Session 6. Parol Evidence, Collateral Contracts, Privity AND Terms PDF

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This session is about pAROL EVIDENCE, COLLATERAL CONTRACTS, PRIVITY AND TERMS...

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`SESSION 6

PAROL EVIDENCE RULE, COLLATERAL CONTRACTS, PRIVITY AND TERMS

PAROL EVIDENCE RULE ENTIRE AGREEMENT CLAUSE AND EXCEPTIONS EXCEPTIONS COLLATERAL CONTRACTS WHAT IS A COLLATERAL CONTRACT? THE ELEMENTS DOCTRINE OF PRIVITY WHAT IS THE DOCTRINE OF PRIVITY TWEDDLE V ATKINSON (1861) PRIVITY AND CONSIDERATION DISTINGUISHED EXCEPTIONS/CIRCUMVENTIONS TRIDENT GENERAL INSURANCE CO LTD V MCNIECE BROS P/L (1988) TERMS TERMS IN GENERAL WHAT ARE TERMS? WHAT IS A CONDITION? WHAT IS A WARRANTY? INNOMINATE/INTERMEDIATE TERMS? CONDITIONS PRECEDENT/SUBSEQUENT IMPLIED TERMS TERMS IMPLIED LAW TERMS IMPLIED BY LAW TERMS IMPLIED BY THE COURTS (IN FACT) BP REFINERY (WESTERNPORT) PTY LTD V SHIRE OF HASTINGS (1977) EXEMPTION/EXCLUSION CLAUSES WHAT IS AN EXEMPTION CLAUSE? NOTICE REQUIREMENT CONTRACTUAL AND NON-CONTRACTUAL NOTICE POINTS TO NOTE LIMITING EXEMPTION CLAUSES TERMS REVISED

PAROL EVIDENCE RULE The parol evidence rule is the principle, in contract law, that where a contract has been reduced to writing in a document that it is intended to be a complete expression of the matters agreed, extrinsic material cannot be adduced in evidence to contradict the document. The intention of the parties is ascertained according to the ‘four corners’ rule: Editor, Australian Law Dictionary (Oxford: 2013). The parol evidence rule was formulated in Goss v Lord Nugent (1833). In Mercantile Bank of Sydney v Taylor (1891) it was stated: “Where a contract is reduced into writing, where the contract appears in the writing to be entire, it is presumed that the writing contains all of the terms of it and evidence will not be admitted of any previous or contemporaneous agreement which would have the effect of adding to or varying it in any way”. Its application is strict. Any previous drafts/written documents, copies of preliminary agreements, letters, etc. leading up to the written contract/agreement are excluded: Henderson v Arthur [1907]. -

Protects sanctity of written contracts from both bad memories and perjury

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Establishes genuine parts of written contracts by limiting introduction of oral evidence not part of the written contracts.

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Rule dates back over four hundred years

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Basic idea: when writing agreements, parties should be able to draft documents that are not prone to implied meanings.

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Argues that once parties determine their complete and final agreements, external evidence should not contradict or supplement final agreements.

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Rarely, the rule allows introduction of extrinsic evidence to resolve ambiguity, prove the defence of written document, or establish a collateral agreement.

HENDERSON V ARTHUR [1907]. -

FACTS: The claimant, Henderson, was a seller who agreed to give a lease of a theatre to the defendant, Arthur, as a tenant. Per the agreement, the defendant promised to make rent payments within a specified timeframe, however prior to the agreement’s signing, the parties had verbally agreed that the claimant would accept debts as rent payments. The claimant subsequently attempted to bring an action against the defendant, contending he had failed to make the required rent payments, whilst the defendant retorted that the claimant had originally stated he would accept debts and was now reneging on this.

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HELD: The Court of Appeal found for the claimant, viewing that the written contract superseded all other agreements, and invalidated any differing prior agreements between the parties. Moreover, the Court viewed that the circumstances in which they ought reasonably consider extrinsic evidence when interpreting a contract was limited and as the defendant could have included the contents of the oral agreement in the written agreement, but failed to do so, they could not then attempt to rely upon the oral agreement at a later date. Further, the Court viewed that it was necessary to presume that the final written agreement between parties is the exclusive and finalized version for the sake of legal certainty and respect for the principle of sanctity of contract.

