Seminar 10: Extrinsic evidence & the parol evidence rule

In a case involving a claim for breach of contract, the plaintiff must prove the existence of a contract and its terms. The contract must be proved in a court by the production of admissible evidence (i.e. evidence which the judge is prepared to admit for consideration). Generally speaking, there are 2 basic types of evidence commonly used to prove that certain things happened: o sworn oral evidence from human beings (i.e. witnesses who can shed light on the facts because they were involved in the events leading up to the dispute); o documentary evidence tendered as exhibits (e.g., letters, draft agreements, final signed agreements, photographs) But not all evidence is admissible, even though such evidence might seem (at least to a lay person) to assist the court in determining the issues in dispute. Literally, the Parol Evidence Rule (PER) operates in relation to contracts that are recorded wholly in writing to: o preclude oral (i.e. parol) evidence being given in court relating to pre-contractual statements/negotiations between the parties (i.e. evidence which is extrinsic to what is contained in the final written contract); o which extrinsic evidence would add to, subtract from, vary or qualify the written terms of the contract. But extrinsic evidence includes anything that exists/occurs apart from the document that appears to be the complete written record of agreement, including: o oral statements;
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o written statements (e.g. letters and earlier draft agreements); and o other conduct. The PER has two parts: o it prevents extrinsic evidence being given to add to, vary or contradict the terms of a contract as they appear in a written document; o it limits evidence being given by parties to explain the meaning of the terms of a written contract. Some main policy justifications for the PER: o discussions or correspondence about negotiated terms should be treated as superseded by a written agreement that appears to be final and complete (consistent with the objective approach taken in contract); o written agreements that appear final/complete should have special status so parties interests are secure and certain; o investigation into extrinsic evidence to work out how the written agreement might be modified is time consuming, costly and unpredictable.

EXTRINSIC EVIDENCE USED FOR IDENTIFYING TERMS Important aspects about the first part of the PER: limits the extrinsic evidence that may be given in court to identify the terms of the contract; and the rule only applies to contracts that are wholly in writing (i.e., it does not apply to contracts which the court finds to be partly in writing and partly oral). How do you know if a contract is wholly in writing?

 Sometimes parties include an entire agreement or merger clause in their written agreement so that it is totally clear. For example:
87. This Agreement, along with any exhibits, appendices, addendums, schedules, and amendments hereto, encompasses the entire agreement of the parties, and supersedes all previous understandings and agreements between the Parties, whether oral or written. The parties hereby acknowledge and represent, by affixing their hands and seals hereto, that said parties have not relied on any representation, assertion, guarantee, warranty, collateral contract or other assurance, except those set out in this Agreement, made by or on behalf of any other party or any other person or entity whatsoever, prior to the execution of this Agreement. The parties hereby waive all rights and remedies, at law or in equity, arising or which may arise as the result of a partys reliance on such representation, assertion, guarantee, warranty, collateral contract or other assurance, provided that nothing herein contained shall be construed as a restriction or limitation of said partys right to remedies associated with the gross negligence, willful misconduct or fraud of any person or party taking place prior to, or contemporaneously with, the execution of this Agreement

Otherwise there are 2 approaches that could be taken: 1. if a written document appears on its face to be the complete record of the parties contract, extrinsic evidence will not be admissible to add to, vary or contradict the terms of the written contract (stricter approach); or 2. court focuses on ascertaining the presumed intentions of the parties by admitting extrinsic evidence to consider whether the written document was indeed intended to be the exclusive record (i.e., the written document is just one, albeit significant, fact to consider amongst oral statements as well) (flexible approach). High Court has not conclusively ruled which approach (the strict or the flexible) should be taken to identify the terms of a contract. In the High Court case of Equuscorp v Glengallan Investments: Court held that a subsequent written contract superseded a prior oral agreement; but this ruling was based on giving effect to the objective manifestations of the

parties intentions if parties enter into a formal written agreement, it is objectively reasonable to assume that the prior oral arrangment is replaced; the High Court did not dismiss the possibility of litigants in other cases adducing extrinsic evidence to establish that a contract was partly in writing and partly oral (even where the document on its face might appear to be the complete record of agreement); Courts will sometimes get frustrated with the PER. State Rail Authority (NSW) v Heath Outdoor
State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 (Court of Appeal, NSW) Facts: State Rail Authority (SRA) entered into written agreements with Heath Outdoor (Heath) in 1981 and 1982, whereby SRA agreed to allow Heath to display billboard advertisements at approximately 140 locations on property owned by SRA around New South Wales. The 1981 and 1982 Agreements contained written terms: [SRA] may terminate this contract at any time upon giving to [Heath] one (1) calendar months notice in writing of its intention so to do, but such action shall not give rise to any claim for compensation whatsoever on the part of [Heath]. (Condition 6) term of the agreement to be for 5 years unless sooner determined.

