Exceptions to the Parol Evidence Rule

Most of the contractual disputes concern the parties’ rights and obligations under the contract. To resolve this kind of disputes the courts normally look at the terms of the contracts. In other words they try to determine what promises were made by parties to each other at that time when the contract was formed and signed. However, once a court accepts that an agreement is entirely in writing, it is presumed that the writing contains all the terms. This is called the “parol evidence rule” [1] . Moreover, the parole evidence rule is a rule which applies to written contracts, or the written parts of partly oral, partly written contracts [2] . However, there is no compensation if parties made a false declaration. This lead to the development of collateral contract as a method of overcoming this problem [3] .

A collateral contract is one where the parties to one contract enter into or promise to enter into another contract.

II PAROL EVIDENCE RULE

The rule provides that where a contract is reduced into writing and appears in the writing to be entire, it is presumed that the writing contains all the terms of it and evidence will not be admitted of any previous or contemporaneous agreement which would have the effect of “adding extra terms or clauses to the agreement, add to the written agreement in any way, or modify its terms” [4] (Mercantile Bank of Sydney v Taylor). Moreover, another definition of the parol evidence rule is found in the case of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales by Mason J where he stated that ….” the broad purpose of the parole evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations to subtract from, add to, vary or contradict the language of a written instrument [5] “….

However, not necessarily agreements between parties are always, or must be in writing. But if the parties agreed that the contract to be entirely in writing, parol evidence is not admissible to add to or vary or contradict the writing (Robertson v Kern Land Pty Ltd).

The rule excludes evidence of extrinsic terms only where the document was agreed to be a complete record of the entire contract, hence does not apply where the agreement is partly written and partly oral e.g. the varying of a pre printed contractual form (Couchman v Hill). (Explain case)

III EXCEPTIONS TO THE PAROL EVIDENCE RULE

As we have seen in other situations a number of exceptions to the rule have emerged over time and been acceptable by courts. However, if both parties agreed that other unwritten (oral) factors would affect the contract in the future then, the parole evidence rule must bend to admit that possibility [6] . As Isaac J put it in Hoyt’s Ltd v Spencer (1919) 27 CLR 133 (at 143) the parol evidence rule applies to “unless it can be shown that the document was not intended to as the complete record of their bargain” [7] . Consequently, six situations in which the parole evidence rule will not be applied. They are:

(a) Custom or usage

Where the language used in the instrument has a particular meaning, for example, by custom or usage in a particular trade, industry or region, evidence of that meaning is admissible. The first exception to the rule was confirmed in the case of Hutton v Warren [8] .

(b) Verbal “condition precedent [9] “

If the parties have made an agreement and have also a detailed contract that is not intended to be activated until an outside event occurs. This exception is illustrated in the case of the Pym v Campbell. A written agreement for the sale of a patent was drawn up, and evidence was admitted of an oral stipulation that the agreement should not become operative until a third party had approved of the invention.

(c) Incomplete written contract

When a contract is formed it is assumed that all the terms are included but, if there are terms missing and not included in the contract then, it may allow the parties to give verbal evidence in court, and this is the case where the contract is partly written partly oral. This exception is illustrated in the case of Van Den Esschert v Chappell. The facts in this case were that a Ms Chappell wanted to purchase a house from Van Den Esschert and before she signed the contract, she asked him if the house was free of ants, the seller assured her that free of ants. Few months later she discovered white ants in the house and she sued the seller, she won the case and the court concluded that even though the contract was detailed was not complete and ordered the seller to pay the cost of rectification.

(d) Ambiguous terms

Extrinsic evidence may be admitted to resolve an ambiguity in the contract.

Ambiguity extends not only to patent ambiguity – language that on its face is capable of more than on possible meaning, or is otherwise made unclear by the other language in the document White v Australian and New Zealand Theatres Ltd.

(e) Mistake

If a term is clearly wrong and that it was a mistake and, that the parties intention was not accurately recorded in the document, then, the document may be rectified by giving verbal agreement.

(f) Identity of the correct parties

Verbal evidence is admissible where there is ambiguity concerning the identity of the parties to the agreement. This is especially so where extrinsic evidence is needed to identify the contract’s subject matter, Akot Pty Ltd v Rathmines investments Pty Ltd [10]

IV COLLATERAL CONTRACTS

A collateral contract, that is, a preliminary contract on which the main contract is entered into, breach of which will result in the injured party being able to sue [11] . However, sometimes a dispute may arouse between parties, as to whether a term is related to the collateral contract or to the main contract. Consequently, collateral contracts also arise from statement made during negotiations, but on this occasion the statement operates as a separate contract [12] . However if an dispute is taken to court and the court find that ……………

A case that illustrates the theory is found in De Lassalle v Guildford. The collateral contract dispute is very similar to the 3rd exception that was in the parol evidence rule as seen in Van de Esschert v Chappell. Cases that illustrate these limiting factors on collateral contracts are Hoyts Pty Ltd v Spencer (1919) and J.J Savage & Sons Pty Ltd v Blankey.

V CONCLUSION

When parties enter into a contract it is presumed by the courts that all the terms are included in the contract and therefore the parties are bound by that contract, however if the parties later on disagree with what they earlier signed and agreed, and a dispute arise the court will accept no verbal evidence that would change the meaning of the contract in any way as it was stated in the case of Mercantile Bank of Sydney v Taylor. However a number of exceptions are introduced and are acceptable by courts where parties are allowed to give verbal evidence in situation where there is ambiguity, mistake etc. A collateral contract is a second agreement related to the first, the original, agreement made by parties.

VI Bibliography

Roger Gamble, et al, Principles of Business Law ( LawBook Co: 2008 ed, 2008)

Parker, Box, Business Law for Business Students (Lawbook Co: 2008 ed, 2008)

Stephen Graw, An Introduction to the Law of Contract (Lawbook Co: 6th ed, 2008)

Andy Gibson, Douglas Fraser, business law , 3th ed, 2007

Andrew Gibson & Douglas Fraser, commercial law, (Lawbook Co: 1st ed,2003)

R B Vermeesch, K E Lindgren, Business Law of Australia, 10th ed, 2001.

J W Carter, Outline of Contract Law in Australia, 2nd, 1994

Peter Gillies, Business Law, 7th ed, 1995