Contract law |
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The parol evidence rule is a rule in the Anglo-American common law that governs what kinds of evidence parties to a contract dispute can introduce when trying to determine the specific terms of a contract. [1] The rule also prevents parties who have reduced their agreement to a final written document from later introducing other evidence, such as the content of oral discussions from earlier in the negotiation process, as evidence of a different intent as to the terms of the contract. [2] The rule provides that "extrinsic evidence is inadmissible to vary a written contract". The term "parol" derives from the Anglo-Norman French parol or parole, meaning "word of mouth" or "verbal", and in medieval times referred to oral pleadings in a court case. [3]
The rule's origins lie in English contract law, but has been adopted in other common law jurisdictions; however there are now some differences between application of the rule in different jurisdictions. For instance, in the US, a common misconception is that it is a rule of evidence (like the Federal Rules of Evidence), but that is not the case; [4] whereas in England it is indeed a rule of evidence. [5] [6] [7]
The supporting rationale for this is that since the contracting parties have reduced their agreement to a single and final writing, extrinsic evidence of past agreements or terms should not be considered when interpreting that writing, as the parties had decided to ultimately leave them out of the contract. In other words, one may not use evidence made prior to the written contract to contradict the writing.
The rule applies to parol evidence, as well as other extrinsic evidence (such as written correspondence that does not form a separate contract) regarding a contract. If a contract is in writing and final to at least one term (integrated), parol or extrinsic evidence will generally be excluded. [8] : p 347 However, there are a number of exceptions to this general rule. These include partially integrated contracts, agreements with separate consideration, in order to resolve ambiguities, or to establish contract defenses.
To take an example, Carl agrees in writing to sell Betty a car for $1,000, but later, Betty argues that Carl earlier told her that she would only need to pay Carl $800. The parol evidence rule would generally prevent Betty from testifying to this alleged conversation because the testimony ($800) would directly contradict the written contract's terms ($1,000).
The precise extent of the rule varies from jurisdiction to jurisdiction. As a preliminary or threshold issue, the court may first determine if the agreement was in fact totally reduced to a written document or (in US terminology) fully "integrated". In the case of State Rail Authority of New South Wales v Heath Outdoor Pty Ltd McHugh J held that the parol evidence rule has 'no operation until it is first determined' that all the terms of the contract are in writing. [9] This threshold question applies even in those jurisdictions that apply a very strong form of the parol evidence rule, called the "Four Corners Rule".
Beyond that, the exceptions to the parol evidence rule vary between jurisdictions. Examples of circumstances where extrinsic evidence may be admissible in different jurisdictions include:
In order for evidence to fall within this rule, it must involve either (1) a written or oral communication made prior to execution of the written contract; or (2) an oral communication made contemporaneous with execution of the written contract. Evidence of a later communication will not be barred by this rule, as it is admissible to show a later modification of the contract (although it might be inadmissible for some other reason, such as the Statute of frauds). Similarly, evidence of a collateral agreement - one that would naturally and normally be included in a separate writing - will not be barred. For example, if A contracts with B to paint B's house for $1,000, B can introduce extrinsic evidence to show that A also contracted to paint B's storage shed for $100. The agreement to paint the shed would logically be in a separate document from the agreement to paint the house.
Though its name suggests that it is a procedural evidence rule, the consensus of courts and commentators is that the parol evidence rule constitutes substantive contract law.
The parol evidence rule is a common trap for consumers. For example:
The effect of this can be negated sometimes by specific statutory rules around consumer contracts (e.g. the Consumer Rights Act 2015 in the United Kingdom).
In order for the rule to be effective, the contract in question must first be a final integrated writing; it must, in the judgment of the court, be the final agreement between the parties (as opposed to a mere draft, for example).
A final agreement is either a partial or complete integration, provided that it has an agreement on its face indicating its finality. [17] If it contains some, but not all, of the terms as to which the parties have agreed then it is a partial integration. This means that the writing was a final agreement between the parties (and not mere preliminary negotiations) as to some terms, but not as to others. On the other hand, if the writing were to contain all of the terms as to which the parties agreed, then it would be a complete integration. One way to ensure that the contract will be found to be a final and complete integration is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties. However, many modern cases have found merger clauses to be only a rebuttable presumption.
