An In-Depth Look at the Four Corners Rule in Contract Law

What is the Four Corners Rule?

Part of contract interpretation is ascertaining the "Four Corners" of the contract. The four corners of the contract mean the four commonly understood aspects of a legal document: the principals of the document, the consideration for the document, the subject of the document, and the intended purpose of the document.
A court will first look to the four corners of a contract to see what a party’s intention is. A party’s intention can be on the outside (the four corners) or on the inside of the document (the body). A court will base its interpretation of the contract using primarily the four corners of the contract . The four corners of the contract can be affected by versus the intent of the parties. The four corners take precedent over any intent of the parties as expressed in the body paragraphs of the contract.
The Four Corners Rule means that when making a contract between parties, it is essential that all parties understand the enumerated aspects of the contract, and that those aspects are all integrated into the legal document. Failure to account for the four corners can lead to misinterpretation of the document in the future.

Historical Context of the Four Corners Rule

The roots of the Four Corners Rule, predominant in American contract law today, can be traced back to the common law practices of many centuries ago in England. As legal concepts evolved in conjunction with case law and public policy, the Four Corners Rule became a widely adopted doctrine that could be applied to a great many contracts to determine enforceability as the case law developed. The codification of the principles in the Uniform Commercial Code ("UCC") and in legislative enactments in many states has helped strengthen the Four Corners Rule but lawsuits and litigation or arbitration disputes over its application continue to appear.
Since the UCC applies only to contracts involving the sale of goods, however, the Four Corners Rule continues to play a significant role in all other types of contracts where the UCC is not the governing source of such law. From its long recognized, historical antecedents in case law, as mentioned above, the Four Corners Rule has been the source starting point for modern courts to ascertain the intent of the parties. Although today modifiable by other voluntary and binding terms, the basic rule is that when interpreting a contract, the Four Corners Rule is to look at the entire document and consider it as a whole to determine the purported intent of the parties.

Interpretation and Impact of the Four Corners Rule

The Four Corners Rule will limit the consideration of external factors to determine the meaning of the terms contained in a written contract. While a judge may interpret what the parties intended, in most cases the parties intention can usually be determined from what was actually contained in the written document itself without attempting to ascertain outside evidence of what the parties intended. It is important when drafting a written contract that the written document itself will contain the terms that were agreed to so that the written contract can itself be the document that determines what the parties intended. An attorney should also ensure that the written contract is clear and unambiguous such that there are not any areas of confusion and no room for interpretation. Ambiguous terms in a written contract might result in having to consider outside factors and apply other rules of contract interpretation.

The Exceptions to the Four Corners Rule

Among the most common exceptions to the Four Corners Rule are ambiguity, fraud, and undue influence. Where there is ambiguity, the Four Corners Rule is dispositive only if all parties agree on the meaning of the contract. Though we will discuss contract formation in detail in another section, it is worth noting here that agreement on contract terms is a necessary component to demonstrating that a contract exists.
Not every ambiguity will permit extrinsic evidence, however. The ambiguity must either be patent or the result of fraud or some other coercive influence. Patent ambiguity, caused by latent ambiguity or something in the contract which renders it unclear on its face, will likely allow for the introduction of extrinsic evidence of the parties’ intent. For example, suppose two parties enter into an agreement for the sale of 15 cows from Seller to Buyer for $50,000. Seller and Buyer disagree on the number of cows—Seller says 15 and Buyer says 25. In that scenario, the existence of a patent ambiguity might permit the introduction of the parties’ correspondence prior to the execution of the contract to show that they bargained for 15 cows at $50,000.
Extrinsic evidence may also be introduced to show that an agreement was never reached at all. As noted above, there are reasons why one or both parties seek to avoid the contract. Contract formation, like any other legal doctrine, relies on mutually-assent after consideration. Where either party intends not to be bound by the contract, or there is some other reason why the contract should not be enforced, extrinsic evidence may be introduced to show that no agreement was reached.

Critique of the Four Corners Rule and Its Shortcomings

Despite the clarity the Four Corners Rule has provided since its inception, it has also been criticized for its perceived rigidity and limitations. One criticism of the Four Corners Rule is that it is not flexible enough to accommodate complicated agreements that involve non-standard terms. For example, under some circumstances, written agreements may contain terms and clauses that refer to oral negotiations or drafts of a deal that were dropped from the final agreement. Other critics point out that there are instances in which the Four Corners Rule restricts the full understanding of the agreement, where contemporaneous oral agreements were intended but were not included in the final written agreement. In cases of conflicting provisions , the Four Corners Rule dictates that the contract must be held invalid based on the conflicting terms. In other words, judges may be required to ignore potentially pertinent evidence because the Four Corners Rule deems it inadmissible. In such cases, one possible option is to void the offending contract altogether. Another criticism is that the Four Corners Rule does not allow for ambiguous contracts to be clarified in many cases. For this reason, another popular doctrine, the Strict Construction Doctrine, develops. As with any legal rule, the Four Corners Rule is not without its criticisms. But ultimately, the rule can be successfully applied to most simple agreements.

