Introduction
Contracts are crucial to the optimal
operation of markets in Australia and other parts of the world. It is therefore
imperative that their execution and enforcement be done in a manner that not
only promotes free enterprise but one that also edifies the sanctity of the
written contracts. Contracts can either be written or oral. Where a contract is
written, the general rule is that oral promises made prior or after its
formation cannot be adopted as evidence in courts of law[1].
While the basis for the rule is the protection of the sanctity of written
contracts, it should be appreciated that markets are dynamic and various
circumstances may arise that may make it necessary for such evidence to be
admitted. For instance, where the contracts are ambiguous, oral promises
exchanged during negotiations could be adopted to provide insights on the
nature of the contracts[2].
Moreover, there may be cases of collateral contracts which may be relevant but
not part of the main contracts. The determination heavily leans on the
understanding of the parol evidence rule and the concept of collateral
contracts. This paper interrogates the question on whether courts should
enforce verbal promises made during negotiations but not forming part of the
written versions of the contracts.
The parol evidence rule was formed with
the intention to protect the sanctity of written evidence. The term parol is
adopted from the word parole in
French which means spoken or oral word. Under the rule, promises made prior to
or after the signing of a contract are not admissible for purposes of the
contract in question especially where they would have the effect of contracting
the terms to the contract or altering its nature significantly[3].
In other words, the written contract is considered to be complete and a
reflection of all the facts that the parties to the contract intended to
include in their agreement. The parol evidence rule was developed in
recognition of the fact that promises, considerations and terms of contracts
evolve rapidly during the negotiation stages of contract formation. It would
therefore be confusing to admit all promises made during the negotiation
process. The assumption is that at the writing of the final contract, the
parties sieve through all the arguments made and only put in writing what they
intend to form part of the contract. This makes other verbal promises void. Chief
Justice Popham of England explained the rationale of the rule in the 17th
century was to ensure that certainty is assured by excluding evidence that does
not form part of a written contract[4].
The parol evidence rule
is said to be the main driver of commerce in the market as is currently known
with contracts being more certain and enforceable. However, there are a number
of exceptions to the parol evidence rule. These include additional evidence to
aid in interpreting the terms to the contract, explanations to resolve any
ambiguities in a contract, information aimed at correcting mistakes,
information to refute claims of payment of consideration and others as may be
determined in a court of law[5].
There are numerous elements guiding the interpretation of the parol rule of evidence
with legal arguments against it mounting in recent years. To begin with, it is
crucial to determine whether the contract in question is the final expression
of the agreement between the parties. If the contract is not integrated, the
parol rule has no relevance and verbal evidence can be admitted. The courts
make this determination by examining the wording of the contracts as written by
the parties.
An example of the
application of the parol rule is in the case of Gianni v Russell & Co 1924 where the tenant had formed a
written agreement with the landlord to use the premises for the sale of soft
drinks and candy[6].
The agreement excluded the sale of tobacco. The tenant would later claim that
the agreement not to sell tobacco was based on an earlier promise that he would
be granted exclusive rights to sell soft drinks at the premises. The court of
appeal ruled against the inclusion of the verbal agreement as the written
contract was found to be integrated and a complete version of their agreement.
The fact that the promise was not included was construed to mean that it was
not the intention of the parties to include it.
The determination by
the courts also applies to ambiguity. The courts can rule that a contract is
ambiguous even where it appears to unambiguous by taking consideration of all
circumstances surrounding the contract and thereby find sufficient grounds to
make an exception to the parol evidence rule[7].
It is the application of this liberty that has analysts and scholars confused
over the certainty of the parol evidence rule. On the whole, the liberal
adoption of the parol evidence rule provides sufficient room for contracts to
be enforced while also ensuring that injustice is not committed in line with
the dynamic nature of business contracts.
In a collateral contract, the
consideration for entering into a contract is a promise to enter into another
contract[8].
In a hypothetical situation, if A enters into a contract for construction with
B on the promise that B would enter into a contract for the supply of quality
building materials with C, it can be said that there exists a collateral
contract. Collateral contracts exist between a party (parties) to the main
contract and a third party.
The existence of a
collateral contract can be demonstrated in the case of Shanklin Pier Ltd v Detel Products Ltd 1951[9].