FOUR CORNERS RULE -

The rule makes exemption clauses valid only if the party seeking to rely on them is operating within the scope of the contract.

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A contracting party is not permitted to deviate from or break a contractual obligation and then seek to rely on a contractual exemption clause.

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The four corners rule operates as an estoppel.

VIDEO: PAROLE EVIDENCE RULE – INTEGRATION AND AMBIGUITIES Parole evidence rule is basically some contracts are what is called an: -

Integration: o

a complete integration that means every term of the contract or everything that the contract covers is in the document written, it does not link to outside documents or incorporate outside documents.

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Partial integration, outside documents can become or be a part of the agreement, can become integrated but everything is not contained in the agreement.

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Parole evidence (outside information) o

Information that was contemporaneous with or prior to the agreement can be excluded. The court follows a rule called the Parole evidence rule and pro evidence is outside evidence, cannot be used to contradict the terms expressed in the contract. ▪

For example: prior emails, the prior letter or discussion back prior entering into agreement do not become a part of the agreement. And the court if there interpreting the agreement between the parties will not look at that as evidence.

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There are exemptions to the rule: ▪

If there is a dispute between the parties and the court is called to interpret the document. The court will look at the document, just what’s written on the page. •

If nothing there is ambiguous, everything is straight forward, the court will simply use its rules of interpretation and interpret the agreement.

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But if there is some ambiguity, in there, something that the terms that conflict or provision that conflict in the court can accurately the intent of the parties the court might allow outside evidence in, to explain that ambiguity. That ambiguity is known as a patent.

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Ambiguity: o

Patent: allows outside evidence to explain ambiguity. ▪

the ambiguity is on the face of the document, that apparent/ obvious just from reading the document.

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Latent: not obvious on its face, so a court will Court may allow outside evidence to clear up, explain or demonstrate ambiguity exists.

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If ambiguity exists, the court will allow additional evidence to explain the ambiguity.

VIDEO: PAROLE EVIDENCE RULE -

Recently a friend of mine was involved in a contract dispute. The dispute was centred on the fact that he paid for a car with cash and a laptop.

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The contract he signed only partial payment of had agreed upon price less the price of the traded laptop. After the sale the company that sold him the car took to small claims court. At court the company disclaimed all knowledge about the laptop as partial payment of the sale.

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The judge decided the case, based on the parol evidence rule. Stating when the parties have reduced their agreement to a final written form evidence of prior or contemporaneous agreements are inadmissible to vary or contradict the terms of the final written agreement.

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Basically this states that if it is not written down in the contract and the contract is complete then the judge cant consider other evidence to decide the terms of the contract because the judge determined that the contract was a final written agreement between the parties and could not take into consideration any evidence presented by my friend that the company did in fact received the laptop leaving my friend without a laptop and having to pay a higher price.

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There are several exemptions to the parole evidence rule: (1) if there is evidence fraud, misrepresentation, duress or mistake, then extrinsic evidence can be considered. (2) applies when there are ambiguities in the contract meaning if the plain language of the contract does not make the rights or duties of the parties clear then extrinsic evidence can be considered.

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The intent of the rule is to give a higher significance to the written agreement of the parties over the oral representations. So next time you discuss the terms of a contract make sure that it gets on the paper before any value is exchanged or you may find yourself on the wring side of the parol evidence rule.

ENTIRE AGREEMENT CLAUSE AND EXCEPTIONS An ‘entire agreement clause’ reinforces the parol evidence rule. -

Example of an EAC is:

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“This Deed constitutes the entire agreement between the Parties and there are no further items or provisions, either oral or otherwise”.

There are some exceptions to the PER. In Hoyt’s P/L v Spencer (1919), Isaacs J stated that the PER rule applies unless: … it can be shown that the document was not intended as the complete record of their bargain. There are therefore a number of situations where the PER will not be strictly applied. HOYT’S P/L V SPENCER (1919), -

FACTS: Hoyt’s agreed to sublease premises from spencer on terms that (inter alia) allowed spencer to terminate the sublease at any time by giving four weeks’ notice. Hoyt’s alleged that it had only signed the agreement because spencer had also verbally promised not to exercise that right unless he was required to do so by his own head lessors. Spencer terminated the lease without being required to do so and Hoyt’s sued on the alleged collateral contract.

