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Parol Evidence Rule In Contract Law

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Question:

Discussion about the Parol Evidence Rule in Contract Law.

 

Answer:

Introduction

Concept of Parole Evidence Rule
 
After the late 19th century, classical theorists began to conceive the contracts as a part of private legislation. They considered that even private individuals may get into contracts to put obligations on each other that could be enforced before a court of law. This led to the very assumption that any agreement, which is incomplete in its nature and essence, may not form part of a contract. (Gergen, 2010) This assumption developed the doctrine on indefinites on the basis of which another assumption was drawn and it was concluded that if parties to contract have reduced their obligations in writing then there are clear intentions from them to approach the court in case of dispute. Further, it was assumed that the court must look into the writing part with the aim to clearly determine the obligations set for each of the parties to contract. (Academy Chicago Publishers v Cheever, 1991)  This gave assumption gave birth to the concept of Parole Evidence Rule.
 
Significance of the Rule to the Law of Contracts
 
The obligations and situations of the parties are decided as per the agreed and written contract between them. When parties have made a written contract and have consented to it as accurate and complete integration of their thoughts and intentions, then any evidence either parole or otherwise, which may vary or contradict the aim of the contract, cannot be admitted for the purpose of supplying negotiations or understandings to the written contract. This is the parole evidence rule, which specifically aims to bind the parties towards the written and legally enforceable agreement signed between them. (Pitcairn v Philip Hiss Co., 1903) This rule has immense significance as it helps in ensuring that the parties do not turn their backs towards the very obligations agreed as per the contract. Further, the parties are abstained from interpreting or demeaning the clauses of the contract by supplying additional evidence. The rule helps in upholding that no evidence is required to prove any provision or clause made under the contract and thereby restricts the parties in taking undue advantage from negative interpretations of supplying additional evidence.


 

The Parole Evidence Rule

The Rule
The very rule of Parole Evidence restricts or prevents any introduction of evidence relating to contemporaneous or prior negotiations and agreements that might cause any modification or contradiction to the terms and provisions of the written contract. But in such cases, the written contract must be complete and should be based on the intentions of the parties. A contract with a “Merger Clause” helps in strengthening this presumption that the contract is complete and expresses the intention of the parties in totality. (JEC, 2016)
 
Prior to ensuring applicability of the parole evidence rule, the following questions must be considered by the court: (Corbin, 1944)
 
Whether a contract is made between the parties?
 
Whether by way of illegality, mistake, fraud, or other relevant reasons, there exists any possibility of the contract being rendered void or voidable?
 
Whether the parties have assented to a particular document or writing to be integrated to the complete and accurate contract agreed between them?
 
On the basis of the conclusions of the above questions, the court must decide whether the rule of parole evidence should be implemented in the context and situation of the case at hand or not. However, it is not necessary that while determining any of the above issues, the bench must be simple minded or gullible. The present question concerns the weight of evidence rather admissibility. (Zell v American Seating Co.,, 1943)
 
In Childs v South Jersey Amusement Co., (1923), the Court stated that the rule of parole evidence is not required to be justified by citing myriads of case. It is well established that if the parties have agreed to the terms stated in the contract by reducing such agreement to writing, then they cannot vary or contradict such terms by submitting additional proofs including agreements and negotiations.


 

Exceptions to the Rule

The rule of parole evidence is strict and thereby creates various hardships for both parties as well as the courts. Considering the same, the court has identified and established are six exceptions to the general rule of parole evidence, which have been detailed in the below paragraphs. These exceptions state that certain evidence may be considered by the court in addition to the written contract. The following evidence may be considered: (Mohamed & Mohamed, 2014)
 
First Exception states that evidence may be allowed that shows either the trade usage or custom to be a part of the contract even when not expressly included in the underlying terms of the contract. This rule is valid in relation to contracts of commercial transactions. The examples include: A Stock exchange’s dealing and a transaction of betting on racecourse with a registered dealer. In such cases the contract is valid but there may be encryption in regards the written evidence. In the Hutton v. Warren’s case, (1836), the court stated that in regards to well entrenched and accepted trade and custom it is presumed that they shall apply unless otherwise proved by the other party. Thus if a trade usage or custom exists that has not been incorporated within the terms of contract, it shall be considered irrespective of the rule of parole evidence.
 