In this case, Detel is a third party in a contract entered into between
Shanklin Pier and a contractor. In the course of the negotiations, the
contracting parties had consulted the defendant who gave a guarantee that the
paint they recommended would last for over 7 years; and a contract was formed
with the contractor based on this assurance. Upon peeling after 3 months, Detel
was sued with the main complication being that there was no direct contract
between the plaintiff and the defendant. The court ruled that Detel was
culpable as there was a collateral contract between them and the plaintiff. Other
cases where the collateral contracts have been confirmed include Heilbut, Symons & Co v Buckleton 1913[10]
and Evans v Andrea Merzario 1976[11].
Collateral contracts
play an important role in ensuring that terms that are incompatible with the
main contract remain relevant to a business transaction[12].
It also helps in smoothing matters where the third parties being factored in
are not parties to the original contract. Collateral contracts run concurrently
with the main contract or may even override some of the provisions of the main
contracts. In a collateral contract, it is crucial that each party fulfils
their obligations to each party for the whole contractual arrangement to be
effective.
In many cases, the
existence of a collateral contract is not put in writing in the main contract.
This is mostly done to avoid contradictions or even complications arising from
the inclusion of third parties to a main contract. The collateral contracts
(whether in writing or oral) tend to be excluded from the main contracts[13].
The courts have therefore generally tended to adopt oral evidence in what may
be seen as yet another exception to the parol evidence rule[14].
The courts therefore exercise their due diligence in determining the existence
of the collateral contract based on the evidence and the circumstances and can
enforce it where it is found to exist.
Negotiation processes involve the
exchange of numerous promises; many of which are not relevant to the final
contract. The raft of negotiations will in many cases be confusing and this is what
makes it necessary that a final agreement be made to describe the final
contract. The final contracts therefore outline the obligations of the parties
to each other as per the negotiated terms. The parties to the contract will
always agree on the terms that constitute the written contracts for the
avoidance of ambiguity and for the smooth execution of the contract[15].
Once the final contract is drawn, other promises should be kept off the
contract. This would promote certainty in the execution of the contract.
The recommendations of
the parol evidence rule should be enforced strictly in view of the need to
ensure that certainty is ensured in contracts. However, in recognition of the
dynamic nature of businesses and contracts, it may be necessary to allow for a
reasonable window where spoken evidence not included in the main contract can
be enforced. There are circumstances that justify the admission of oral
evidence. For instance, where the written contract was meant to be tentative
pending the formation of a final one that was yet to be formed, it would be
justifiable to admit the oral evidence[16].
The courts would in this case need to admit the evidence after determining that
the written agreement was not meant to be a final contract. The oral evidence
may also come in handy where there is ambiguity in the written contract. Such
information may be very crucial in clarifying contradicting issues and making
the contract more understandable. The ambiguity of contracts may not be
apparent at the point of signing the contract and it is incumbent upon the
courts to seek such clarifications[17].
In the case of
collateral contracts, it is almost certain that the same would be oral
promises. This is because in normal business practice, the contracts are with
third parties and their nature often contradicts or is incompatible with the
main contracts[18].
However, collateral contracts can also be made in writing. Given that the
contracts are relevant to the main contracts and often the basis for the
decision to enter into the contracts, it is recommended that courts recognise
and enforce them.
While it may be
necessary to ensure that the sanctity of contracts is maintained, it would
similarly be unjust to summarily disallow oral evidence not forming part of the
written contracts. The courts should make determinations depending on the facts
of the case and the prevailing circumstances. A rigid application of the law
would have a contrary effect of paralysing business operations especially where
dealings cannot be fully captured in writing.
The preservation of the sanctity of
written contracts is the central theme of the parol evidence rule. This rule
insists on the exclusion of verbal evidence containing promises made between
parties to a contract during negotiations or after the execution of contracts.
With the development of the law, a number of exceptions to the rule have been
fronted. The main ones include the admission of evidence to aid in interpreting
the terms to the contract, explanations to resolve any ambiguities in a
contract, information aimed at correcting mistakes, information to refute
claims of payment of consideration and others as may be determined in a court
of law[19].
Verbal evidence can also be admitted in the case of collateral contracts. Collateral
contracts exist between a party (parties) to the main contract and a third
party and the main consideration tends to be the entering into a contract with
another party. Where such collateral arrangements are verbal, courts could opt
to admit them.
In determining whether
verbal evidence should be enforced in contracts, it is important to strike a
balance between the need to secure certainty in the execution of contracts and
the need to dispense justice in the face of the prevailing circumstances. This
study takes the position that verbal promises not forming part of the contracts
should not be enforced by courts of law. However, courts should reserve the
right to make exceptions as provided for under the parol evidence rule where
questions of ambiguity, integration of contracts, collateral contracts and
others should be put into consideration. However, the emphasis should be on the
need for parties to contracts to ensure that their contracts are unambiguous
and comprehensive. Exceptions should therefore be made selectively and only
where there are compelling reasons to do so.