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HELD: Hoyt’s action failed. The “promise” in the alleged collateral contract and the express words of the sublease were inconsistent and they could not stand together. Consequently, the “promise” could not be enforced.

EXCEPTIONS 1. Contracts that are partly written, partly oral. 2. Contracts impliedly subject to some trade usage/custom; 3. Contracts in which are suspended by oral agreement; 4. Invalid contracts; 5. Instances of mistake in reducing the agreement to writing; and 6. Circumstances where extrinsic evidence is required to resolve some ambiguity/uncertainty VIDEO: EXCEPTIONS TO THE PAROL EVIDENCE RULE A court may employ extrinsic evidence for the following reasons: -

To aid in the interpretation of existing terms (for example, when an ambiguity exists)

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To show that a writing is or is not an integration

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To establish that an integration is complete or partial

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To establish subsequent agreements or modifications between the parties

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To show that the terms of the contract were the product of illegality, fraud, duress, mistake, lack of consideration or invalidating cause.

COLLATERAL CONTRACTS WHAT IS A COLLATERAL CONTRACT? Collateral contracts are statements made before entry into a contract, which are clearly intended to have contractual significance but are for some reason precluded from operating as terms of the contract: Editor, Australian Law Dictionary (Oxford: 2013). It is where one party makes a promise that is connected to, but independent of, a main contract and as consideration for that promise, the other party agrees to enter into the main contract. Refer to Heilbut Symons & Co v Buckleton [1913]. An example: •

Freddie is selling a car to Elton.

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Elton is reluctant to buy the car as he unsure over the car's performance.

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Freddie makes a promise, or an assurance, that the car can go from 0 to 100 km/h in 8 seconds.

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The purchase of the car main contract.

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Freddie’s assurance to Elton amounts to a collateral contract, which exists alongside the main one.

THE ELEMENTS For a pre-contractual oral statement to take effect as a collateral contract, the statement must be: i.

‘promissory and not merely representational’: JJ Savage & Sons P/L v Blakney (1970);

ii.

intended to induce entry into the contract: JJ Savage & Sons P/L v Blakney (1970); and

iii.

consistent with the main terms of the contract: Hoyts P/L v Spencer (1919).

Again, the parol evidence rule will not preclude evidence of a statement forming a collateral contract: However, as per the 3rd element, the collateral contract must be consistent with the main contract. This is known as the rule in Hoyts P/L v Spencer. As such, the collateral contract has a relatively narrow operation as a means of giving contractual force to an oral representation varying a contract in writing: Patterson, Robertson and Duke, Principles of Contract Law (Thomson Reuters: 2016). DOCTRINE OF PRIVITY WHAT IS THE DOCTRINE OF PRIVITY The ‘doctrine of privity’ (aka the ‘privity of contract’) states that only the parties to a contract are legally bound by and entitled to enforce it: Tweddle v Atkinson (1861). The law knows nothing of a jus quaesitum tertio (right on the part of third parties) arising by way of contract. Refer to Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915]. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. Therefore, although a third party may be benefited or burdened in fact by performance of the contract, according to the privity doctrine only the contracting parties are benefited and burdened in law by the making of the contract. THIRD PARTY RIGHTS -

Doctrine of Privity of Contract o

Only a party to a contract can be sued on a contract

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Only a party to a contract can sue on a contract.

DUNLOP PNEUMATIC TYRE CO LTD V SELFRIDGE AND CO LTD [1915]. -

FACTS: Dunlop was a tire manufacturer who agreed with their dealer to not sell the tires below a recommended retail price (RRP). As part of the agreement, Dunlop also required their dealers to gain the same agreement with their retailers, who in this instance was Selfridge. The agreement held that if tires were sold below the RRP, they would be required to pay £5 per tire in damages to Dunlop. This was agreed between the dealer and Selfridges, which effectively made Dunlop a third-party to that agreement. Sometime after this, Selfridge sold the tires below the agreed price and Dunlop sued for damages and an injunction to prevent them from continuing this activity. At the initial trial, the decision was given to Dunlop. This was appealed by Selfridge and the decision was reversed. Dunlop appealed.