In January 1983, Heath entered into a 5 year agreement with Rothmans (ciagrette makers), allowing Rothmans to rent advertising space on the billboards. (i.e. the Rothmans-Heath agreement is practically dependent on the SRA-Heath agreement).

Heath then spent $138k installing signs at the locations in reliance on its agreement with Rothmans. In March 1983, the NSW government announced policy to phase out cigarette advertising on state property (this included SRAs property).

This policy gave rise to a dispute between SRA and Heath resulting in SRA terminating the agreement. SRA relied on Condition 6, arguing the clause gave it an unfettered right to terminate before the 5 year

period was up. Heath pointed to oral assurances that were given by a representative of SRA before the agreements were signed about the effect of Condition 6. No need to be concerned because Heath had 5 years on the contract. The only time the clause is invoked is for non-payment of rent or if somebody wants to advertise objectionable content. Dont be concerned because the terms of the agreement apply only to billboards that belong to us and where you place your advertising terms wont affect you because all were doing is renting you the ground space. Oral assurances (i.e. evidence extrinsic to the contractual document) were said to be part of the terms of the agreements. Held (McHugh JA): A preliminary question is whether the parol evidence rule (PER) prevents reliance on the oral assurances [as terms of the contract]. Important aspects of the the PER: PER only applies if the terms of the agreement are wholly in writing; if it does apply, parol evidence is not admissible to contradict or vary the terms of a written agreement; this means oral evidence adduced to prove a contractual term cannot be excluded [from the courts consideration] until any written terms are shown to record the whole of the parties agreement. It is not always easy to determine whether an agreement was wholly in writing, or party oral and partly written. Possible approaches: when a document appears on its face to be the a complete record of the parties contract, it is conclusively presumed to be the contract; when it is shown the parties assented to a particular writing as the complete and accurate integration of the contract. But in my opinion the correct rule is as follows: writing which appears to represent a written contract between the parties is no more than an

evidentiary foundation for a conclusion that their agreement is wholly in writing; however complete a contractual document may look, the court cannot exclude evidence [from its consideration] of oral terms if the other party asserts that such oral terms were agreed; if the assertions about the existence of oral terms are found to be proven [after the court has considered the evidence], then the court has obviously found the agreement to be partly oral (in which case the PER does not apply); if the assertions about oral terms are not found to be proven, the court has simply found that the agreement is wholly in writing and, by necessary implication, excluded evidence of terms being found elsewhere (this does give rise to any PER being applied). [His Honour found that the oral assurances were not terms on the facts].

Even if a court rules: o a particular contract is wholly in writing; o such that the PER operates to exclude extrinsic evidence being adduced in an attempt to alter or contract its terms, o the application of the PER can be practically avoided in other ways.

A party could argue the existence of a collateral contract: o PER only operates to excluded extrinsic evidence being adduced in relation to the contract that it is wholly in writing; o it does not operate to preclude evidence being adduced to establish another contract (a contract collateral to the main one); o but the terms of the collateral contract must be consistent with the main contract; o and the material elements a contract must be present in a collateral contract just as they must be in all contracts (e.g. promissory statements) o Hoyts v Spencer

Hoyts Ltd v Spencer (1919) 27 CLR 133 (High Court of Australia) Facts: Cousens Spencer entered into a written agreement with Hoyts whereby Spencer agreed to lease certain premises to Hoyts for 4 years. The lease contained the following proviso in writing: Provided always that the said Cosens Spencer may at any time during the currency of the term hereby created terminate this lease by giving to the lessee at least four weeks notice in writing of his intention to do so. Spencer purported to terminate the lease during the 4 year term pursuant to the termination clause. But Hoyts argued that: prior entering into the lease agreement, Spencer had promised Hoyts that he would not terminate the lease during its 4 year currency unless he was requested/required to do so by the Head Lessors (and this was not Spencers reasons for terminating); on the basis of this promise, Hoyts entered into the lease agreement. accordingly, there was a collateral contract between Hoyts and Spencer connected to the main lease. Held (Isaacs J): When 2 parties enter into contractual relations,they may elect to conclude their bargain: without writing (i.e. purely oral contract); or record it in writing.

