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Illinois Courts Fall Prey to ‘Dark, Subtle Difficulties’ of Parol Evidence Rule

A legacy from Professor Marie Adornetto Monahan is a new law review article challenging the Illinois Supreme Court to clarify confusing cases on the parol evidence rule. “Survey of Illinois Law: Contracts — The Disagreement over Agreements: The Conflict in Illinois Law Regarding Parol Evidence and Contract Interpretation,” 27 Southern Illinois Law Journal 687.

Marie, who died at home of cancer at age 53 on Easter Sunday, earned a Ph.D. in classics before going to law school. She clerked for Justice William White, in the Illinois Appellate Court, before becoming the first woman attorney in the Chicago litigation department of Baker & McKenzie. Then, in 1989, Marie joined the faculty at The John Marshall Law School. She is survived by her husband, Chicago litigator Peter Monahan, and two sons, Matthew and Joseph.

Marie will be greatly missed by all of us who were blessed by having met her.

Here are some highlights of her last law review article (with various omissions not noted in the quoted text):

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“In Illinois, the law on the parol evidence rule has been in conflict since 1976. Specifically, the Illinois courts have applied two different analytical approaches to matters involving the parol evidence rule and contract interpretation: the four-corners rule and the provisional admission approach.

“As this article will show, the four-corners rule is premised upon a restrictive view of meaning as fixed and certain; therefore, it gives great deference to a written agreement. In contrast, the provisional admission approach attempts to analyze meaning as contextual; therefore, it is more liberal with regard to the admission of extrinsic evidence to resolve questions concerning the scope and meaning of contract terms.

“Because each approach is based upon very different policy considerations regarding meaning, there is no clear or unified policy underlying the decisions of the Illinois courts in this area of contract law. The court’s lack of direction from a policy perspective is reflected in the practical understanding of the judiciary which has confused the applicability of the parol evidence rule with the separate and distinct undertaking of contract interpretation.

“While it is not unusual to see a conflict between different jurisdictions with regard to a liberal or restrictive approach to the parol evidence rule and matters of contract interpretation, it is unusual and undesirable for such a conflict to exist within a single jurisdiction.

“This conflict in Illinois law has been noted by courts and scholars alike, but has not been resolved by the Illinois Supreme Court. In fact, although the Illinois Supreme Court has set forth the four-corners rule as the operative methodology for analyzing the applicability of the parol evidence rule, it has not overruled authority employing the provisional admission approach, and has implied that the provisional admission approach might be appropriate under certain facts. As a result, the Illinois Appellate Court continues to apply both a restrictive and a liberal approach to the rule.

“The restrictive approach is generally associated, from a scholarly perspective, with Williston and the First Restatement. Under this approach, a court determines a document’s completeness by looking only at the document itself. Therefore, extrinsic evidence is not admissible to aid the judge in this determination.

“In making findings of total integration from the document itself, courts have looked to the written agreement for its thoroughness and detail, the absence or presence of signature, the reference to outside documents or material, and the absence or presence of a merger clause.

“If, after this process, the court finds that the written agreement is reflective of the total obligations of the parties, the court will not allow extrinsic evidence to add to or vary the scope of the written document. The courts in Illinois have followed a restrictive approach by deciding the issue of integration based solely on the four corners of the agreement.

“Contrastingly, a liberal approach to the parol evidence rule is generally associated with Corbin and the Second Restatement. Under a liberal approach to the parol evidence rule, a court may consider extrinsic evidence, including evidence of prior negotiations in making the initial determination of a document’s completeness, and if the court finds the document to represent the entire undertaking of the parties, then the court will preclude the admission of extrinsic evidence for the purpose of adding to or varying the scope of the totally integrated document.

“Some Illinois cases follow a liberal approach, and have decided the issue of integration based on the context or surrounding circumstances, as opposed to the four corners of the agreement alone.

“When deciding the ambiguity issue under a restrictive approach, a court will consider only the document itself and will not look to extrinsic evidence of prior negotiations to resolve an allegation of ambiguity. Generally, this approach is associated with the plain-meaning rule, which is premised upon the belief that the meaning of language can be so clear that it can be determined solely from the language of the document and the context in which it is written and, therefore, without reference to prior negotiations.