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HELD: The court held in a unanimous decision that Dunlop could not claim for damages in the circumstances. The court found that firstly, only a party to a contract can claim upon it. Secondly, Dunlop had not given any consideration to Selfridge and therefore there could be no binding contract between the parties. Lastly, Dunlop was not listed as an agent within the contract and could therefore not be included as a valid third-party who had rights to claim on the contract.

TWEDDLE V ATKINSON (1861) In Tweddle v Atkinson (1861), it was stated that: “no stranger to the consideration can take advantage of a contract, although made for his benefit”. -

FACTS: The son and daughter of the parties involved in this dispute were getting married. As such, the father of the groom and father of the bride entered into an agreement that they would both pay sums of money to the couple. Unfortunately, the father of the bride died before he paid the money to the couple and the father of the son died before he could sue on the agreement between the parties. As a result of this, the groom brought a claim against the executor of the will for the payment that was previously agreed between the fathers.

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HELD: The groom’s claim was rejected by the court. It was held that the groom was not a part of the agreement between the fathers and he did not provide any consideration for the promise made by the father of the bride. Also, as a stranger to the contract, the son could not enforce it. On this basis, the court found in favour for the executor of the will.

PRIVITY AND CONSIDERATION DISTINGUISHED The formula ‘consideration must move from the promisee’ assumes satisfaction of the privity requirement; it is only to the promisee that the requirement of consideration need be applied. The rule that consideration must move from the promisee is regarded as conceptually distinct from the requirement of the privity doctrine that a promise is enforceable only at the instance of the promisee, although commonly a third party beneficiary of a promise will be disentitled to enforce it on both grounds.

Although it has been strongly argued that the requirements of consideration and privity are but different ways of stating the one rule, the weight of authority supports the existence of two separate, though interrelated, principles. Refer to Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988). EXCEPTIONS/CIRCUMVENTIONS The various situations in which a third party intended to be benefited by a contract to which he or she is not party may nonetheless have a remedy against the party who promised to confer the benefit are often said to arise because the case comes within an exception to the privity doctrine, the main examples being: •

Agency

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Trusteeship

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Privity of Estate

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Assignment

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Statute

TRIDENT GENERAL INSURANCE CO LTD V MCNIECE BROS P/L (1988) -

FACTS: McNiece was the main construction contractor for work being carried out at a limestone plant named Blue Circle. Blue Circle entered into a contract with Trident, an insurer. The policy covered work defects and public liability amongst other things. Under the insurance contract, Blue Circle, “the assured” was defined as including “all related companies, contractors and sub-contractors”. Insurance for public liability did not include “any claim arising under any Workmen's Compensation Law”. A worker, contracted to McNiece by an employment company, was seriously injured while driving a crane on sight. McNiece commenced action against Trident for indemnity. o

McNiece Bros P/L (“McNiece”) contractor for construction work undertaken at Blue Circle Southern Cement Ltd’s (“BC”) plant.

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BC had insurance contract with Trident General Insurance (“Trident”).

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Trident agreed to provide cover to BC, its subsidiaries, its contractors and its suppliers for liability/PI.

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Workman injured onsite and sues McNiece.

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McNiece seeks indemnity from Trident but Trident denies liability on grounds that McNiece not a party to the contract (doctrine of privity).

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HELD: The appeal by Trident was dismissed. It was found that even though McNiece was a third party, the wording of the contract it expressly referred to coverage of contractors and sub-contractors under the policy. Further, as a matter of business efficacy the policy was intended to cover any contractor working for Blue Circle at the time of any claim. The fact that Blue Circle were the only party to the contract and the only party liable for the insurance premium did not negate cover. Even though McNiece was a third party, they were determined to be entitled to indemnity in respect of a claim of negligence by their injured sub-contrac...