Substantive Common Law Rule in Contract Cases

Parol Evidence Rule is a substantive common law rule in contract cases that restricts a party to a written contract to present evidence that conflicts or adds to the written terms of the contract that appears to be whole. Its principle is to lend certainty, integrity and predictability to contracts that have been properly formalized. The terms of the contract are usually proposed, discussed and negotiated before they are put into the final agreement. Hence when parties put their contracts into writing it is assumed that it was the final agreement between the parties. Moreover it minimizes the uncertainties in agreements which are formed during conversations. The rule is only effective if the written document is the final agreement between the two parties.

In the case of Henderson v Arthur [1907] KB 10 the plaintiff leased the defendant a theatre. The lease provided an annual rent and the lessor sued to recover the rent which was allegedly unpaid. The defendant presented evidence of oral agreement that the lessor in exchange of change cash would accept payment through post dated bill but later refused. It was held that the tenant was not allowed to introduce previous oral agreement. It contradicts the express terms of the written lease.

Usually in written contracts a merger clause is used to provide clear evidence that all of the terms in the agreement are agreed and it is complete and final agreement between the parties. Moreover the merger clause also specifies that any changes in the contract must be in writing and signed by the parties in the agreement.

The merger clause prevents any oral alteration, it makes sure that the parties understand and there is no disagreement later on and to enforce parol evidence rule if there is any dispute. In the case of Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 the agreement had a clause which says all the terms are embraced in the written contract and no other representation, covenant or whatsoever not specifically contained will not have any effect or validity hence it was held that the oral promise which was not a part of the written contract will not be enforceable.

Parol Evidence Rule acquired its name from the French word parole which means an oral or spoken word. But the word is has only a conventional meaning because the rule is used for both written and oral evidence. The rule was developed in the middle ages and later gained acceptance in the modern times. Written document got sufficient importance with the rise of the seal in the eleventh century.

With the development of printing in the fifteenth century and regulation of the statutes required certain documents to be in written form hence if gave more influence to the written agreement. There were three statutes by the end of the seventeenth century which required contracts such as bargain and sale to be in written form so that they can be enforced by legal action. The statute had a significant influence in the development of parol evidence rule. The parol evidence rule was made for two reasons. Firstly it invalidates the practice of just oral agreements between parties and secondly it permits the required documents to be in writing without seal.

Parol evidence Rule is controversial topic for the common law system. It has often blamed for injustice that result from its application and sometimes even for lack of rationality in its justification. However it has remained valid in common law since the actual purpose of the contract is considered by the court and considering intentions other what is written in the contract is simply irrelevant.

The basic reasons this rule is used are to prevent fraud, keep discipline, promote certainty and avoid conflicts. When there is dispute in an agreement the parties tend to deceit each other. Hence the party, who is not satisfied after the agreement has been made, commences fraud evidence in the court as a part of the contract. Since in most cases the judge is not able to distinguish the actual fact with the lie parol evidence rule is the best way to bring justice.

With written documents it might be thought that the problems will end but the parties in a case might argue that there was oral contract between them and written document is not whole agreement. The court considers all the arguments but at the end it has to decide whether the statements were part of the contract and whether it can be enforceable. If the contract appears to be whole parol evidence rule is used and in this way the discipline is maintained. The rule promotes that any contract made should be a whole agreement hence any conflicts in the future can be avoided.

However there are certain exceptions to the parol evidence rule. There are seven situations in which parol evidence rule is strictly not applied. They are:

Contracts which are partly written and partly oral. The court will allow the exception if it is clear to the parties that the written contract is not the whole agreement and it is in fact partly written and the effect of the intended oral term. In the case of Van den Esschert v Chappell [1960] WAR 114 a house was bought and just before buying the buyer asked whether the house was affected by termites and the seller confirmed that there were no termites and the buyer signed the deal. Few months later the buyer found termites in the house and sued the seller for cost of repair. It was held that the seller verbal assurance was a term of the contract and has to compensate for the damages.