Second Exception states that if there exists any verbal agreement, which is a condition precedent and the basis of the written contract such that it is crucial for the operation of such written agreement, then evidence proving the same shall be admissible before the courts. In Pym v Cambell, (1856), this exception has been relied by the courts where the court allowed a verbal condition to be adduced as evidence and stated that until fulfilment of such a condition the written contract could not be enforced. It may appear from the contract that it is well concluded between the parties to be enforced but the courts may admit some previously agreed extrinsic evidence that proves that the contract may not be enforced until the fulfilment of certain condition. For example: such condition may be by the approval of consent of party, or happening or non-happening of a future event.
 
Third Exception- if the claimant if able to prove that the written agreement does not include all the essential terms to the that were agreed between the parties, then certain missed out oral evidence or terms may be allowed by the court. For this exception to apply, the courts must first determine whether the contract is fully concluded and includes all the relevant and other terms required in the contract. Since, the party who relies on an oral term is basically trying to prove that the contract is partly written and partly oral. This exception was implemented in Van Den Esschert v Chappell¸ (1960), where the court stated that the oral agreement was relevant to the contract which was breached by the vendor who must compensate the other party. It is required to be highly alert while implementing this exception and the factors include time and relative importance must be considered in this regard.
 
 

Fourth Exception states that if there lies any ambiguity in the written terms of the contract then oral evidence may be required to eliminate any such ambiguity.
 
Fifth Exception states that if from the written contract it clearly seems that there exists a mistake then oral evidence for rectifying the said mistake may be allowed by the courts. This exception ensures that the vulnerable party does not lose pertaining to the mistake in the basic terms of the contract and it gets a chance for the rectification of mistakes under the parole evidence rule. For example: In cases, where the other party alleges any type of fraud or mistake, then the court may consider extrinsic evidence as admissible. In Janardan v Venkatesh, (1939), the court held that when there exists a mistake either in fact or law while determining and executing the terms of written contract and when such mistake exists for all the parties to contract, then evidence to rectify the mistake will be considered.
 
Sixth Exception states that in cases where the written contract is unable to establish or identify its parties, then the oral evidence will be used to ensure identification and impose obligations on the contracting parties. For example: if a contract is between an unregistered company or a company has negotiated a contract in lieu of pending registration. Then in such cases, the court may consider the proof of registration to establish the parties to contract. In the case of Gilberto v Kenny, (1983), the court stated that to prove the identity of the purchaser, extrinsic evidence may be considered so as to find out that whether the purchaser was acting solely for itself or also as the agent of her husband.

Implication of the Rule

For the above analysis of the exceptions, it becomes clear that the rule if applicable to wide arena of cases but may be excluded by taking shield of any of the valid exceptions or ensuring that the additional evidence is important to do justice to the parties. This section focuses on analysing the practical application of the parole evidence rule.

 

Practical Application of the Rule

The rule of Parole Evidence is always applied in the context of Australian Laws unless the claimant is successful in proving that the written contract is not capable of considering complete intentions of the parties. (Gordon v McGregor, 1909) The general presumption of the courts in case of a written contract, which includes all relevant terms to the contract, is that no type of evidence may be added at a later stage, which may vary the terms of the contract. (Mercantile Bank of Sydney v Taylor 317 A.C., 1893).
 
