What Is Meant By the Parol Evidence Rule?

The Parol Evidence Rule is a principle stating that contract terms are supreme over contradicting terms within negotiation documents; however, misrepresentations may deem a contractual relation void and render the rule moot.

Understanding Parol Evidence Rules Including Exceptions

Contract Document With Complete Representations Clause The question regarding supremacy of contract in a business relationship often arises.  The parol evidence rule states that where a written contract exists and such contains a complete express term, evidence and argument that the term is altered in someway by external writing (eg.  a preceding email regarding the term) or verbal representation is forbidden whereas it is the written term within the contract that trumps any contradicting term found outside the contract.  In this way, the parol evidence rule is used to ensure that business transactions will be based on the terms embodied within a contract document without the risk of being trumped by unembodied terms. However, it is important to bear in mind that the parol evidence rule is merely a legal tool used to ensure that a contract is interpreted, and applied, in accordance to the terms written within the contract when the contract is a valid and enforceable contract but the parol evidence rule lacks the ability, and fortunately so, to make an otherwise unenforceable contract enforceable.

The Law

The general principles as well as primary exceptions to the parol evidence rule were well explained by the Manitoba Court of Appeal within the case of King v. Operating Engineers Training, 2011 MBCA 80 where it was said:

What is the parol evidence rule?

34  Some authors have suggested that it is misleading to refer to this principle of law as the “parol evidence rule.”  It is neither limited to oral evidence nor is it a rule of evidence.  The rule encompasses all types of evidence and it is a rule of substantive law.  S. M. Waddams, “Do We Need A Parol Evidence Rule” (1991) 19 Can. Bus. L.J. 385, states (at p. 387):

…. It has, indeed, evidentiary consequences in that it makes evidence of such extrinsic statements irrelevant, and for that reason inadmissible, but this does not make it a rule of evidence.  ….

There is no shortage of articles and reports examining the “parol evidence rule.”  See, for example, Arnie Herschorn, “The Parol Evidence Rule” (1998) 20 Advocates’ Q. 176; Paul M. Perell, “A Riddle Inside an Enigma:  The Entire Agreement Clause” (1998) 20 Advocates’ Q. 287; Paul M. Perell, “The Ambiguity Exception to the Parol Evidence Rule” (2001) 36 Can. Bus. L.J. 21 and Manitoba Law Reform Commission, The Parol Evidence Rule (Manitoba Library and Archives Canada, 2010).

35  Basically, the rule can be stated as follows: where the whole of a contract has been reduced to writing, extrinsic evidence is not admissible to add to, subtract from, vary or contradict that written contract.  Extrinsic statements and promises cannot affect the parties’ obligations as stated in the written agreement.

36  However, there are a myriad of exceptions to the rule, or circumstances where the rule is inapplicable.  (Some academics have suggested that there is a subtle distinction to be drawn between exceptions to the parol evidence rule and the inapplicability of the parol evidence rule.  See Waddams at p. 390 and Angela Swan, Canadian Contract Law, 2d ed. (Markham: LexisNexis Canada Inc., 2009) at para. 8.47.  In my opinion, it matters little.)  OETIM’s position that because the language of the contract is unambiguous, no extrinsic evidence is admissible, is an oversimplification of the rule.  Ambiguity in the written contract is only one exception to the application of the parol evidence rule.

37  In the often cited decision of Gallen et al. v. Allstate Grain Co. Ltd. et al. (1984), 1984 CanLII 752 (BC CA), 9 D.L.R. (4th) 496 (B.C.C.A.), Lambert J.A. identified a long list of circumstances to which the rule does not apply.  For our purposes, in particular, he mentioned two examples of exceptions to the rule; evidence that demonstrates the written document does not represent the whole agreement, and evidence that goes to the surrounding circumstances or factual matrix of the agreement (at p. 506):

So the rule does not extend to cases where the document may not embody all the terms of the agreement.  And even in cases where the document seems to embody all the terms of the agreement, there is a myriad of exceptions to the rule.  I will set out some of them.  Evidence of an oral statement is relevant and may be admitted, even where its effect may be to add to, subtract from, vary or contradict the document:

….

(b)   to dispel ambiguities, to establish a term implied by custom, or to demonstrate the factual matrix of the agreement;

….

(e)   to establish a collateral agreement;

(f)     in support of an allegation that the document itself was not intended by the parties to constitute the whole agreement;

….

The Rule Does Not Apply Where the Written Document is Not the Complete Agreement or Where There is a Collateral Agreement

38  The first task of a judge in contractual interpretation matters is to determine the terms of the contract.  If the court finds, as it did in this case, that the contract is partly in writing and partly oral, the problem of the parol evidence rule does not arise because the rule is not applicable.  The rule only comes into operation when the court is satisfied that it was the parties’ intention that the writing represents the exclusive record of the parties’ agreement.

