Explaining the parol evidence rule and its exceptions to the rule

Parol evidence rule is a rule that preserves the genuinity or integrity of a written document. It was first established during the case of Goss v Lord Nugent (1833) and it was concisely stated by Innes J in Mercantile Bank of Sydney v Taylor (1891). The rule prohibits the parties from amending the meaning of the written document through the use of previous oral declarations that are not stated in the document itself. When parties had discussed and negotiated the terms of a contract, this process means that they have integrated the contract. In Hutton v Watling (1948), a written agreement was drawn up and signed by the vendor. In an action to enforce one of the clauses in the agreement, the vendor claimed that it did not represent the whole contract. It was held that the vendor was not entitled to introduce evidence in this point, because the written document represented a true record of the contract.

The parol evidence rule existed for several reasons. Its existence is to safeguard the terms of a contract. The rule helps to secure the originality of the written document. This is to exclude extrinsic terms only where the document was agreed by both parties that the document was agreed to be a complete record of the entire contract and all prior oral or written agreements merge in the writing. Courts usually consider the following factors in making this determination. Whether the written agreement appears to be a complete statement of the parties’ agreement, whether the parol evidence rule contradicts with the written contract, whether any alleged “collateral agreement" might naturally be made as a separate agreement and whether the parol evidence is likely to mislead the jury.

The parol evidence rule has exceptions to the rule because it may be clear that other terms or agreement have been accepted by both parties but the terms have not been included in the written contract. This may cause unfairness to the opposite side of the party. For example in the case of Henderson v Arthur (1907), the plaintiff which is the seller and the defendant, a tenant were parties to a lease. The agreement contained a promise under seal for the payment of a certain amount at a certain time. Before the lease was drawn up, the parties negotiated orally about the payment and decided that the rent could in fact be paid in debts. Later on, the plaintiff sued the tenant for not making on time payments and the tenant pointed out the oral agreement. Court of Appeal held that the extrinsic evidence could not be substituted. The court's decision held that they will stick with the terms of the written agreement. The written agreement had caused the previous oral agreement about the payment in debts to be invalid. This may seen unfair to the tenant but the tenant didn't took the advantage to change the terms of the contract before signing. One of the parties could feel aggrieved if evidence on the point were excluded merely because the disputed term was not set out in the written document. Many contracts are partly written and partly oral, and over time a number of exceptions to the rule have emerged rendering the rule unworkable. Courts developed a total of 7 exceptions to the rule. The most significant exceptions are rectification, partly oral and partly written contracts and collateral contract.

Rectification is an equitable remedy which allows a document to be revised where there has been a transcription mistake in recoding in writing a previous oral agreement. Rectification could not be applied without the existence of an exception to the parol evidence rule, since extrinsic evidence must be introduced to prove the content of the original oral agreement. Rectification is not easily acknowledged and few conditions must be met. Firstly, both parties must come out with a complete agreement that was in writing. Secondly, the written document must contain an error or more. Thirdly, no third party must have acquired an interest in the subject matter of the contract and lastly, the amendment me be capable of expression in clear terms. An example of rectification can be seen in the case of Webster v Cecil (1861) whereby Webster was trying to argue that this purchase of land was £1,250 in the written document. Cecil then was able to prove that he had already declined an offer of £2,000, the accurate price was £2,250. The price was amended for that reason.

The second exception to the parol evidence rule would be partly written and partly oral contracts. This means that the contract is not entirely a written contract therefore the parol evidence rule absolutely does not apply. The exception states that extrinsic evidence is permitted to show if it can be proved by both parties that the contract consist of oral and written terms. This means that the parol evidence rule has little effect, because it can be bypassed by introducing oral evidence and concluding that the contract is not a written one. A good example of a case with this exception is the case of Van den Esschert v Chappel. The purchaser which was the plaintiff was about to sign a contract to buy a house. Just before signing the contract, the seller guaranteed orally that the house weren’t affected by white ants. The assurance of the seller resulted the buyer to sign the contract and buy the house. Several months later, the buyer of the house discovered that they were white ants and had to pay a sum of money to have them destroyed and for the damaged timbers. The plaintiff sued the seller for the costs of damage and repair. The plaintiff won even though the term that there were no white ants weren’t in the written agreement. As Wolf CJ said when purchasing a house in that country, information regarding the presence of white ants was an important matter. However, when the contract is intentionally written, there is less fact to argue that the document isn’t entirely the agreement. The courts stated that if the contract didn’t contain the whole agreement, why parties put their signature on without amendment? An example of a case with this scenario is Nemeth v Bayswater Road Pty Ltd. The parties agreed in hiring an aircraft and the agreements were recorded in a specially prepared written document. It also contained specific acknowledgement that all terms contained in this contract. The plaintiff later sued for additional hire charges that, it alleged, were due under an oral agreement entered in to before the written contract was executed. The plaintiff failed because the written document clearly stated that all terms are already contained in the document.