Australian Contract Law, Terms of a contract (2012) Australian Law Contract <
http://www.australiancontractlaw.com/law/scope-terms.html>
Carter, John W, Cases
and materials on contract law in Australia (LexisNexis Butterworths, 2012)
Evans v Andrea
Merzario (1976) 1 WLR 1078
Gibson, Andy, Business
law (Pyront, NSW: Thomson Reuters, 2011)
Hayek, Emil J, ‘collateral contracts and the supreme
court of Canada: Carman construction ltd vc Canadian pacific railway co’ (1983)
7.3 The Canadian Business Law Journal 328
Heilbut, Symons
& Co v Buckleton (1913) AC 30
Insite Law, Terms
of the Contract (7 September 2012) Magazine Insite Law <
http://www.insitelawmagazine.com/ch7termsofcontract.htm>
Law Teacher, ‘A
collateral contract’ (2012) <
http://www.lawteacher.net/contract-law/essays/what-is-a-collateral-contract-law-essay.php>
Lindgred, Kevin E, Business law of Australia (Chatswood, NSW: Lexis Butterworths,
2011)
Morris, Mark O; Evensen, Elizabeth, ‘What’s
happening to the parol evidence rule? More holes in the dike’ (2000) 67.2 Defense Counsel Journal 209-220
Perell, Paul M, ‘The ambiguity exception to the
parol evidence rule’ (2001) 36.1 The
Canadian Business Law Journal 21,35
Peterson, Jeannie Marie, Principles of contract law (Pyront, NSW: Thomson Reuters Australia,
2012)
Shanklin Pier
Ltd v Detel Products Ltd (1951) 2 KB 854
Testley, William, Good faith in contracts (2004) McGill University < http://www.mcgill.ca/files/maritimelaw/goodfaith.pdf>
Torzilli, Paolo, ‘The aftermath of MCC-Marble: Is
this the death knell for the parol evidence rule?’ (2000) 74.3 St. John’s Law Review 843,873
[1]
Australian Contract Law, Terms of a
contract (2012) Australian Law Contract < http://www.australiancontractlaw.com/law/scope-terms.html>
[2]
Hayek, Emil J, ‘collateral contracts and the supreme court of Canada: Carman
construction ltd vc Canadian pacific railway co’ (1983) 7.3 The Canadian Business Law Journal 328
[3]
Perell, Paul M, ‘The ambiguity exception to the parol evidence rule’ (2001)
36.1 The Canadian Business Law Journal
21,35
[4]
Ibid.
[5] Testley,
William, Good faith in contracts
(2004) McGill University <
http://www.mcgill.ca/files/maritimelaw/goodfaith.pdf>
[6]
Lindgred, Kevin E, Business law of
Australia (Chatswood, NSW: Lexis Butterworths, 2011)
[7] Insite
Law, Terms of the Contract (7
September 2012) Magazine Insite Law <
http://www.insitelawmagazine.com/ch7termsofcontract.htm>
[8] Gibson,
Andy, Business law (Pyront, NSW:
Thomson Reuters, 2011)
[9] Shanklin Pier Ltd v Detel Products Ltd (1951)
2 KB 854
[10]
Heilbut, Symons & Co v Buckleton (1913)
AC 30
[11] Evans v Andrea Merzario (1976) 1 WLR
1078
[12] Carter,
John W, Cases and materials on contract
law in Australia (LexisNexis Butterworths, 2012)
[13] Law
Teacher, ‘A collateral contract’
(2012) <
http://www.lawteacher.net/contract-law/essays/what-is-a-collateral-contract-law-essay.php>
[14]
Ibid.
[15]
Torzilli, Paolo, ‘The aftermath of MCC-Marble: Is this the death knell for the
parol evidence rule?’ (2000) 74.3 St.
John’s Law Review 843,873
[16]
Ibid.
[17] Morris,
Mark O; Evensen, Elizabeth, ‘What’s happening to the parol evidence rule? More
holes in the dike’ (2000) 67.2 Defense
Counsel Journal 209-220
[18]
Peterson, Jeannie Marie, Principles of
contract law (Pyront, NSW: Thomson Reuters Australia, 2012).
[19]
Ibid.
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