Parol Evidence Rule

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 to, subtracting from or varying it in any way (Mercantile Bank of Sydney v Taylor).

Agreements between parties are not always entirely reduced to writing. This is particularly the case where pre printed standard form contracts are used and any changes to the standard form may not be written down, but perhaps agreed to on a handshake.

There are two aspects to the rule, i.e. in relation to:

The Content of the contract

This aspect states that if the parties intended the contract to be wholly 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 printing contractual form (Couchman v Hill).

Exceptions to the rule

(a) Evidence of collateral contract

The prevention of extrinsic evidence being led to affect the main contract does not apply to the collateral contract, therefore, oral evidence relating to that contract can be led. The rule will continue to operate in relation to the main contract.

(b) Evidence that the written contract is not yet in force

The rule will operate only if the contract is in force, and the written document reflects the contractual arrangement.

(c) Evidence that the written document was later varied or discharged

The rule prevents introduction of extrinsic evidence that the parties varied the agreement before it was reduced to writing, not evidence that the parties later agreed to its variation or discharge.

Unless the contract was one required to be in writing to be enforceable, neither the variation nor discharge need be in writing. Therefore, oral or other evidence can be led that the written agreement has been subsequently varied or discharged.

(d) Evidence necessary for rectification

Although the rule will generally prevent the introduction of evidence to add to, subtract from or vary the agreement, the rule will not exclude such evidence if it is necessary to rectify the written document so as to correct such an error eg the recording of a different sum other than agreed upon for the purchase of a house (NSW Medical Defence Union v Transport Industries).

The interpretation of the contract

This aspect involves the rule being used to determine the true meaning of a contract and applying that meaning to the circumstances surrounding the entry into the contract. Extrinsic evidence of antecedent negotiation, the subjective intention of the parties and subsequent conduct appear to be inadmissible.

Factual Matrix

Extrinsic evidence of the factual matrix or setting of the contract is admissible. When a court embarks upon a process of construing a document, it must place itself in thought in the same factual matrix as that in which the parties were. Accordingly, when determining the parties intentions, the court may validly take into account not only the words recorded in the document but also evidence of the surrounding circumstances. The evidence of surrounding circumstances must be known to both parties.

Exceptions to the Rule

(a) Ambiguity

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), but also latent ambiguity – where an apparently clear meaning is shown to be ambiguous when extrinsic facts are taken into account (Hope v RCA Photophone of Australia Pty Ltd).

(b) Identification of subject matter

Extrinsic evidence is admissible to resolve ambiguity about the subject matter of the contract. This is usually as a result of latent ambiguity. Thus the doubt created by extrinsic knowledge is resolved by extrinsic evidence.

(c) Identification of the parties

Extrinsic evidence is admissible where there is ambiguity concerning the identity of the parties to the agreement, or concerning their relationship or the capacity in which they have entered into the contract.

(d) Identification of real consideration

Extrinsic evidence is admissible to prove the real consideration under a contract where:

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

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

·  A substantial consideration is stated but an additional consideration exists, provided the additional consideration proved is not consistent with the instrument.

Where the additional consideration is of a different kind, it will not be inconsistent unless perhaps the written instrument says that the stated consideration is the only consideration. Where a substantial consideration is stated, and the additional consideration is the same kind, for example the stated consideration is $100 000 and the true consideration is claimed to be $150 000, the argument for inconsistency is stronger.

(e) 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, even if there is no patent ambiguity.

(f) Rectification

Extrinsic evidence may be admitted to show that the parties intention was not accurately recorded in the written instrument. In appropriate circumstances, the document may be rectified so that it accords with the parties actual agreement.

Inadmissible Evidence

Regardless of surrounding circumstances, certain evidence is remains inadmissible.

(a) Subjective intention

Evidence of the actual, subjective intentions of the parties is not admissible. Intention is ascertained objectively - a court cannot receive evidence from a party regarding his or her intentions and construe the contract by reference to those intentions (Life Insurance Co of Australia v Phillips)

(b) Prior Negotiations

Evidence of negotiations that precede the written document is generally not admitted because the evidence is unhelpful (Prenn v Simonds). The nature of negotiation is that even if the parties intentions are convergent, they are still not the same and only the final document will properly reflect a consensus of the parties.

(c) Subsequent conduct

Evidence of subsequent conduct cannot be referred to for the purpose of interpreting the contract (Administration of Papua & New Guinea v Daera Guba) as parties may tailor their post contract behavior according to the case they believe they later have to present in court; they may seek to advance their understanding of the agreement simply to persuade the other party to accept their construction; they expansion in the field of inquiry would add to the burden of fact finding and consequently the length and cost of litigation; and subsequent conduct may be based on an erroneous understanding of the parties rights (Hide & Skin Tradig v Oceanic Meat Traders).