How the Four Corners Rule Applies in Practice for Attorneys and Clients

For lawyers, the Four Corners Rule clearly does not allow for external evidence to be considered in determining a contract’s meaning. Therefore, what must be considered is the contract itself, in order to determine whether a "true" ambiguity exists. If one is found, then the court may look to other evidence. However, the court can only do so if that evidence explains the ambiguity. Without an understanding of this distinction, experienced lawyers lose cases. This is certainly not to say that the Four Corners Rule is an unfaltering dogma — it must be viewed as a baseline rule. For example, most lawyers know that a party can make the argument that a contract is ambiguous because parts disagree with one another. If they are able to prove that there is no harmonious reading of the contract at all (i.e., there is no way to read the entire contract without two different meanings), then the words are ambiguous (even if separately the words may mean something).
There are two practical implications of the Four Corners Rule for clients and lawyers. The first is that you need to have your contract drafted by a qualified lawyer. Sony Eletcronics, Inc. v. Connectics Corp., 166 F. App’x 1024, 1025 (Fed. Cir. 2006). This goes for any contract, no matter the dollar amount involved or the perceived importance. In order to avoid problems, a client should have a qualified attorney review the contract before it is signed to ensure that the proper language is present. If a plaintiff is able to argue that the contract is ambiguous due to the failure of attorneys to draft a contract that accurately reflects intent, they will likely win their argument.
The second is that if an ambiguity does exist, you must make sure that you avoid presenting a contract with an ambiguity that you created through a change. As a recent Virginia case found: "Even if one of the parties makes a contract and later agent [or attorney] makes a mistake that causes ambiguity, the fact that a mistake was made that caused the problem does not affect the four corners rule. The contract is still controlling." Nakell v. Oxygenic, Inc., No. 2:15-cv-140, 2015 U.S. Dist. LEXIS 186441, at *11 (E.D. Va. Dec. 1, 2015). When a party conspires to create the ambiguity, then it is obvious that they are doing so in order to manipulate the Four Corners Rule.

Case Examples of the Four Corners Rule

The Four Corners Rule has been invoked in a number of cases in the annals of contract law history. In Texaco, Inc. v. Pennzoil Co., No. 86-1229, 3:86-CV-416-G (N.D. Tex. 1987), Texaco allegedly breached an oral agreement with the jury verdict affirming the court’s holding that the oral contract was terminable at will based on its indefinite duration. The court held "that the parties intended to be bound only by a formal written contract." The prospective agreement left material terms open "a remedy provision, the time period for the obligation, a commitment by Pennzoil to fund Texaco’s business plan, and Texaco’s time commitment to the merger," without any agreement as to these material terms and therefore, there was no intent to be bound. In In re Genesys Data Technologies Inc., No. 03-43542(DML), 2009 Bankr. LEXIS 1010 (Bankr. N.D. Tex. Apr. 21, 2009) appellants, Diana and Donald Palmer, purchased shares in a judgment believing it would be profitable. They did not know that a majority of the outstanding shares of stock were owned by people who needed them to repay debts. When the company was sold the stockholders received a dividend whereas the class the Palmer’s purchased lost a large portion of their investment . The court held that the appellants had no rights under the notes or purported trust indenture as there was no meeting of the minds as to the material terms leaving the only reasonable inference that appellants did not read the notes before signing them. In Morris v. Moser, 89 S.W.3d 687 (Tex.App.-Fort Worth 2002, no pet.) the parties entered into a contract "for prompt delivery by the seller of crops . . . after 1993 and before 1997." The court held that there was a material term missing from the agreement, the type of crop to be sold leaving no meeting of the minds on the terms of the agreement. In Tiffany (NJ) Inc. v. eBay Inc., 576 F.Supp.2d 457 (S.D.N.Y. 2008) eBay sold jewelry on their website, Tiffany sued eBay alleging that the sellers were selling counterfeit Tiffany goods on their website. eBay filed a motion to dismiss the complaint for failure to state a claim. The court held that Tiffany’s allegations were based on speculation, not facts and Tiffany failed to establish that a reasonable person would believe the goods advertised on the eBay website were authentic Tiffany goods as the fact what a reasonable person believed required factual allegations to support his claim. Tiffany also argued that eBay was liable for contributory trademark infringement, and vicarious trademark infringement. However, Tiffany alleged no facts sufficient to state any claim as to eBay and it was therefore dismissed.