Whatever form they decide on, they may further agree to have: 1 contract only; or separate and distinct contracts (i.e. there could be a contract collateral to the main one).

If the parties: determine to make 1 contract only; and

have agreed to commit their agreement to writing,

then what is written is the conclusive record of the terms of their agreement. Unless it can be shown that the document was not intended as the complete record of their bargain, no oral evidence can be admitted to alter or qualify it. [i.e. This is a classic re-statement of the Parol Evidence Rule] But here, Hoyts is suing on the basis that the parties entered into 2 contracts, namely: the lease between the parties (the main contract); and a promise by the lessor that his power to terminate the lease should be qualified by restricting its exercise to an occasion on which his lessors (the Head Lessors) should request and require him to exercise it, in consideration for Hoyts entering into the lease (the collateral contract). Hoyts is suing for breach of the collateral contract, a contract which is not wholly in writing. Accordingly, the PER has no application. However, principles which must govern such collateral contracts are: the collateral contract must be consistent with the main contract; the collateral contract is supplementary to the main contract, but it cannot impinge upon it the collateral contract cannot alter the rights created by the main contracts provisions. In this case: the promise in the alleged collateral contract impairs the contractual rights of Spencer in the main contract; but for the additional promise alleged in the collateral contract, Spencer had the power (under the proviso in the lease) to do exactly what he did (i.e. terminate the lease on 4 weeks notice); Hoyts case is that, by the collateral contract, that power to terminate was cut down almost to the point of rendering it nugatory; Accordingly, the collateral contract is inconsistent with the main contract. The collateral contract alleged is not legally enforceable. Dissent (Ferguson J, dissenting in Full Court of Supreme Court of NSW): There is no inconsistency between the provisio in the lease and the promise in the collateral contract, because: the promise in the collateral contract, limiting the right to terminate in the main contract, could

have been included in the main contract without giving the slightest incongruity or difficulty in interpretation; in the circumstances, it may have been and probably was a very reasonable condition to impose on the right to terminate the lease; In any event, I cannot see why parties, by another agreement, should not be able to modify rights contained in another agreement (whether the modifying agreement was made earlier, later or contemporaneous with the main agreement).

A party could also argue estoppel: o this argument could be made where there is clear and convincing proof of the estoppel; o even when the assumption adopted (deriving from a representation made extrinsic to the written contract) is inconsistent with the written contract o Whittet v State Bank of NSW

Whittet v State Bank of New South Wales (1991) 24 NSWLR 146 (Supreme Court, NSW) Facts: Mr and Mrs Whittet owned a parcel of land (as joint tenants) on which was built their matrimonial home (the Property). The Property was worth approximately $600k. Mr Whittet ran his own business. He asked Bank for an overdraft facility. Bank agreed to lend Mr Whittet up to $100k. Bank required a mortgage over the Property to secure loan - this needed Mr and Mrs Whittets agreement. Mrs Whittet reluctantly agreed, but only after: Mrs Whittet obtained a 2nd mortgage over Mr Whittets share of the Property to secure her own interests (if her husbands dealings went pear-shaped). She engaged her own separate solicitor for this.

Mrs Whittet obtained verbal assurances (through her solicitor) from the Bank that the principal sum of Mr Whittets indebtedness to the bank would never exceed $100k.

But the terms of the written mortgage agreement stipulated it was an all moneys mortgage (i.e. it was not limited to securing just $100k).

For many years Bank lent money to Mr Whittet within confines of the $100k limit (because Bank always considered that was the limit).

Bank then suffered losss on certain foreign exchange transactions it carried out on behalf of Mr Whittet (amount to several hundred thousand dollars).

Bank sought to enforce mortgage in accordance with its written terms (i.e. conduct a mortgagee sale of the Property and use the proceeds to recoup all moneys owed by Mr Whittet).