Terms which refer to traditional customs or usage. When there is a renowned tradition parol evidence rule cannot be used to eliminate extrinsic evidence of that traditional custom. In the case of Hutton v Warren (1836) 1 M & W 466; 150 ER 517 the lessee had been asked to leave a lease farm. There was local tradition that if the farmer has to leave his tenancy he was authorized to receive an allowance from the owner for his cultivation and labour from previous year’s tenancy. The owner did not agree and the farmer sued. It has held that because of the established custom the tenant was entitled to receive the compensation.

Deferment of an operation. Sometimes there are oral contracts of an occurrence of an event in the operation of a written contract. Parole evidence rule is rejected in this case. The exception is used because extrinsic evidence does not vary or add the written agreement. In the case of Pym v Campbell (1856) 6 El & Bl 370; 119 ER 903 Pym had a deal to sell Campbell an interest in his invention. The oral agreement was that if two engineers approve his invention the defendants would buy the interest. In a meeting only one engineer was present and he approved the invention and the parties signed the deal, which would become a contract if the engineer approves the invention. The other engineer disapproved and parties wanted to cancel the deal but Pym argued that written agreement was enforceable and sued. It was held that oral agreement was acceptable since it did not vary or add to the written agreement. It only showed that the agreement would become a contract if the invention is accepted by both engineers.

Invalidity of the contract. Extrinsic evidence can be initiated to show that the contract is invalid because of absence of consideration, intension or capacity. Evidence which does not reflect on what is in the written contract results to be invalid.

Correction of the written contract. When a written contract does not show the actual intension of the parties, any one of the parties may seek correction to make changes in the contract so that it represents what they actually agreed. To get an order from the court for the rectification the party will have to show there was a preexistent agreement and that a mistake was made in minimizing it to writing. In the case of MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 the parties had a contract to purchase and sell a home unit. The contract was about a floor plan in the northern side of the unit. But the unit was actually located in the southern side and dealer wanted to make the correction in the contract. The defendants wanted their deposit back and cancel the deal. It was held that the dealer could rectify the mistake since the defendants wanted to buy the unit and there was only an error in naming position of it.

If the court does not understand the language of the contract and what the parties actually intended, moreover the parties have a different explanation of what is written in the agreement; the written contract is uncertain or ambiguous. Hence extrinsic evidence is needed to recognize the contract’s subject matter. In the case of Akot Pty Ltd v Rathmines Investments Pty Ltd there was a deal to purchase and sell ‘unit 115’ on the fifth floor of an apartment building. The floor had five units but was not labeled with numbers. However agreement was made by brochures the seller had given and an agent present who can give a testimony. It was held that the brochure and testimony was acceptable to determine the unit.

When a collateral contract exist. Collateral contract is a contract where there is consideration to enter another contract which accompanies the main contract. There are two types of collateral contracts. Two party situation or a tripartite collateral contract. In collateral contracts there has to be an intention for the party to enter the main contract on reliance of the oral agreement made. Collateral contracts are generally made to skip out parol evidence rule hence enforcing oral agreements and moreover privity of contract rule can be avoided.

It is evident when there is written contract, oral agreements do occur. But usually in cases the consideration of the oral contract is absent. To get around parol evidence rule the parties will have to show that the oral contract has independent existence but is associated with the main contract. Moreover the court will not consider collateral contract unless it has all the elements for a valid contract.

The main elements are agreement, consideration and intention. To have an agreement the plaintiff will to prove that there was promise and the terms in it were accepted. In the case of J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 Blakney had a contract with Savage of a boat. When Blakney was analyzing before the contract he wanted to know about the details of the engines. A letter was given to him and among the details the speed of 15mph matched to what he wanted in his boat. He replied that the boat was good and speed will be helpful for him. After the boat was given to him the boat speed was not up to what was written in the details and he sued. It was held that there were only statements made and no promise hence there was no collateral contract. So he lost the case.

Collateral contracts need to have consideration. The intension of a collateral contract is to enter the main contract. In the case of De Lassalle v Guidford [1901] 2 KB 215 the party had an agreement of a house lease. The lessee repelled to complete the deal unless the landlord assured him that the drain was in good order. The drains were not in good order and the tenant sued. It was held that the assurance was a individual collateral contract and consideration for the tenant to enter main contract because of the collateral contract. The tenant won and the landlord had to pay for the damages.