Parol Evidence Rule

The rule provides that where a contract is reduced into writing and appears in the writing
to be entire, it is presumed that the writing contains all the terms of it and evidence will
not be admitted of any previous or contemporaneous agreement which would have the
effect of adding to, subtracting from or varying it in any way (Mercantile Bank of
Sydney v Taylor).

Agreements between parties are not always entirely reduced to writing. This is
particularly the case where pre printed standard form contracts are used and any changes
to the standard form may not be written down, but perhaps agreed to on a handshake.

There are two aspects to the rule, i.e. in relation to:

The Content of the contract

This aspect states that if the parties intended the contract to be wholly in writing, parol
evidence is not admissible to add to or vary or contradict the writing: Robertson v Kern
Land Pty Ltd.

The rule excludes evidence of extrinsic terms only where the document was agreed to be
a complete record of the entire contract, hence does not apply where the agreement is
partly written and partly oral e.g. the varying of a pre printing contractual form
(Couchman v Hill).

Exceptions to the rule

(a) Evidence of collateral contract
The prevention of extrinsic evidence being led to affect the main contract does not apply
to the collateral contract, therefore, oral evidence relating to that contract can be led. The
rule will continue to operate in relation to the main contract.

(b) Evidence that the written contract is not yet in force

The rule will operate only if the contract is in force, and the written document reflects the
contractual arrangement.

(c) Evidence that the written document was later varied or discharged
The rule prevents introduction of extrinsic evidence that the parties varied the agreement
before it was reduced to writing, not evidence that the parties later agreed to its variation
or discharge.

Unless the contract was one required to be in writing to be enforceable, neither the
variation nor discharge need be in writing. Therefore, oral or other evidence can be led
that the written agreement has been subsequently varied or discharged.

(d) Evidence necessary for rectification

Although the rule will generally prevent the introduction of evidence to add to, subtract
from or vary the agreement, the rule will not exclude such evidence if it is necessary to
rectify the written document so as to correct such an error eg the recording of a different
sum other than agreed upon for the purchase of a house (NSW Medical Defence Union v
Transport Industries).

The interpretation of the contract

This aspect involves the rule being used to determine the true meaning of a contract and
applying that meaning to the circumstances surrounding the entry into the contract.
Extrinsic evidence of antecedent negotiation, the subjective intention of the parties and
subsequent conduct appear to be inadmissible.

Factual Matrix
Extrinsic evidence of the factual matrix or setting of the contract is admissible. When a
court embarks upon a process of construing a document, it must place itself in thought in
the same factual matrix as that in which the parties were. Accordingly, when determining
the parties intentions, the court may validly take into account not only the words recorded
in the document but also evidence of the surrounding circumstances. The evidence of
surrounding circumstances must be known to both parties.

Exceptions to the Rule

(a) Ambiguity
Extrinsic evidence may be admitted to resolve an ambiguity in the contract.

Ambiguity extends not only to patent ambiguity - language that on its face is capable of
more than on possible meaning, or is otherwise made unclear by the other language in the
document (White v Australian and New Zealand Theatres Ltd), but also latent ambiguity
– where an apparently clear meaning is shown to be ambiguous when extrinsic facts are
taken into account (Hope v RCA Photophone of Australia Pty Ltd).

(b) Identification of subject matter

Extrinsic evidence is admissible to resolve ambiguity about the subject matter of the
contract. This is usually as a result of latent ambiguity. Thus the doubt created by
extrinsic knowledge is resolved by extrinsic evidence.

(c) Identification of the parties

Extrinsic evidence is admissible where there is ambiguity concerning the identity of the
parties to the agreement, or concerning their relationship or the capacity in which they
have entered into the contract.

(d) Identification of real consideration

Extrinsic evidence is admissible to prove the real consideration under a contract where:
 No consideration or nominal consideration is expressed in the instrument;
 The expressed consideration is in general terms or ambiguously stated; or
 A substantial consideration is stated but an additional consideration exists,
provided the additional consideration proved is not consistent with the instrument.

Where the additional consideration is of a different kind, it will not be inconsistent unless
perhaps the written instrument says that the stated consideration is the only consideration.
Where a substantial consideration is stated, and the additional consideration is the same
kind, for example the stated consideration is $100 000 and the true consideration is
claimed to be $150 000, the argument for inconsistency is stronger.

(e) Custom or usage

Where the language used in the instrument has a particular meaning, for example, by
custom or usage in a particular trade, industry or region, evidence of that meaning is
admissible, even if there is no patent ambiguity.

(f) Rectification
Extrinsic evidence may be admitted to show that the parties intention was not accurately
recorded in the written instrument. In appropriate circumstances, the document may be
rectified so that it accords with the parties actual agreement.

Inadmissible Evidence
Regardless of surrounding circumstances, certain evidence is remains inadmissible.

(a) Subjective intention

Evidence of the actual, subjective intentions of the parties is not admissible. Intention is
ascertained objectively - a court cannot receive evidence from a party regarding his or her
intentions and construe the contract by reference to those intentions (Life Insurance Co of
Australia v Phillips)

(b) Prior Negotiations

Evidence of negotiations that precede the written document is generally not admitted
because the evidence is unhelpful (Prenn v Simonds). The nature of negotiation is that
even if the parties intentions are convergent, they are still not the same and only the final
document will properly reflect a consensus of the parties.

(c) Subsequent conduct

Evidence of subsequent conduct cannot be referred to for the purpose of interpreting the
contract (Administration of Papua & New Guinea v Daera Guba) as parties may tailor
their post contract behavior according to the case they believe they later have to present
in court; they may seek to advance their understanding of the agreement simply to
persuade the other party to accept their construction; they expansion in the field of
inquiry would add to the burden of fact finding and consequently the length and cost of
litigation; and subsequent conduct may be based on an erroneous understanding of the
parties rights (Hide & Skin Tradig v Oceanic Meat Traders).