Property sold for $651k, which was applied as follows: Bank claimed the first $100k; Bank then allowed Mrs Whittet to claim $50k as 2nd mortgagee; Bank then claimed the balance of $501k.

Mrs Whittet was left with nothing more than $50k. She argued that, notwithstanding the written all moneys clause, the principal indebtedness was promised by the Bank to never exceed $100k which is all the Bank was entitled to claim from the mortgage proceeds.

Held (Rolfe J): In this case Mrs Whittet made a number of submissions: that there was a parol (oral) contract that was either collateral to the written mortgage or that imported a further term into that mortgage contract (i.e the term the principal indebtedness for the purposes of the mortgage security would be limited to $100k). that there should be rectification to give effect to either the collateral contract or the further term to be imported into the mortgage contract [N.B. rectification is a remedy that parties can seek whereby the court can rectify a mistake the parties to a contract have made in relation to a term of the contract when it was formed]. alternatively, that there was an estoppel by convention.

By oral evidence (i.e. evidence relating to the verbal assurances given by Bank to Mrs Whittets solicitor), an attempt is made to circumvent the effect of the written document.

There is a policy issue that arises because the above submissions, if accepted, are capable of outflanking the PER.

Reasons for the PER operating so as to exclude evidence of pre-contract negotiations for the purpose of alleging an estoppel: there is no reason in principle why PER should not extend to pre-contract negotiations that are alleged to found an estoppel (what was said/agreed orally has been superseded by the written contract); policy on which the PER is founded and the security of the written contract would be undermined, if the same pre-contractual statements could be used to argue estoppel simply because the PER is said only to apply to contract claims (but not estoppel claims); time consuming and unrewarding to investigate what was said in negotiations leading up to the written contract, this being at the expense of the actual language of the written contract; a willingness by courts to identify, in pre-contractual negotiations, a basis for estoppel will introduce uncertainty into the law of contract.

Reasons against the PER operating in relation to estoppel claims (i.e. so that pre-contractual negotiations could be used on to support estoppel): the rationale of equitable estoppel is that it is unconscionable for a person to resile from a promise which the promisee was induced to act on to his/her detriment; McHugh JA in State Rail Authority (NSW) v Heath Outdoor held that regard could be had to precontractual negotiations for the purposes of establishing an estoppel (which Kiby P and Glass JA did not refute); the protection of maintaining the integrity of the written contract (i.e. the response to those who claim that contract law would be undermined if the PER were not extended to estoppel claims) is to require clear and convincing proof of the matters alleged which would support the estoppel by convention claim.

Accordingly, the PER does not operate to exclude evidence in support of estoppel by convention, as long as there is clear and convincing proof.

But courts are divided as to whether PER precludes the admission of extrinsic evidence to establish an estoppel, for obvious reasons:
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o If estoppel can be used in this way, it completely obliterates the need for a PER in contract law altogether. o And where there is an entire agreement/merger clause, any such estoppel argument should be rejected (the merger clause itself estops the other party from arguing estoppel). o Australian Co-operative Foods v Norco Co-operative o But if a party has acted unconscionably, why should a merger clause be able to protect him/her from an estoppel claim? (Branir v Owsten)
Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267 (Supreme Court, NSW) Facts: ACF (trading as Dairy Farmers) owned the registered trade mark Lite Wite which it applied to white reduced fat modified milk which it sold for public consumption [Note: ownership of a registered trade mark gives the owner the exclusive right to use it in marketing a certain category of goods or services]. Dairy Farmers and Norco entered into a written agreement 1998, pursuant to which Dairy Farmers gave permission for Norco to use the same trade mark on similar products which Norco produced and sold (the Licence Agreement). Clause 8.4 of the Licence agreement stated that Norco must not distribute or advertise its products using the Lite Wite trade mark without prior written approval of Dairy Farmers, such approval being at the sole discretion of Dairy Farmers [i.e. Dairy Farmers effectively had to approve packaging and promotional material which featured its trade mark]. The Licence Agreement also contained an entire agreement clause: This Agreement contains the entire agreement of the parties with respect to its suAbject matter. It sets out the only conduct relied on by the parties and supersedes all earlier conduct by the parties with respect to its subject matter. Prior to the agreement being signed, Dairy Farmers had given verbal indications that Norco could use the Lite Wite trade mark in conjunction with Norcos own logo on its packaging (co-branding). This is what Norco had been doing for some years under a preceding trade mark licensing agreement and it was common industry practice. Shorty after the parties had signed the agreement, Dairy Farmers exercised its right under clause 8.4 not to