The importance of the distinction between partial and complete integrations is relevant to what evidence is excluded under the parol evidence rule. For both complete and partial integrations, evidence contradicting the writing is excluded under the parol evidence rule. However, for a partial integration, terms that supplement the writing are admissible. To put it mildly, this can be an extremely subtle (and subjective) distinction.
To put it simply, (1) If the parties intend a complete integration of the contract terms, no parol evidence within the scope of agreement is permitted. (2) If the parties intended a partial integrated agreement, no parol evidence that contradicts anything integrated is permitted. And (3), if the parol evidence is collateral, meaning it regards a different agreement, and does not contradict the integrated terms, and are not terms any reasonable person would always naturally integrate, then the rule does not apply and the evidence is admissible.
In a minority of U.S. states, (Florida, Colorado, and Wisconsin), the parol evidence rule is extremely strong and extrinsic evidence is always barred from being used to interpret a contract. This is called the Four Corners Rule, and it is traditional/old. In a Four Corners Rule jurisdiction, there are two basic rules. First, the court will never allow parol evidence if the parties intended a full and completely integrated agreement, and second, the court will only turn to parol evidence if the terms available are wholly ambiguous. The policy is to prevent lying, to protect against doubtful veracity, to enable parties to rely dearly on written contracts, and for judicial efficiency.
In most jurisdictions there are numerous exceptions to this rule, and in those jurisdictions, extrinsic evidence may be admitted for various purposes. This is called the Admission Rule. It favors liberalizing the admission of evidence to determine if the contract was fully integrated and to determine if the parol evidence is relevant. In these jurisdictions, such as California, one can bring in parol evidence even if the contract is unambiguous on its face, if the parol evidence creates ambiguity. The policy is to get to the actual truth, sometimes.
The third and final admissibility rule is that under the UCC § 2-202: Parol evidence cannot contradict a writing intended to be the "final expression" of the agreement integrated but may be explained or supplemented by (a) a course of dealing/usage of trade/ course of performance, and by (b) evidence of consistent additional terms unless the writing was also intended to be a complete and exclusive statement of the terms of the agreement.
Additional information on the parol evidence rule may be found in Restatement (Second) of Contracts § 213.
In New South Wales, if an entire agreement clause, [8] does not exist in the contract terms, parol evidence rule is a default rule of a completely written contract that the admission of extrinsic evidence is not allowed, and the contract should be understood in an objective approach. [18]
However there are two exceptions that could overcome the parol evidence rule that extrinsic evidence is admissible: Exception 1: the contract is an oral contract or partly written. Exception 2: parties may have entered into a collateral contract, [12] or are establishing an estoppel, [19] with rectification, condition precedent, the true consideration, ACL, implied terms.
There are also exceptions to the parol evidence rule in construing a contract. The first exception is that there is evidence of trade usage, which is well-known, uniform and certain. Appleby v Pursell [1973] 2 NSWLR 879. [20] Also, a narrow view of admissibility of extrinsic evidence has been taken, where evidence of surrounding circumstances is only admissible to resolve patent ambiguity, [21] latent ambiguity, [22] and inherent ambiguity in the meaning of the words of a contract. [8] [23] The High Court in Electricity Generation Corporation v Woodside Energy Ltd [24] took a different approach to interpreting commercial contracts, considering the "language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract" at the "genesis of the transaction". This necessarily implies consideration of surrounding circumstances and indicates a broader approach may be adopted by the court in the future. The latest view is the narrow view which was described in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited. [18]
In the New South Wales case of Saleh v Romanous, it was held that equitable estoppel triumphs common law rules of parol evidence. [19]
See L G Throne v Thomas Borthwick where the dissent of Herron J has been subsequently adopted. [25]
In South Africa the Supreme Court of Appeal, beginning with the landmark ruling in KPMG Chartered Accountants (SA) v Securefin Ltd, [26] redefined the rules relating to the admissibility of evidence that may be used in the interpretation of contracts in South Africa and in Dexgroup (Pty) Ltd v Trustco Group International (Pty) Ltd [27] the Supreme Court of Appeal gave further clarity on these rules. The starting point is the language of the document and the parol evidence rule prevents evidence to add to, detract from or modify the words contained in the document. However, evidence to prove the meaning of the words, expressions, sentences and terms that constitute the contract, is admissible from the outset irrespective of whether there is any uncertainty or ambiguity in the text – as long as the evidence concerned points to a meaning which the text can reasonably have and the evidence is relevant to prove the common intention of the parties. [28]
A statute of frauds is a form of statute requiring that certain kinds of contracts be memorialized in writing, signed by the party against whom they are to be enforced, with sufficient content to evidence the contract.
