Parol Evidence Rule (Extrinsic Evidence, Entire Agreement Clauses) 2

CONTRACTS FINAL OUTLINE (April 2016) – Jayde Jessome

Parol Evidence Rule (Extrinsic Evidence, Entire Agreement Clauses) 2

How to Apply Parol Evidence Rule 2

Case Briefs 3

Standard Form Contracts & Exclusion Clauses 3

Principles of Interpretation/Strict Construction 3

Case Briefs 4

Standard Form Contracts 4

Signed Documents/Reasonable Notice Doctrine 4

Case Briefs 4

Doctrine of Fundamental Breach 5

Case Briefs 5

Mistake 7

Mutual Mistake 7

Case Briefs 7

Unilateral Mistake 8

Snapping Up/Mistake as to Terms 8

Case Briefs 8

Common Mistake 8

Common Law/Mistaken Assumption 8

Equitable Mistake 8

Case Briefs 9

Mistaken Identity 10

Case Briefs 11

Common Law Solution 12

Mistake in Written Record 12

Case Briefs 12

Documents Mistakenly Signed 12

Case Briefs 13

How to Approach a Mistake Question 13

Frustration 14

Test 14

Historical Development 14

Remedy 14

Case Briefs 15

Control of Contractual Power 15

Duress 15

Categories 16

Test 16

Case Briefs 16

Undue Influence 17

Categories 17

Test 17

Case Briefs 17

Unconscionability 18

Test 18

Case Briefs 18

Statute 19

Illegality & Public Policy 19

Categories 20

Restraint of Trade 20

Severance 20

Case Briefs 20

Other Public Policies 21

Statutory Illegality 21

Case Briefs 21

Effects of Illegality 21

Good Faith/Duty of Honest Performance 21

Case Briefs 22

Consumer Protection 22

Legislation 22

Sale of Goods Act 22

Business Practices and Consumer Protection Act 22

Policy 23

Case Briefs 23

Commercial Practice & Contract Drafting 24

Principles of Effective Drafting 24

Building Blocks of a Contract 24

Common Law Remedy – Damages 25

Expectation Measure of Damages 26

Reliance Measure of Damages 26

Case Briefs 26

Loss of Chance 27

Case Briefs 27

Cost of Completion vs. Difference in Value 27

Case Briefs 27

Remoteness 29

Test 29

Case Briefs 30

Loss of Enjoyment/Mental Distress Damages 31

Test 31

Case Briefs 31

Punitive Damages 32

Test 32

Case Briefs 33

Mitigation 33

Case Briefs 34

Liquidated Damages, Deposits & Forfeitures 34

Case Briefs 34

Equitable Remedies 35

Specific Performance 35

Defenses 35

Case Briefs 35

Injunction 36

Case Briefs 36

Appendix 1 – Chart on Duress, Undue Influence & Unconscionability 37

Appendix 2 – Chart on Cause & Effect of Each Principle 38

Appendix 3 – Checklist 39

Parol Evidence Rule (Extrinsic Evidence, Entire Agreement Clauses)

·  Parol = verbal expressions or words

·  Excludes from the courts’ consideration evidence as to oral/written statements preceding or contemporaneous with the completion of the written contract

·  Purpose: to achieve finality and certainty in contractual obligations and to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (Sattava)  helps to prevent fraud, enhance efficiency, prevent unfair surprise, etc.

·  Very little residual practicality because exceptions have largely “swallowed” the rule

·  EXCEPTION: rectification allows proof by extrinsic evidence that the parties made an agreement, but then recorded it incorrectly, so that the court may correct the inaccurately written document

·  Section 187 of the Business Practices and Consumer Protection Act says: “a provision in a contract or a rule of law respecting parole or extrinsic evidence does not operate to exclude or limit the admissibility of evidence relating to the understanding of the parties as to the consumer transaction or as to a particular provision of the contract”

How to Apply Parol Evidence Rule

(1) Determine whether the oral representation is a warranty

(2) If yes, harmonize (read together) with the signed document if possible

(a) If there is no contradiction, there is no problem

(b) If there is a contradiction, there is a strong presumption that the written contract governs

Presumption in favor of written K increases à à à à à

Adds a term varies contradicts

Factors to consider:

·  Nature of the change/conflict and how serious it is

·  Nature of the document  intended to be whole agreement, entire agreement clause, clarity of wording, knowledge of parties

·  Bargaining relationship  power, standard form K, past relations and experience

·  Nature of the representation  quality and credibility of the evidence, clarity and specificity, significance

·  Entire agreement clause  holds more weight if shown to party, holds less weight if part of standard form, general vs. specific exclusion clause and representation (Zippy Print)

Extrinsic evidence can be introduced:

·  When the written agreement is not the whole contract

·  To clear up an ambiguity in a contract

·  To show that the contract is invalid because of a lack of intention, consideration, or capacity

·  To show that there was a misrepresentation that was either innocent, negligent, or fraudulent

·  To show that there was some mistake as to the nature or effect of the contract

·  To correct an error/mistake in putting the contract in writing (rectification)

·  To show that there was a condition precedent to the contract taking effect

·  To show that was a separate agreement along with the written agreement (collateral contract/warranty/agreement)

