Elements in a Contract 9

When the terms of a contract have been formalized by a written agreement, the general rule is that the terms cannot be changed by adducing extrinsic (external) evidence to alter the terms of the contract. This is known as the parol evidence rule.

In Henderson v Arthur (1907) the defendant was party to a lease that stipulated that rent should be paid in advance. However, prior to that there was an oral agreement whereby the parties agreed that the rent could be paid in arrears.

The rent was outstanding and the plaintiff brought an action against the defendant. The defendant argued that there was a prior agreement that allowed him to pay the rent in arrears but the Court of Appeal held that an earlier oral agreement could not replace the terms of a later written agreement and the parol evidence rule prevented the earlier agreement from altering the terms of the new agreement.

There are however certain exceptions to the rule and instances or circumstances where the rule will not apply. The first exception is rectification, i.e. when an oral contract is formalized in writing and there is an error in the written agreement, then extrinsic evidence may be allowed to show that there was an error, so that the contract may be rectified in the manner in which the contracting parties intended.

The next exception to the rule occurs when there is a partially written agreement, i.e. the agreement is part oral and part written. In Couchman v Hill (1947) the plaintiff bought a heifer at an auction and prior to acquiring the heifer, he had related to the defendant that he intended that the heifer be “unserved” and the defendant was fully aware of the plaintiff’s intentions. It was later discovered that the heifer was carrying a calf and died as a result of carrying the calf too young. The plaintiff sued and was successful. He was allowed to adduce the prior oral agreement as evidence to support his claim.

Similarly, in J Evans & Sons (Portsmouth) Ltd. v Andrea Merzario Ltd. (1976) the defendant assured the plaintiff that goods will be ferried below deck when in actual fact the goods were stored on the deck and were damaged in a storm. The plaintiff sued and was successful. The oral agreement was held to be a collateral contract, i.e. a prior agreement that induced the parties to enter into the main contract.

When a term of a contract is ambiguous or worded in a manner that gives rise to more than one interpretation, extrinsic evidence may be adduce to show or determine the intention of the parties and hence ambiguous terms are also an exception to the parol evidence rule.

The parol evidence rule is also waived when there is a need to show that existing custom or tradition gives the term or attaches a different meaning to the term than which would otherwise normally be applied. In Smith v Wilson (1832) it was held that the interpretation of 1,000 rabbits as 1,200 rabbits as dictated by local custom was valid.

In Hutton v Warren (1936) the plaintiff was a tenant in the defendant’s fields and had accordingly tilled the fields and sown it with seeds. The tenancy was then terminated prior to the crops being harvested and the defendant, contrary to local custom refused to pay the plaintiff for the cost he’d incurred and for the work he’d done because it was not stipulated in the written agreement. The plaintiff brought an action against the defendant and was successful.

Another exception to the parol evidence rule occurs when there are terms implied by law and those terms are not present in the contract. In Liverpool City Council v Irwin (1977) the tenants in a block of flats rented out by the City Council refused to pay the rent because the flats were in a state of disrepair and some of the basic amenities were either not available or were unusable. The council sued and, in their claim, they argued that the duty to keep the flats in good repair was not a term of the agreement. The House of Lords held that the landlord should take reasonable care to ensure that the facilities were kept in a good state of repair and the plaintiffs were unsuccessful in their claim.

The parol evidence rule will also not apply when a written contract is dependent on an event taking place prior to coming into operation. In Pym v Campbell (1856) the plaintiff signed an agreement with the defendant who agreed to acquire a portion of the profits that would result from the plaintiff’s invention and accordingly signed an agreement with the plaintiff.

Later one of the two inspectors that tested the invention failed to approve it and the defendant refused to continue with the agreement. The plaintiff brought an action in court. The courts found for the defendant and held that the agreement was subject to approval from the inspectors or would commence only after the invention had been approved.