The third exception to the parol evidence rule would be terms implied through trade usage or custom. Whereby, it states that the parol evidence rule cannot be used to exclude extrinsic evidence of trade usage or custom. If there is, the matter would be dealt with in detail under implied terms. In the case of Hutton v Warren (1836), the defendant was given notice to withdraw from his leased farm, he then claimed that there was a local custom that he will be entitled to receive a refund or payment from the landlord for both the labour and seed he had used on the farm for the past years. He claimed that this right is enforceable even though it wasn’t written in the lease. The tenant’s action succeeded. His contract with the landlord had to be viewed in the light of the established custom and it is decided that he had the right to recover fair compensation.

The fourth exception to the parol evidence rule is suspension of operation. It states that the operation of a contract proved in writing is verbally made subject to occurrence of some named event or to the continuation of some specific state of affairs, extrinsic evidence may be adduced to show that the contract hasn't come into operation or that it has been hold to operate. Courts says that the exception is allowed because the extrinsic evidence does not differ or contradict the written agreement. It is clearly illustrated in the case of Pym v Campbell (1856) whereby Pym was about to sell Campbell his invention of a multifunctional machine. Both agreed that Pym would explain the machine's function to the two engineers of Campbell. If both engineers approved, Campbell would purchase Pym's invention. They both arranged a meeting, both engineers were present but Pym was not. When Pym arrived, only one of the engineers were present and he approved Pym's machine. Agreement was drawn up and signed which will become the contract if the other engineer agrees. Pym later argued that the contract was enforceable and that oral evidence could not be adduced to show. What was held was that oral evidence is admissible. The evidence did not differ or contradict the written agreement. If and only the other engineer put his signature on, then the contract is enforceable.

Next exception to the rule would be invalidation by misrepresentation whereby a claimant is looking forward to avoid the penalty of a contract having discovered that the contract has been made as the result of a mistake or representation or other invalidating factors. A person is clearly entitled to introduce extrinsic evidence to prove that the contract is entered because of incapacity, misrepresentation, force or undue influence. The sixth exception to the parol evidence rule is ambiguity or uncertainty in a written contract. When the courts cannot decide what the parties intention were, because of the ambiguous or uncertainty meanings in the written document. Parol evidence can, on the other hand, be used to explain words or phrases which are unclear. See, for example in the case of Akot Pty v Rathmines Investments Pty Ltd [1984]. The parties contracted to buy and sell "unit 115" on the 5th floor of an apartment. The floor plan which was included in the contract illustrated five units but it did not identify each units by its number. However, it was easily determine which unit the parties had agreed on by referring to the brochure.

Second Part

The courts have also been willing to allow the use of collateral contracts to side-step the parol evidence rule. The parol evidence rule will apply to the written contract, but there is also an oral second (collateral) contract which exists in corresponding which is the reason why the main contract was entered. Since this collateral contract contains two separate contract, the parol evidence rule cannot apply to it. There are two requirements to be fulfilled to prove that the collateral contract exist. One is that the representor must have intended that the agreement to be legally binding. Secondly, the representee must have entered into the main contract on the basis of the statement and in dependence on it. A collateral contract is not supposed to contradict the terms of the main contract. In the case of City and Westminster Properties (1934) v Ltd v Mudd [1959], the defendant rented a shop for six years, together with a small room in which he slept, which was known by the claimant landlords. When the lease was up for renewal the landlords inserted a clause restricting use of premises to the 'showrooms, workrooms and offices only', the effect of which would be to prevent the defendant from sleeping at the premises. He then gained assurance that he could still sleep in the room, on which basis he signed the new lease. The landlord then sue the tenant for breaching the new clause. It was held that the defendant broke the terms of the contract, but the landlord were unable to enforce its terms against him because of the collateral contract. Representation was made that the landlord would not enforce a covenant in a lease preventing the tenant from residing in the premises. The tenant would not have entered into the contract without that assurance.

The second famous case would be De Lassalle v Guildford [1901]. In this case, the parties had negotiated the lease of a house. The landlord gave the assurance that the drains were in good order. Later on the tenant sued the landlord because the drains were not in good order but the landlord argued that the oral assurance wasn't written in the contract. The tenant succeeded, the assurance constituted a separate contract, it was the consideration for which the tenant had entered into the main contract.

To conclude this essay, parol evidence rule, preserves the integrity and meaning of the written document. However, there is a total of six plus one exceptions to the parol evidence rule stated above. Each of the exceptions can only be applied if the case's circumstances and fact meets it requirements of the exceptions. Collateral contract mentioned above can be an advantage to a party to a contract who would otherwise be prevented from discussing in litigation a verbal promise made to him or her by the other party during pre-contract negotiations.