Various authors have found that the implementation of this rule is comparatively less severe than what the actual rule appears to be. Consequent to this, various exceptions have been admitted by the Australian courts relying on the pattern of England courts but also maintaining certain differences. For example: in England the exception relating to subsequent conduct between the parties will be a weak exception to use to interpret the prior written and agreed contract. However, the Australian courts have agreed to the exception of ulterior behaviour between the contractual parties for the purpose of elucidating the vague or ambiguous terms of the contract. The legal stand of this exception relation to subsequent conduct has been varied as per the opinions of the court. It has been agreed in Air Great Lakes Pty. Ltd. v K. S. Easter (Holding) Pty. Ltd., (1985) and Farmer v Honan, (1919). But finally the Supreme Court in FAI Traders Insurance Company v Savoy Plaza Pty. Limited, (1993) resolved the conflict and stated that the law does not permit any degree of reliance in cases concerning subsequent conduct.
 
Further, in regards to the application of this rule it is pertinent to note that Australia is a signatory and has ratified to the Convention on Contracts for the International Sale of Goods or CISG. However, considering the implementing of various legal traditions identified within the Convention, the Australian Courts have been witnessed to be incompatible to the application as required under the CISG. The incompatibility came during the case of South Sydney Rugby League v News Ltd., (2000), wherein the Court discussed the implications of the terms of contract on the basis of imputed or presumed intention between the parties. The court observed that not every Legislature State and Territory within the country is deterred to enact the provisions of CISG within their domestic laws. (Zuppi, 2007)

Conclusion

The rule of parole evidence has existed since history in the law of contract to ensure that a contract whose terms are agreed by the parties and suit their intentions, then such terms would be relied by the court and no additional or extra evidence may be adduced to interpret the terms of the contract. This rule helps in restricting the parties to the agreed terms of the contract so as to ensure that with changing circumstances the parties are not changing, otherwise it will vitiate the very existence of the contract. However, in certain cases the rule has been relaxed to ensure justice to the vulnerable parties whose interest may be defeated under the shield of parole evidence rule.
 
 

References

Academy Chicago Publishers v Cheever (1991) N.E. 2d 981.
 
Corbin, A., 1944. The Parol Evidence Rule. Yale School Legal Scholarship Repository, 603-665.
 
Gergen, M. P., 2010. Ango- American Contract and Torts, l.: Uni-goettingen.
 
JEC, 2016. The Parol Evidence Rule. [Online]
 
Available at: https://jec.unm.edu/education/online-training/contract-law-tutorial/the-parol-evidence-rule
 
Mohamed, M. A. S. & Mohamed, A. A. A., 2014. A Critical Appraisal of the Parol Evidence Rule in Contract Law. Istanbul, OCERINT, pp. 865-872.
 
Pitcairn v Philip Hiss Co. (1903) 110 Fed. 125.
 
Zell v American Seating Co., (1943) 641 F.2d 138.
 
Zuppi, A. L., 2007. The PArole EVidence Rule: A Comparative Study of the Common Law, The Civil Law Tradition, and Lex Mercatoria. Georgia Journal of International and Comparative Law, 233-276.
 
Childs v South Jersey Amusement Co., (1923) 122 Atl. 803.
 
Hutton v. Warren’s case, (1836) 1 M&W 466.
 
Pym v Cambell, (1856) 119 ER 903.
 
Van Den Esschert v Chappell, (1960) WAR 114.
 
Janardan v Venkatesh, (1939) AIR Bom 151.
 
Gilberto v Kenny, (1983) 48 CLR 620.
 
Gordon v McGregor, (1909) 9 CLR 316.
 
Mercantile Bank of Sydney v Taylor, (1893) A.C. 317.
 
Air Great Lakes Pty. Ltd. v K. S. Easter (Holding) Pty. Ltd., (1985) 2 N.S.W.L.R. 309
 
Farmer v Honan, (1919) 26 C.L.R. 183
 
FAI Traders Insurance Company v Savoy Plaza Pty. Limited, (1993) 2 V. R. 343
 
South Sydney Rugby League v News Ltd., (2000) F.C.A. 1541
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