Parol evidence rule

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The parol evidence rule prevents the admission of extrinsic evidence for the purpose of identifying or construing the terms of a contract. The parol evidence rule operates as follows:

  • In identification:
    • Rule only works when
      1. The agreement is in writing.
      2. The written agreement is the entire agreement (the agreement was meant to be wholly in writing).
        • For the purposes of determining whether the agreement was wholly in writing, the court is permitted to examine the extrinsic evidence.[1]
    • Rule does not apply to:
      1. Collateral contracts.[2]
      2. Estoppel.[3]
  • In construction:
    • Rule does not apply when:
      1. the court needs to resolve an ambiguity.[4]

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 391-8 [14.05-14.50].

Introduction

[5] In the case of a written contract, the parol evidence rule prevents the admission of further extrinsic evidence for identifying the terms of the contract. It is usually considered in two parts:

  • Identifying - It prevents extrinsic evidence being given to add to, vary or contradict the terms of the contract as they appear in the document.
  • Construction - It limits the evidence which might be given to explain the meaning of those terms.

The parol evidence rule works within confines, as detailed below.

Extrinsic evidence

[6] Extrinsic evidence usually refers to anything that isn't the written contractual agreement. This can include early negotiations, oral conversations, letters and earlier drafts of the contract.

Parol evidence rule in identifying the terms

The Parol evidence rule prevents the admission of extrinsic evidence for the purposes of identifying what are the terms of the contract.

Rule only applies to a contract wholly in writing

[7] The first part (identification part) parol evidence rule will only apply to a contract made wholly in writing (i.e. the written document comprises the entirety of the contract). This means that the courts will not exclude extrinsic evidence for the purposes of identifying the terms of a contract made only partially in writing[8].

Determining whether an agreement is wholly in writing

[9] In the absence of an entire agreement clause, the court will need to assess whether the agreement was made wholly in writing or only partially. In determining whether the agreement was made wholly in writing, extrinsic evidence is often extremely relevant.

The question arises whether extrinsic evidence can be used to determine whether the contract was made wholly in writing. In other words, does the parol evidence rule also apply when determining whether a contract is made wholly in writing? There are two opinions:

  • Strict view - Where a formal written document has been created, and appears to be complete, it should be presumed that the parties intended the document to contain all the terms of the agreement[10]. This means that extrinsic evidence cannot be used to determine whether the agreement was made wholly in writing.
  • Lenient view (favoured approach) - No presumption should be adopted. Extrinsic evidence should be considered in order to determine whether the agreement was made wholly in writing. Note that if the extrinsic evidence indeed shows that the agreement was made wholly in writing, then the parol evidence rule will come into effect and extrinsic evidence will not be allowed for identifying the terms the of the contract.

The lenient approach was advocated in Corbin on Contracts[11]:

  • It is impossible to establish whether the parties intended that a particular writing to be the complete and accurate integration of that contract by simply looking at the contract itself. Extrinsic evidence must be allowed for the purposes of determining whether a written document comprises the entire agreement.

And also in State Rail Authority of New South Wales v Heath Outdoor Pty Ltd:

  • The existence of a written agreement which appears to be complete does not automatically entail that the agreement is wholly in writing. It only serves as a foundation (or supports) for that belief.
    • "The existence of writing which appears to represent a written contract between the parties is no more than an evidentiary foundation for a conclusion that the agreement is wholly in writing[12]."
  • The parol evidence rule doesn't apply when determining whether the contract wholly in writing. If the Plaintiff claims that the agreement was partly oral, the court will examine extrinsic evidence to determine whether the contract was wholly or partially in writing.
    • "The mere production of a contractual document, however complete it may look, cannot as a matter of law exclude evidence of oral terms if the other party asserts that such terms were agreed[13]."

Exceptions to the parol evidence rule in identifying terms

Collateral contracts

see article: collateral contracts

[14] Besides from alleging that the agreement was only partly written, a Plaintiff can also circumvent the parol evidence rule by alleging a collateral contract. It has been established that the parol evidence rule does not apply to collateral contracts.[15]

Estoppel

In addition, the parol evidence rule does not apply to claims of estoppel. Since estoppel is a creature of equity, it is not affected by a common law rule such the parol evidence rule. This was illustrated in Saleh v Romanous

  • Franklins Pty Ltd v Metcash Trading Ltd: “if the estoppel ... is equitable ... the common law parol evidence rule will not impede its proper operation[16]”, and “equity would not permit an entire agreement clause to stultify the operation of its doctrines[17]”.
  • "the legal rights trumped by equity include those protected by the parol evidence and entire contract rules[18]."
  • It should be noted that the precedents specifically add "pre-contractual promissory estoppel to the grounds on which equity will protect one contracting party from inequitable conduct by the other[19]."

Parol evidence rule in construing the terms

[20] The parol evidence rule also applies to prevent the admission of extrinsic evidence for the purposes of construing the terms of the contract.

Exceptions to the parol evidence rule in construing the terms

[21] However, the court has also ruled that construction requires consideration of surrounding circumstances.[22] In Royal Botanic Gardens and Domain Trust v South Sydney Council,[23] it was decided that:

  • Extrinsic evidence can only be used to resolve an ambiguity in construing the terms.

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191
  2. Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133, 139, 147
  3. Saleh v Romanous [2010] NSWCA 274, at [68]
  4. 'Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 186 ALR 289
  5. Textbook, p. 251 [14.05]
  6. Casebook, p. 394 [14.30]
  7. Casebook, p. 391 [14.10]
  8. Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133, 143;Hope v RCA Photohphone of Australia Pty Ltd (1937) 59 CLR 348, 357
  9. Textbook, pp. 252-3 [14.20]
  10. L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (Australasia) Ltd (1956) SR (NSW) 81, 88; also Williston on Contracts (3rd ed, 1961), s 633
  11. (1950), vol 3 pp. 215-6 in Casebook, p. 392 [14.15]
  12. (1986) 7 NSWLR 170, 191
  13. (1986) 7 NSWLR 170, 192, quoting The Law Commission, Law of Contract, The Parol Evidence Rule (Cmnd 9700, January 1986), [2.12 at 11]
  14. Casebook, pp. 394-5 [14.35]
  15. Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133, 139, 147
  16. [2009] NSWCA 407, 264 ALR 15 [34]
  17. [2009] NSWCA 407, 264 ALR 15 [554]
  18. [2010] NSWCA 274, [68]
  19. [2010] NSWCA 274, [68]
  20. Casebook, p. 402 [14.80]
  21. Casebook, p. 402 [14.80]
  22. "consideration, not only of the text of the documents, but also the surrounding circumstances known to [the parties], and the purpose of the transaction":Pacific Carriers v BNP Paribas (2004) 218 CLR 451, at [22] (Gleeson CJ et al]
  23. (2002) 186 ALR 289
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