The Four Corners Rule in Contract Law Explained

What is the Four Corners Rule?

The Four Corners Rule, or Rule of Four Corners, is a fundamental principle in contract law that dictates how contracts should be interpreted. Historically, it emerged as a means for judges to apply the rules of contract construction in determining issues surrounding contracts. The rule confines the interpretation of a contract to the contract document itself. As such, it stipulates that all relevant evidence must be found in the "four corners" of the document, i.e., within the contract itself to support the interpretation of its terms.
The roots of the rule can be traced back to 19th-century England where it was established to determine whether contractual terms were ambiguous. Previously , the courts had utilized a form of evidence (other than the language of the instrument itself) to determine whether a contract term was ambiguous. This form of evidence included the factual circumstances of the contract’s execution or the statement by a party of intentions. In 1804, the House of Lords abolished this form of evidence after holding that the meaning of contracts should be determined by using the words used in the contract. The result was, and still is, that the language employed in the contract controls how that contract should be interpreted.
The primary purpose is to promote the objective interpretation of contracts over the subjective interpretation (i.e., to avoid interpreting a contract based on the subjective intent of the parties). It should be noted that while many jurisdictions have adopted the rule, it is not universally applied.

Why the Four Corners Rule is Important

The Four Corners Rule is of critical importance in the field of contract interpretation. For starters, the approach is actually rooted in the long-standing principle that when it comes to written contracts, the terms should generally be read as they are written and therefore interpreted literally. The purpose behind this principle is to promote more legal certainty and predictability when it comes to a particular contract.
More importantly, however, the Four Corners Rule represents more than just an arrowed aim for the proper legal interpretation of a given contract, but rather a fundamental device for ensuring greater consistency on the part of regulatory bodies, courts, and non-contracting parties when it comes to contractual obligations. A specific provision in a written contract should not be open to different interpretations, particularly not multiple interpretations that could affect the way it is administered by regulatory bodies, enforced by courts, and understood by contracting parties and non-contracting parties alike. As with many legal principles, the Four Corners Rule is not a perfect one, and is typically only intended to be applied to what can be called standard written contracts. In the case of a written contract that contains any possible ambiguities, therefore, alternative means of interpretation may be applied by courts, including considering background facts, context, and previous negotiations.

How Does the Four Corners Rule Work?

The Four Corners Rule works in the following way: If a contract written in clear and unambiguous terms, then a party cannot supplement its clear terms by proffering any evidence regarding subsequent agreements between the parties or proof of any subjective or extrinsic intent. For example, if you have a loan agreement that clearly and unequivocally states all parties agree to the interest rate, principal amount, and repayment date, that contract will likely be enforced as is despite a recent meeting of the parties where they allegedly agreed to a different interest rate or repayment date. Instead, the Court will review those parties’ agreement as agreed upon in the contract and not based on any subjective intent.
That said, the parties’ prior course of dealing may still be admissible evidence for the Court to consider; however, such evidence typically cannot modify the agreement, but rather can only be used to explain the circumstances under which the contract was created. Following the example above, if the loan agreement between the parties stated that for each of the last 5 years the parties had various interest rates despite the loan agreement specifying a certain interest rate, the Court could review that information to make sure the parties were not in mutual mistake and were aware of and intended to be bound by the contract it signed.
Furthermore, if one of the parties to the contract breaches the contract, the Courts will refer to the contract first before referring to statutes of limitations because interpretation of the contract itself must first be done before a breach can be found to exist. If the contract in the example above really specified a different interest rate and repayment date, the Court must first look at the language contained in the contract itself before deciding whether or not a breach of that contract has occurred. Only then can the Court next look to the statute of limitations to review whether or not the dispute came forth to the Court (or was properly filed in the Court) within a proper time limit set forth by that statute.

Exceptions to the Four Corners Rule

Exceptions to the Four Corners Rule arise in "rare" and "exceptional circumstances." Among those recognized is the consideration of external evidence in aid of the interpretation of a contract. Federal courts have consistently endorsed the introduction of extrinsic evidence to resolve contractual ambiguities, and many state courts have followed suit.
For example, in PPG Industries, Inc. v. Webster Auto, Inc., 231 Conn. 382 (1994), the Supreme Court of Connecticut analyzed the applicable state law and determined that consideration of extrinsic evidence to determine the meaning of words and phrases within a contract was proper. In doing so, the Connecticut Supreme Court substantially adopted the Restatement (Second) of Contracts ("Restatement"). The Restatement recognizes that sometimes language is not dispositive as to the intent of the parties, and thus permits parties to consider extrinsic evidence that "reflect[s] the circumstances surrounding the transaction," including the parties’ conduct and the situation between them. The Restatement further states that "evidence of additional terms is admissible to supplement an integrated agreement with respect to (a) course of performance … (b) course of dealing … or (c) usage of trade … if the court finds the agreement is reasonably susceptible to the proffered interpretation."
Relying on PPG, many state court decisions have rejected the argument that a court cannot consider any extrinsic evidence and have acknowledged the need for the courts to make a contextual reading of an entire agreement to determine the intent of the parties. For example, the Court of Appeals of North Carolina ruled that the consideration of extrinsic evidence was proper where the incorporated documents "were expressly referenced in the indenture, and it is clear from the Face Amount Pledge [the referenced document] freely allows the use of extrinsic evidence to modify established contractual requirements." In re 2000 North Carolina Nonrecourse Equipment Finance Project Notes, 682 S.E.2d 693, 696 (N.C. Ct. App. 2009). The consideration of extrinsic evidence was held permissible, in part, because the language at issue ("restructuring") was not defined in the agreement itself. The court further noted that consideration of the proffered evidence was justified because "[p]lan administrator has not succeeded on the merits of its motion to dismiss and has a right to rely on the proffered evidence to defeat [the] motion to dismiss."
Other exceptions to the Four Corners Rule have been recognized by courts in the New York, Pennsylvania and Michigan state courts. Under the New York law, consideration is appropriate in situations involving inconsistent forms within a contract. Under Pennsylvania law, consideration is appropriate where the agreement between the parties as to what constitutes whether or not a contract has been breached is not clear on its face. Under Michigan law, consideration is appropriate in the context of in pari materia in determining the intent of the parties and the meaning of a contract involving multiple documents executed contemporaneously.
The Nevada state courts have adopted the reasoning of these other state courts in considering extrinsic evidence under certain circumstances. In Landreth, supra, the Nevada Supreme Court applied the Restatement definition of when extrinsic evidence was properly introduced to explain terms and to resolve any ambiguity. In doing so, the Nevada court explicitly stated that "extrinsic evidence may be considered before determining whether a contract is reasonably susceptible of interpretation." Landreth, 705 P.2d at 632 (emphasis in original). The Nevada Supreme Court thus appears to agree with the growing body of state case law that has permitted consideration of extrinsic evidence where the contract at issue contains unclear language in seeking to determine the intent of the contracting parties.

