#7306 - The Parol Evidence Rule Textbook Summary - Contracts 2

Textbook Summary

The Parol Evidence Rule

• Where contracts are oral, the court may consider all relevant evidence (what was said when the contract was made, nature of the industry etc.)

• When parties record their agreement in writing, evidence admissible for identifying/construing terms is limited by the parol evidence rule (Goss v Lord Nugent (1833). The parole evidence rule has two parts:

  • Preventing extrinsic evidence being given to add to/vary/contradict the terms of a contract as they appear written

  • Limit evidence that can be given to explain the meaning of terms of a written contract

• The parol evidence rule generally applies to exclude oral statements made by parties when negotiating/making a contract and also potentially applies to extrinsic evidence in the form of writing (e.g. letters, memoranda etc.) – Harris v Sydney Glass & Tile Co (1904) 2 CLR 227

Extrinsic Evidence in Identifying the Terms

• The parol evidence rule applies only when a contract is wholly in writing (Hoyt’s Pty Ltd v Spencer)

  • As a corollary it does not apply in identifying terms of a contract only partly in writing

The use of extrinsic evidence in determining whether a contract is wholly in writing

• Parties can include terms in written contracts that state that it represents the entire agreement and such a clause, a merger clause, will be binding

• There are two approaches as to the use of extrinsic evidence in assessing whether or not a contract contains whole or part of an agreement:

  • The strict approach – is that primary be given to written documents that appear as a complete record of the parties’ contract (Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348)

    • Hence extrinsic evidence isn’t admissible to add to/vary/contradict terms of the agreement

    • Any negotiation/correspondence is not relevant, it is either accepted or rejected by the written contract

  • The presumed intentions approach – the parol evidence rule does not apply unless it is determined that the parties intend the written document to contain all terms of the contract

    • Hence extrinsic evidence is admissible to determine whether or not the parties intended for the contract to be a complete expression of their intentions or it was to be varied by promissory statements

Though no one approach has been taken in Equuscorp Pty Ltd v Glengallan Instruments Pty Ltd (2004) the HCA took the view that subsequent written contracts supersede any prior oral agreements, though this was based on the policy of giving effect to objective manifestations of consent of contracting parties. They did not reject the possibility of extrinsic evidence being brought in to establish parties intention concerning the ambit of the contract.
The NSWSC expressly acknowledged that extrinsic evidence may be used in determining whether parties intended their contract to be wholly, or only partly, in writing (State Rail Authority of New South Wales v Heath Outdoor Pty Ltd)

The parol evidence rule and electronic contracts

• In Chitty on Contracts it is suggested that the parol evidence rule should apply to electronic contracts (such as click-wrap contracts). Under this approach any oral or e-mail correspondence will be limited by the parol evidence rule.

Exceptions to the parol evidence rule in identifying terms

• There are a number of circumstances in which the parol evidence rule does not apply to extrinsic evidence adding to or varying terms of a contract being admitted.

Collateral Contracts

• Collateral contracts are contracts independent of the main contract, consideration for which is a promise to enter into the main contract Heilbut Symons & Co v Buckleton [1913] AC 30

• The parol evidence rule doesn’t apply to excluding evidence of a collateral contract (Hoyt’s v Spencer) since it is submitting for the purpose of establishing another collateral contract

• This gives two options for one attempting to bring evidence of an extrinsic statement into the contract:

  • Contend that the contract was not expressed wholly in writing; or in the alternative

  • Show that there were two separate contracts - the main contract and another collateral contract which consists of a separate promise

• In order to establish a collateral contract the statement must have been:

  • Made as a promise (JJ Savage & Sons v Blakney)

  • Intended to induce entry into the contract (JJ Savage)

  • Consistent with the terms of the main contract (the rule in Hoyt’s v Spencer)

    • This restricts the operation of a collateral contract to being used only to add to the main contract and not alter its provisions. The two contracts MUST be able to stand together

Estoppel

• Estoppel provides an effective response to oral responses supplementing written contracts and is not restricted by the requirement of consistency – State Rail Authority of NSW v Heath

• Courts are divided on whether or not extrinsic evidence can be admitted for the purpose of establishing estoppel

  • Whittet v State Bank of New South Wales (1991) 24 NSWLR 146

  • Australian Co-operative Foods v Norco Co-operative (1999) 46 NSWLR 267

Rectification

• Courts have equitable power to rectify contracts in writing where mistakes have been made in recording the parties agreement

Contracts subject to a condition precedent

• Extrinsic evidence can be used to show that written contracts are subject to contingent conditions that must be satisfied before the contract will become effective – Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60

• Extrinsic evidence can also be admitted to show that a binding contract was not intended (Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309

The true consideration

• Extrinsic evidence can be admissible to prove the real consideration under a contract if:

  • No consideration or nominal consideration is expressed in the instrument; or

  • The expressed consideration is in general terms or ambiguously stated; or

  • Substantial consideration is stated, but an additional consideration exists

    • But the additional consideration cannot be inconsistent with the terms of the written instrument

    • Written evidence can also be admitted to prove illegality of consideration (Pao On v Lau Yiu Long)

Implied Terms

• Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) – courts can have regard to extrinsic evidence when considering if a term should be implied into a contract

Extrinsic Evidence in Construing a Contract

• Most exceptions to the parol evidence rule in construction relate to ambiguity – such as the admission of evidence to identify parties or subject matters of a contract where they aren’t revealed in the written contract – Edwards v Edwards (1918) HCA

The relevance of the surrounding circumstances or ‘factual matrix’

• Though there is uncertainty as to whether evidence of surrounding circumstances is admissible it is generally said that such evidence may be admissible in Australian contract law

• In Codelfa Mason J stated that evidence of surrounding circumstances is admissible to assist in interpretation if the language is ambiguous or susceptible to more than one meaning.

  • However in England it was said that evidence of surrounding circumstances is always admissible in construction – ICS Ltd v West Bramich Building Society

  • In Royal Botanic Gardens, the joint judgement stipulated that Codelfa should be followed until an express determination on the issue was made by the High Court

  • In Pacific Carriers Ltd v BNP Paribas [2004] the joint...