“Illinois courts have followed a restrictive approach to determine the issue of ambiguity, but have equated the plain-meaning rule with the four-corners rule. Under a four-corners rule in Illinois, the court has precluded the admission of any extrinsic evidence and therefore has limited the inquiry to the language of the document alone.

“In contrast, under a liberal approach the court will allow any relevant extrinsic evidence to assess the threshold consideration of whether ambiguity is present. The liberal view is premised upon a belief that language or meaning is fluid and contextual. In addition to a plain-meaning or four-corners rule, Illinois courts have also applied the provisional admission approach, which is reflective of the more liberal view.

“Under the provisional admission approach, Illinois courts make a threshold determination of ambiguity, with the aid of all relevant extrinsic evidence, including evidence of prior negotiations. If, as a threshold consideration under either the restrictive or liberal approach, a court finds an agreement to be ambiguous, it will look to extrinsic evidence (very often the same extrinsic evidence that determined the threshold consideration of the existence of ambiguity) to resolve the ambiguity in the agreement.

“In a seminal case, Armstrong Paint & Varnish Works v. Continental Can Co. [301 Ill. 102, 106 (1921)], the Illinois Supreme Court established the four-corners rule as the test to be used by courts in Illinois for contract cases involving issues arising under the parol evidence rule and interpretation.

“In Armstrong, the court never stated that it was following a four-corners rule, but clearly it used this methodology.
“The court also followed a restrictive approach to the issue of ambiguity.

“Armstrong has never been reversed or modified; therefore, controlling precedent in Illinois dictates that lower courts apply a restrictive approach to cases raising issues of integration and ambiguity. Specifically, with regard to matters of integration, the majority of appellate decisions follow Armstrong and apply a four-corners rule.

“The Illinois Appellate Court has also used a restrictive approach toward interpretation issues.

“Although the court has applied a restrictive approach to issues of integration and ambiguity in a majority of decisions, the court has departed from precedent as set forth in Armstrong, and followed a liberal approach with regard to determinations of both integration and ambiguity. This conflict in Illinois law began with the Illinois Appellate Court’s use of a different test to determine ambiguity, the provisional admission approach.

“Under the provisional admission approach, the court is not restricted to the four corners of the written agreement when making its assessment as to whether a term is ambiguous; rather all relevant extrinsic evidence is allowed to assist the court in its threshold decision of whether a contract contains an ambiguity. The court has been liberal with regard to the types of evidence permitted, allowing the admission not only of evidence of the circumstances and context surrounding the execution of the contract, and evidence of the manner in which the parties interpreted it by their performance, but also evidence of prior negotiations.

“The policy underlying this approach is to give deference to contextual meaning. It is based on an assumption that words derive their meaning from context, and therefore, to effect the meaning of a contract term, the term needs to be analyzed not only within the limited context of its text, the written agreement, but also within the broader context of its formation and performance, such as the circumstances surrounding the contract.

“Moreover, in following the provisional admission approach, the court has been persuaded by a long-held criticism of the four-corners rule that language is not fixed in meaning, but rather the meaning, or intent of the parties with regard to their choice of a particular term, is best discerned with the aid of evidence that allows the judge to understand the meaning of a term within the broader context in which it is used.

“The provisional admissions approach originated in two cases decided by the Illinois Appellate Court in 1976 and 1977: Baird & Warner [v. Ruud, 45 Ill.App.3d 223 (1st Dist. 1976)] and Keep Productions [v. Arlington Park Towers Hotel Corp., 49 Ill.App.3d 258 (1st Dist. 1977)]. In those two cases, the court held that the existence of an ambiguity in a contract should be decided as a threshold issue through the use of extrinsic evidence.

“In neither Baird Warner nor Keep Productions did the court note that the provisional admission approach was a departure from the four-corners rule; yet, in both cases the court indirectly acknowledged this departure from Illinois precedent because its holding relied primarily on authority from the [7th U.S. Circuit Court of Appeals] in the case of Ortman v. Stanray [437 F.2d 231, 235 (7th Cir. 1971)].

“By following the 7th Circuit’s lead, with regard to contract interpretation, the Illinois Appellate Court introduced a liberal approach, consistent with both Corbin and the Second Restatement.
“In addition to adopting a liberal approach to the parol evidence rule with regard to matters of interpretation, the Appellate Court has also applied a liberal approach to matters of integration.