Four Corners Rule vs. Other Aids to Interpretation

The Four Corners rule serves as a valuable guide for contract interpretation, but it is useful to compare this tool to other legal interpretive instruments such as the Parol Evidence Rule. While many contract interpretation tools are similar in some regards, not all tools are interchangeable. Sometimes the tools compliment each other while other times the tools work at cross-purposes.
The Parol Evidence Rule seeks to answer the question: What is relevant information when determining the meaning of a contract? In contrast, the Four Corners rule seeks to answer the question: What is the source of relevant information?
The parol evidence rule addresses the situation where the parties have written and signed an agreement. It seeks to determine the purpose of the written agreement in light of what was said by the parties at the time of the contract formation. So in many ways it works to limit the scope of evidence that can be used to interpret the meaning of contract terms.
In contrast, the Four Corners rule is often the first tool used to determine the meaning of a contract. The Four Corners rule suggests using the language in the contract to define the meaning of the terms . It seeks to answer the question – what do the words mean?
As it is often a first step, the Four Corners rule does not seek to determine the source of information, whereas the parol evidence rule does address the source of information in that it looks to information not included in the written contract as oral evidence. Once the Four Corners rule is reviewed, then the Parol Evidence Rule may come into play.
Parol evidence analysis tends to come about after Four Corners analysis does not yield a clear-cut interpretation. But sometimes the Parol Evidence Rule is applied with Four Corners rule analysis to exclude information that may be relevant under the Four Corners rule. So while the two do not complimentary fit in all instances, sometimes they can be problematic both together and apart.
An attorney may be able to use these tools in tandem or in a progression to understand the meaning of a contract. The Four Corners rule seeks to understand the meaning of the words of an agreement and then the Parol Evidence Rule seeks to identify information to address the meaning of the terms in light of the intentions of the parties.

Implications of the Four Corners Rule for Drafters

The Four Corners Rule carries significant influence on the process of contract drafting. As the benchmark contractual interpretation commonly applied by courts, contract drafters are advised to comply with the rule to the extent possible and practical. To better ensure that a contract falls within its four corners, it is sensible to carefully address the following aspects of a contract prior to its execution:
• Include appropriate use of headings to properly inform the reader the subject matter to be covered, as well as pertinent information about the contents of the relevant section or article; headings can also justify the text within the relevant scope;
• Provisions of a contract should be as clear, concise, and relevant as possible; provisions should also be placed in an appropriate section of the contract according to their subject matter;
• Words and phrases within the contract should be used consistently, situating words and phrases in places with similar or relevant meanings elsewhere in the document;
• Words or phrases that are common legal jargon or have defined meanings in other contexts should be avoided; without defining the terms or clarifying their meaning through context, words with mere legal significance can be detrimental to a contract when not in combination with other specific language; additionally, the incorporation of defined terms is not always helpful, especially if they do not specifically apply to the relevant context or objective; and
• Where applicable, the parties should explicitly express their wishes to strictly abide by the four corners of the contract and its plain meaning.

Four Corners Rule Case Examples

The Four Corners Rule has been applied in various legal cases, each providing further clarification and context to the principle. In the case of Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., the U.S. Court of Appeals for the Second Circuit examined the applicability of the Four Corners Rule to an international contract for the sale of frozen chicken. The court held that the rule prohibited the interpretation of ambiguous contractual provisions by extrinsic evidence of the parties’ intent. Through an application of the rule, the court determined that the "broiler" chickens in question referred to stewing chickens, rather than the broilers requested by plaintiff. In reaching this decision, the court was able to avoid any discussion of the intent of the two parties in entering into the contract.
Another key case applying the Four Corners Rule was St. Paul Fire & Marine Ins. Co. v. General Star Indem . Co. Here, the U.S. District Court for the Northern District of Illinois dealt with multiple insurance policies. Finding no language in the relevant policies that would separate their scopes of coverage, the court applied the rule in holding that the insurer must pay for the covered damages equally. In determining the equal apportionment, it denied the insurance self-insured retention for the co-primary insurers, finding that "no award may be directly assessed against the non-participant insurers."
Finally, there is Community Servs. of Ariz. v. Universal Health Servs. In this case, the Court of Appeals of Arizona found that there was no need to look beyond the Four Corners of the insurance policy in question to determine its meaning. Holding that the words used in the policy were clear and unambiguous, the court declined to apply a construction that could have been more favorable to the insurance holder.