approve any of Norcos packaging if it was co-branded (it would only approve packaging with Lite Wite on it as long as Norcos logo was absent). Norco argued estoppel based on the verbal assurances, dairy industry practice for a decade, and permission granted under previous agreements. Held (Bryson J): The estoppel alleged relates to the manner in which Dairy Farmers rights under clause 8.4 can be exercised [i.e., if the estoppel is permitted, it essentially operates to limit/qualify the way in which Dairy Farmers can refuse to approve Norcos use of the Lite Wite trade mark on its packaging]. But the estoppel cannot be enforced because: The Licence Agreement is as its terms show intended to be a comprehensive written expression of the parties agreement. Its provisions (i.e. clause 8.4) cannot be qualified by evidence of the terms of the parties precontractual negotiations. The estoppels alleged would be inconsistent with the express terms of clause 8.4 (they would qualify an otherwise wide discretion) and clause 22 (an entire agreement clause which clearly states that pre-contractual conduct has been superseded by the written contract); Effect must be given to the formal, final and considered expression of the parties contractual intention which they put in writing. Estoppel fails.

EXTRINSIC EVIDENCE USED FOR CONSTRUING CONTRACT Important aspects about the second part of the PER: o prevents exstrinsic evidence being given to explain the meaning of the terms of a written contract (e.g. What does reasonable expenses mean in clause 1 of the contract?); o but this has been traditionally subject to exceptions where there is ambiguity in the contract making it hard for court to interpret the parties exact obligations by reading the words alone, e.g.:

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parties may not be clearly identified (contract refers to owner of 21 Seaford Ave, Brighton but extrinsic evidence needed to establish who that is);

subject matter not clear (contract refers to Freds car, but which car exactly?);

o evidence of surrounding circumstances to the written contract (i.e. its factual matrix) is admissible to assist in interpretation of the contract if the language is ambiguous or susceptible of more than one meaning (Codelfa). o Royal Botanic Gardens and Domain Trust v South Sydney City Council
Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 186 ALR 289 (High Court of Australia) Facts: In 1976 the Trustees (legal owners of the Domain) entered into a written lease agreement with Council whereby Trustees agreed to lease the Domain to Council for 50 years. The Domain included car park and footway. Clause 1 of the lease stipulated rent for first 3 years was $2000. Clause 4(b)(iv) provided that yearly rent for each subsequent 3-year period may be determined by the Trustees at the commencement of each of the affected periods ... provided that ... in making any such determination the Trustees may have regard to additional costs and expenses which they may incur in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the Lessee. Was the lessor constrained by clause 4(b)(iv) to have regard only to the matters specified in that clause in determining the new rent, or could the lessor have regard to other things as well (e.g. market value of land)? Held (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ): Evidence of surrounding circumstances is admissible to assist in the interpretation of a written contract if the language is susceptible of more than one meaning.

In this case, the difficulty concerns the phrase the Trustees may have regard to additional costs and expenses...: Does this mean they cannot have regard to other matters? If they can have regard to other matters, what are they?

The clause does not expressly state: that the additional costs and expenses are the only matters that the Trustees may have regard to; or alternatively, that the specified matters do not limit the generality of matters to which regard may be had.

As a consequence, there is ambiguity as to which of these alternatives was intended. Resolution of the ambiguity requires the application of settled principles of construction: appropriate to have regard to more than internal linguistic considerations; consider the circumstances in which the words were used to work out the objective which the parties had in mind; appreciate the commercial purpose of a contract, the background, the context, the market in which the parties are operating.

Their Honours then reviewed the circumstances relating to the dealings between the parties and their predecessors and noted, inter alia: the parties were 2 public authories and the purpose of the transaction was for the provision of a public facility (not commercial profit for one at the expense of the other); the clause was designed to protect lessor from incurring additional expenses in the future as a result of the construction of the car park (and no more);

Accordingly, additional costs and expenses were the only matters permitted.

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