An oral contract is a contract, the terms of which have been agreed by spoken communication. This is in contrast to a written contract, where the contract is a written document. There may be written, or other physical evidence, of an oral contract – for example where the parties write down what they have agreed – but the contract itself is not a written one.
The law of evidence, also known as the rules of evidence, encompasses the rules and legal principles that govern the proof of facts in a legal proceeding. These rules determine what evidence must or must not be considered by the trier of fact in reaching its decision. The trier of fact is a judge in bench trials, or the jury in any cases involving a jury. The law of evidence is also concerned with the quantum (amount), quality, and type of proof needed to prevail in litigation. The rules vary depending upon whether the venue is a criminal court, civil court, or family court, and they vary by jurisdiction.
A collateral contract is usually a single term contract, made in consideration of the party for whose benefit the contract operates agreeing to enter into the principal or main contract, which sets out additional terms relating to the same subject matter as the main contract. For example, a collateral contract is formed when one party pays the other party a certain sum for entry into another contract. A collateral contract may be between one of the parties and a third party.
An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.
In contract law, an integration clause, merger clause, is a clause in a written contract which declares that contract to be the complete and final agreement between the parties. It is often placed at or towards the end of the contract. Any pre-contractual material which the parties wish to be incorporated into the contract need to be assembled with it or explicitly referred to in the contractual documentation.
The law of contract in Australia is similar to other Anglo-American common law jurisdictions.
Rectification is a remedy whereby a court orders a change in a written document to reflect what it ought to have said in the first place. It is an equitable remedy, and so the circumstances on which it can be applied are limited.
L'Estrange v F Graucob Ltd [1934] 2 KB 394 is a leading English contract law case on the incorporation of terms into a contract by signature. There are exceptions to the rule that a person is bound by his or her signature, including fraud, misrepresentation and non est factum.
A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual obligation, the breach of which may give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.
An equitable interest is an "interest held by virtue of an equitable title or claimed on equitable grounds, such as the interest held by a trust beneficiary". The equitable interest is a right in equity that may be protected by an equitable remedy. This concept exists only in systems influenced by the common law tradition, such as New Zealand, England, Canada, Australia, and the United States.
The Four Corners Rule is a legal doctrine that courts use to determine the meaning of a written instrument such as a contract, will, or deed as represented solely by its textual content. The doctrine states that where there is an ambiguity of terms, the Court must rely on the written instrument solely and cannot consider extraneous evidence.
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more mutually agreeing parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. A binding agreement between actors in international law is known as a treaty.
Contractual terms in English law is a topic which deals with four main issues.
Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3 is an English contract law case, concerning the frustration of an agreement.
South African contract law is "essentially a modernized version of the Roman-Dutch law of contract", and is rooted in canon and Roman laws. In the broadest definition, a contract is an agreement two or more parties enter into with the serious intention of creating a legal obligation. Contract law provides a legal framework within which persons can transact business and exchange resources, secure in the knowledge that the law will uphold their agreements and, if necessary, enforce them. The law of contract underpins private enterprise in South Africa and regulates it in the interest of fair dealing.
Union Government v Vianini Ferro-Concrete Pipes (Pty) Ltd is an important case in South African contract law, heard in the Appellate Division by De Wet CJ, Watermeyer JA, Tindall JA, Centlivres JA and Feetham JA on 25 September – 15 October 1940.
KPMG Chartered Accountants (SA) v Securefin Ltd and Another, potentially a landmark case in South African contract law, was heard in the Supreme Court of Appeal (SCA) on 17 February 2009, with judgment handed down on 13 March. It could herald a new era in the interpretation of contracts in South Africa.
The term course of dealing is defined in the Uniform Commercial Code as follows:
A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, ("Codelfa") is a widely cited Australian contract law case, which serves as authority for the modern approach to contractual construction. The case greatly influenced the development of the Eastern Suburbs railway line. In terms of contract law, the case addresses questions of frustration, construction and the parol evidence rule. The case diverged from the well established English approach regarding the use of extrinsic evidence in contractual interpretation.