to enable B to transfer title to C, may be shown as against X, who is B's judgment creditor and who has levied execution upon such property.20 A gave a check on a bank in which he had no funds subject to check. The holder of the check neglected to present it for payment, and the bank failed soon after. In an action between the holder of the check and A, A was allowed to show that he had made a special deposit for which he had received a certificate of deposit, and that by oral agreement between himself and the bank, checks drawn by him were to be paid out of such special deposit, though not ordinarily subject to check.21 In an action between an agent of one of the parties to a written contract and his principal,22 such as a broker,23 or the adversary party to the contract,24 or a third person,25 extrinsic evidence may be admitted to show the real understanding. A contract for the transfer of an interest in realty may be explained or contradicted by extrinsic evidence as between the state and one whom the state contends is the owner of such realty or of an interest therein for the purpose of taxation.26 So if an agent is a defendant in a criminal action in which he is charged with embezzlement, he may introduce extrinsic evidence to show the real contract between himself and his principal, and thus show that the money appropriated by him was not taken with criminal intent, though in an action between himself and his principal, upon the contract of employment, such evidence would have been inadmissible.27