“The conflict in the Appellate Court with regard to its use of both a restrictive approach and a liberal approach is significant. Although the court has employed a restrictive approach using the four-corners rule as to matters of integration and interpretation, three districts of the court have employed a liberal approach by adopting a contextual analysis to issues of integration and the provisional admission approach to issues of interpretation.

“In fact, even though three districts of the Appellate Court have employed the provisional admission approach in some decisions, those same three districts have also employed the four-corners rule in other decisions. Therefore, a conflict exists not only among the five districts of the court, but within the districts themselves.
“This conflict has even resulted in the same judge following a four-corners rule in one case and a provisional admissions approach in another, with no guidance as to why. This conflict has been noted by the Illinois Appellate Court itself, the 7th Circuit, the 6th Circuit, legal scholars and recently by the Illinois Supreme Court.

“In 1999, the Illinois Supreme Court addressed the conflict between the provisional admission approach and the four-corners rule in Air Safety Inc. v. Teachers Realty Corp. [185 Ill.2d 457, 706 N.E.2d 882 (1999)].

“The court’s holding in Air Safety is significant for a number of reasons. First, it reaffirmed the applicability in Illinois of the four-corners rule.

“[However,] the court’s decision implies that application of the provisional admission approach is an alternative to use of the four-corners rule in Illinois, especially where no merger clause is included in the contract.

“The decision in Air Safety encourages the Illinois Appellate Court to fluctuate between application of the four-corners rule and the provisional admission approach, depending on the facts of the case or the preference of the judge. It also encourages the court to distinguish cases on a strained interpretation of merger clauses or look to the lack of a merger clause even where an agreement may be completely integrated. Therefore, while the Supreme Court had the opportunity of resolving the conflict in the Appellate Court, it acknowledged the conflict, refused to resolve it and based its decision on a fact that may very well further confuse the law.

“Since Air Safety, the status of Illinois law is still conflicted and confused.

“Not surprisingly, since the holding in Air Safety, the Appellate Court has followed the lead of the Illinois Supreme Court and has rendered decisions under both the four-corners rule and the provisional admission approach with no compelling rationale as to why one test is preferable to the other.

“There is no guidance in the case law, other than the existence of a merger clause, as to when the four-corners rule is preferable to a provisional admission approach. Therefore, the Illinois Appellate Court is still likely to write decisions that confuse integration with ambiguity and apply both the provisional admission and four-corners rule without regard to the fact that they are conflicting. Without guidance from the Illinois Supreme Court as to which approach the court should use, liberal or restrictive, the control over contractual agreements will reside more in the courts than in the parties.

“Illinois has fallen prey to the dark, full and subtle difficulties of [the parol evidence] rule. Because there is insufficient guidance from the Illinois Supreme Court with regard to policy or approach, the law in Illinois allows a judge to decide a case using the liberal or restrictive approach as a matter of judicial discretion. While an inter-jurisdictional conflict might be a workable situation, a conflict within a jurisdiction is very undesirable for reasons of practicality as well as policy.

“First, it is important to understand that the liberal and restrictive approaches are premised on very different policy considerations. The restrictive approach generally regards meaning as fixed and ascertainable solely from the text of written words. It also arises out of a distrust of juries and a likelihood for jurors to be manipulated by false testimony of a sympathetic underdog.

“In contrast, the liberal approach regards meaning not as fixed but as contextual and therefore is far more likely to allow extrinsic evidence to discern meaning. Therefore, a fluctuation between the liberal and restrictive approaches, results in a jurisdiction without a consistent or well-articulated policy underlying its decisions on the parol evidence rule and contract interpretation. The Illinois courts need to answer the question, How do they view meaning?

“Unless the Illinois Supreme Court leads the way with a policy statement regarding contractual meaning, the confusion in Illinois case law will continue. The current status of the law in Illinois allows a judge to choose among conflicting approaches simply based on a factual distinction. As set forth above, the continuation of the conflict between the four-corners rule and the provisional admission approach has resulted in a confusion of integration with interpretation, a conflation of the four-corners approach with the parol evidence rule, and a conflict with regard to the determination of ambiguity.

“The Illinois Supreme Court needs to appreciate the nature of the conflict between the different approaches and acknowledge that allowing both to continue within one jurisdiction presents a conflict in theory, practice and policy.”