39  The oral and written parts of the contract must then be considered together and interpreted as one inclusive contract.  Hall states at pp. 44-45:

Except where the terms of a written agreement would be contradicted, the parol evidence rule does not apply where the parties did not intend to encompass all contractual terms in their written agreement, or where they have entered into a collateral agreement (which is often, but not necessarily, oral).  Taken together, these circumstances create a broad exception to the operation of the parole evidence rule.  ….

40  Therefore, all relevant evidence will be admissible if there is an allegation that the written document was not intended to be a complete reflection of the terms of the contract.  See Gallen (at p. 507):

So, if it is said that an oral representation, that was made before the contract document was signed, contains a warranty giving rise to a claim for damages, evidence can be given of the representation, even if the representation adds to, subtracts from, varies or contradicts the document, if the pleadings are appropriate, and if the party on whose behalf the evidence is tendered asserts that from the factual matrix it can be shown that the document does not contain the whole agreement.  The oral representation may be part of a single agreement, other parts of which appear in the document.  (The one-contract theory.)  Alternatively, the document may record a complete agreement, but there may be a separate collateral agreement with different terms, one of which is the oral representation.  (The two-contract theory.)

41  For example, in the Gallen case, the Allstate Grain Company made an oral representation to Gallen that weeds would not be a problem in the growing of a new type of buckwheat seed.  Gallen signed Allstate’s standard buckwheat marketing agreement, which contained a clause that Allstate gave no warranty as to the productiveness of the seed.  The weeds destroyed the buckwheat crop.  The British Columbia Court of Appeal held that evidence of the statement was admissible to show that it was a part of the contract, or that it constituted a collateral contract.

42  Another example arises in the case of Nevin v. British Columbia Hazardous Waste Management Corp. (1995), 1995 CanLII 1814 (BC CA), 129 D.L.R. (4th) 569, where the British Columbia Court of Appeal dealt with a wrongful dismissal.  The plaintiff was offered a position as a communications expert for the defendant and signed a one-page offer letter setting out her position, salary and benefits.  Evidence was adduced that she was told that her position would last for at least three and one-half years.  The Court of Appeal, reversing the trial judge in Nevin ([1994] B.C.J. No. 524 (SC)(QL)), held that the parol evidence rule did not apply in the circumstances as it does not exclude evidence of oral terms of a contract unless a written document is intended by the parties to be a complete reflection of all the terms of the contract.  Commenting on the judge’s rejection of the evidence based on the parol evidence rule, the court stated (at paras. 10-11):

With respect, this would appear to be a case in which one of the exceptions to the rule – or perhaps more correctly, an instance of the inapplicability of the rule – can be invoked.  Even if the letter had some contractual force, the rule does not exclude evidence of oral terms unless the written document was intended as a complete reflection of the terms of the contract.  ….

In my view, the letter quoted above was not intended as a complete statement of the terms under which Ms Nevin was hired, and whether it had contractual force or not – that is, whether the parties’ agreement was an oral one or partly written and partly oral – the evidence of the parties’ oral discussions would allow the reasonable observer to conclude that Ms Nevin was hired for a fixed term ending August 31, 1995.  This objective conclusion must prevail over any subjective intentions that Dr. Woznow may have had.

43  The point is that appropriate allegations in the pleadings that the written document does not represent the entire contract between the parties will require that relevant and material evidence be admitted.  It may eventually be rejected by the judge, but it must at least be admitted for consideration.

Laypeople, and some lawpeople, will sometimes attempt to argue that a written document, that may be titled "Contract" and signed or sealed, thus appearing at first glance as a bona fide agreement, holds supremacy.  The argument, "there is a contract and it is signed and therefore nothing else matters", is an inaccurate perception.  Of course, it remains accurate to say that a person who signs an agreement without proper care is bound to the agreement when the other party to the agreement relies on the agreement in good faith and for value; Realcor Commercial Realty Inc. v. Seca2009 CanLII 12325 at paragraph 21; however, there are situations where a signed document is merely a signed document without any actual legal teeth.

[21]  A person who fails to exercise reasonable care in signing a document is precluded from relying on non est factum as against a person who relies upon that document in good faith and for value.  See Marvco Color Research Limited v. Paris 1982 CanLII 63 (SCC), [1982] S.C.J. No. 98.

The legal rules regarding contract formation require the element of intention.  The element of intention is sometimes referred to in law as a "meeting of the minds" or ad idem (which is Latin for meeting of the minds).  Where a genuine intention to enter into a contractual relationship is absent, a contractual relationship is absent - and the parol evidence rule fails to absolutely mandate that intention existed.  Again, and as above, the parol evidence rule simply precludes a party to a contract from arguing that what a contract document says is something other than what it says due to some external evidence.  As an example, where a contract document states, "Wiring will be 12 gauge copper", the parol evidence rule prevents use of external evidence, such as an email that says, "Wiring will be 18 gauge aluminum".  The parol evidence rule provides supremecy to the term embodied within the contract.

The Saving Law

The parol evidence rule can be defeated, as should be, where it is shown that a contractual relationship, and therefore any contract document as evidence such as a signed "Contract", fails to exist.  Again, without a valid and enforceable contract, the parol evidence rule is unable to apply to the terms within the contract because the contract fails to exist in law.  The case of Smith v. Mid City Auto Centre Ltd., 2003 SKPC 152 at paragraph 31 states:

[31]  The modern position is very flexible; parol evidence will generally be allowed on the basis of the principle that the parties to a contract must have a genuine intention to bind themselves to an agreement if it is to be legally enforceable.  Of course, this can only happen if the parties mutually agree on the essential terms of the contract which must include all essential material representations made orally by one of the parties to the contract where the other party has relied upon the representations to his/her detriment, even though the representations were not incorporated into the written contract.

Where a person can hold a tangible written document in hand, where such document is titled, "Contract", and is signed or sealed and initially appears in everyway as a valid contract but the person is actually holding an unenforceable contract that is unsaved by the parol evidence rule is most common when the contract formation would fail to exist 'but for' a deceit or fraudulent misrepresentation.  When it is shown that a deceit or fraudulent misrepresentation enticed a party into agreeing to a contract that otherwise would be without agreement, the contractual relationship failed to form and the purported contract document is unenforceable.  Quite simply, the signed contract is merely an initial appearance of a meeting of the minds rather than the genuine meeting of the minds that is required to form an actual, enforceable, contractual relationship.

Evidence that a contract was entered into by way of the mischief of misrepresentation is permissible rather than excluded by the parol evidence rule.  This was said by the Court of Appeal in Beer v. Townsgate I Ltd., 1997 CanLII 976 at page 16:

… In my opinion, the parol evidence rule cannot operate to exclude evidence of a misrepresentation that induced the making of the contract and thus be used to allow the defendant to rely on a clause in the face of the misrepresentation: see Canadian Indemnity Co.  v. Okanagan Mainline Real Estate Board, 1970 CanLII 152 (SCC), [1971] S.C.R.  493 at p.  500, 16 D.L.R.  (3d) 715 at p.  720.

In situations where but for the tort of deceit a contract would be avoided, the result is that the purported contract is vitiated and unenforceable and unsaved by the parol evidence rule; D.L.G. & Associates Ltd. v. Minto Properties Inc.2014 ONSC 7287.  Additionally, softer forms of misrepresentation may also vitiate a contract; 1250810 Alberta Ltd. v. 1284768 Alberta Ltd., 2010 ABQB 125.  Specifically, it was said in D.L.G. and 1250810 that:

[69] There is an established principle that a disclaimer or exculpatory clause will not immunize a tortfeasor from an award of damages for committing the tort of fraudulent misrepresentation.  There is ample authority for the proposition that "fraud vitiates every contract and every clause in it": Pearson & Son v. Dublin Corp., [1907] A.C.  351 at p.  362; Ballard v. Gaskill, [1955] 2 D.L.R.  219 (B.C.C.A.); 1018429 Ontario Inc.  v. FEA Investments Ltd., 1999 CanLII 1741 (ON CA), [1999] O.J.  No.  3562 (C.A.) at paras.  52-54; Nepean (Township) Hydro Electric Commission v. Ontario Hydro, 1982 CanLII 42 (SCC), [1982] 1 S.C.R.  347Francis v. Dingman (1983), 1983 CanLII 1985 (ON CA), 43 O.R.  (2d) 641 (C.A.), leave to appeal to S.C.C.  refused, 23 B.L.R.  234n; Cannon v. Funds for Canada Foundation, 2012 ONSC 399 (CanLII) at para.  446.

[70] In Pearson & Son v. Dublin Corp., supra, Lord Halsbury stated at p.  356:

The action is based on the allegation of fraud, and no subtly [sic] of language, no craft or machinery in the form of contract, can estop a person who complains that he has been defrauded from having that question of fact submitted to a jury.

[47] Although 128 may have failed to plead particulars of fraud, it must be remembered that misrepresentations that fall short of fraud may still vitiate a contract.  In Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R.  102, 110 D.L.R.  (3d) 424, McIntyre J., stated:

The third argument involves the assertion that the execution of the guarantee was procured by misrepresentation of its full nature and effect by the bank or, alternatively, that there was a failure to explain its nature and effect.  The misrepresentation alleged is that the bank manager told the guarantor that upon his paying the amount secured under the guarantee, the book debts would be reassigned to him.  This representation was false for the reason that it contradicted the bank's own document.  It was contended that the guarantee would not have been executed in its absence.  Various authorities were cited for the proposition that a contract induced by misrepresentation or by an oral representation, inconsistent with the form of the written contract, would not stand and could not bind the party to whom the representation had been made.  These authorities included Canadian Indemnity Company v. Okanagan Main Line Real Estate Board et al.  [ 1970 CanLII 152 (SCC), [1971] S.C.R.  493.], per Judson J.  at p.  500Jacques v. Lloyd D.  George and Partners Limited [[1968] 1 W.L.R.  625 (C.A.)], per Lord Denning at pp.  630‑631, Firestone Tire and Rubber Company Limited v. Vokins and Co.  Ltd.  [[1951] 1 Lloyds L.R.  32 (K.B.D.).], see Devlin J.  at p.  39, and Mendelsohn v. Norman Ltd.  [[1970] 1 Q.B.  177 (C.A.).]

No quarrel can be made with the general proposition advanced on this point by the appellant.  To succeed, however, this argument must rest upon a finding of some misrepresentation by the bank, innocent or not, or on some oral representation inconsistent with the written document which caused a misimpression in the guarantor's mind, or upon some omission on the part of the bank manager to explain the contents of the document which induced the guarantor to enter into the guarantee upon a misunderstanding as to its nature. ...  The cases referred to above support the general proposition advanced but rest upon a factual basis providing support for the argument.  In each case there is a clear finding of a specific misrepresentation which led to the formation of the contract in question, a circumstance not to be found here.  ...

[Emphasis added.]

[48] For there to be certainty in commerce, parties to a contract must be able to rely on the written contract as representative of their respective rights and obligations, so long as there is no evidence of oppression or misrepresentation.  In Ronald Elwyn Lister Ltd.  v. Dunlop Canada, (1982) 1982 CanLII 19 (SCC), 1 S.C.R.  726, 135 D.L.R.  (3d) 1 Estey J.  states at p.  745:

Where parties experienced in business have entered into a commercial transaction and then set out to crystallize their respective rights and obligations in written contract drawn up by their respective solicitors, it is very difficult to find or to expect to find a legal principle in the law of contract which will vitiate the resultant contracts.  Certainly where the parties have capacity in law to enter into the contract, where the terms of the contract are clear and unambiguous, where there is valid consideration passing between the parties, and where there is no evidence of oppression or operative misrepresentation, the law recognizes no principle which fails to enforce the validity of such a contract.  No doubt the law of contract in this connection reflects the needs for certainty in commerce.  This is particularly true where, as here, the two contracts, at the time of commencement of action, are not executory but have been acted upon and performed by the parties.  Where, as here, the persons engaged in the commerce at hand were fully and continuously in contact with their legal advisors, there is neither need not warrant for the intervention of the courts to remake or set aside these contracts.

Those comments are probably of even more weight where the person who wants to make an offer retains a solicitor and that solicitor drafts the offer, which is later accepted by the offeree.  There must be certainty in commerce.

[Emphasis added.]

Summary Comment

As the above authorities show, where a successful misrepresentation or oppression argument results in the vitiation of a contract, the enforceability of the contract is nullified.  As clear as the above appears, nullifying a contract by arguing that misrepresentation or oppression trumps the validity of the contract is challenging and concernedly so.  While certainty in contracts is important for commerce as indicated within the authorities above, avoiding unfair contracts is also important for function of bona fide commerce.  However, what is stated within a contract document may be negated, and unsaved by the parol evidence rule, or any other "language, craft, or machinery" within a contract or within the principles of contract law, where outright misrepresentation unjustly induced the contract relations or where there was a failure in meeting of the minds.  The argument should simply be that, 'Just because you hold in hand a document titled Contract does not mean that a contract actually exists'.  An enforceable contractual relationship is intangibly created by the foundational principles of contract law.  A document titled "Contract" is created tangibly by a photocopier.  The foundational principles of contract law do, and should, trump a photocopier.


SFG Paralegal Services LLPis an affordable Paralegal in:
SFG Paralegal Services LLP

10265 Yonge Street, Suite 200
Richmond Hill, Ontario,
L4C 4Y7

P: (888) 398-0121
E: sglass@sfglegal.ca

Hours of Business:

9:00AM – 5:00PM
9:00AM – 5:00PM
9:00AM – 5:00PM
9:00AM – 5:00PM
9:00AM – 5:00PM
Monday:
Tuesday:
Wednesday:
Thursday:
Friday:

By appointment only.  Please call for details.  Messages may be left at anytime.