·  To show that the transaction was brought about through unconscionable means

·  To show that the contract has been modified/terminated

·  In support of a claim for an equitable remedy

Extrinsic evidence cannot be introduced:

·  To provide evidence of subjective intentions of the parties

·  According to Hawrish, to introduce evidence of a collateral agreement that contradicts the written contract

Case Briefs

·  Hawrish v. Bank of Montreal (SCC, 1969) à parol evidence of a distinct (independent) collateral agreement that does not contradict the main agreement is admissible

o  Parole evidence rule didn’t apply here because the oral evidence was in plain contradiction of the terms in the guarantee

·  Bauer v. Bank of Montreal (SCC, 1980) à collateral agreement cannot be inconsistent with written contract

o  Provision in the agreement that parties orally decided could not be used if one party breached its undertaking

o  Court found it difficult to find evidence of this collateral agreement, and in any event it would contradict the written contract so parol evidence rule cannot apply

o  Recognized an exception to the principle that agreements cannot contradict one another: if the contract is induced by an oral misrepresentation that is inconsistent with the written contract, the written contract cannot stand

·  Gallen v. Allstate Grain Co. (BCCA, 1984) à reformulated PER into a presumption

o  Provision in the K said that AG gave no warranty as to the productiveness of the buckwheat, but AG gave oral assurances that it would smother weeds (which it did not end up doing)

o  Court found no contradiction between oral warranty and signed document, so the oral warranty has contractual effect and AG is liable for breaching it

o  Eight points about PER:

(1) If there are two agreements about the same subject matter and they contradict each other, the oral one is assumed to have never been made

(2) Rule should not be absolute b/c shouldn’t protect unscrupulous

(3) Fact that evidence in Hawrish and Bauer was considered indicates that the rule was not meant to be absolute

(4) If contract is induced by an oral misrepresentation that is inconsistent with written contract, the written contract cannot stand

(5) Rule not applied with equal force in all situations (distinguishes between contradicting the written agreement and merely subtracting from, adding to, or varying it)

(6) Rule only a strong presumption, and is strongest when parol evidence actually contradicts the written agreement

(7) Presumption is stronger when individually negotiated than if standard form K

(8) Presumption is less strong when oral agreement is specific and written agreement is more general

Standard Form Contracts & Exclusion Clauses

Principles of Interpretation/Strict Construction

·  Contractual interpretation aimed at ascertaining the true intentions of the parties at the time the contract was signed  courts apply an objective approach to determining intentions

·  Consider: factual matrix, commercial context, and surrounding circumstances

·  General rule is that evidence of prior negotiations is inadmissible for the purpose of construing the final agreement

·  Interpretation must give effect to all parts of the contract  no provision of an agreement should be interpreted to be redundant

·  Although English courts have stated that it is not legitimate to examine subsequent conduct, Canadian courts have generally taken a more flexible view

o  When there are two reasonable interpretations of a provision then evidence of subsequent conduct “may be admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable interpretations is the correct one” (Re CNR & CP)

·  Related agreements may be taken into account where the agreements are components of one larger transaction

·  Words are to be given their natural or ordinary meaning  evidence may be admitted to prove that a word has a special or technical meaning

·  Contra proferentem: where a contract has been drafted by one of the parties, any ambiguities in it are likely to be construed against that party and in favor of the other (Mobil Oil)

·  Very clear words must be employed in order for one party to protect itself from liability for negligence

·  Where a defendant is potentially subject to two liabilities (strict liability and negligence), general words of exclusion will not be construed as protecting the defendant from negligence; however, where a defendant’s potential liability rests only in negligence, general words of exclusion are capable of covering negligence (since otherwise the clause would lack subject matter)

·  House of Lords has suggested that clauses limiting liability should not be regarded with the same hostility as those excluding liability (should be construed more broadly)

Case Briefs

·  International Terminal Operators (SCC) à relaxed the principle that negligence had to be addressed specifically by the exclusion clause

·  Bow Valley Husky (SCC) à suggested that a different approach should be adopted for the construction of clauses that expressly provide for “the assumption of liability limited to a specific circumstance” as opposed to those that provide for general exclusion from liability

Standard Form Contracts

·  Business to business contract transactions that follow a standard layout

·  May be signed (contracts) or unsigned (tickets/oral agreements)

·  Offer a level of certainty and predictability (should be consistently interpreted)

·  BENEFITS: efficiency and bargaining made faster, facilitates shopping b/c can compare various rates, facilitates administration of K b/c both parties understand the duties, etc.

·  CONCERNS: terms imposed by stronger party (“take it or leave it”), fairness/knowledge of terms, broad exclusions of liability

Signed Documents/Reasonable Notice Doctrine

·  Traditional view that a signature on a document containing terms established assent to those terms; contract binding whether or not the party actually read the document (L’Estrange) à this is also the case for signed waivers for risky activities

·  Doctrine also applies to unsigned documents (tickets) that come from trains, buses, movies, amusement parks, parking, museums, skiing, etc.

·  Common law courts have developed a doctrine of reasonable notice: if there is no knowledge of conditions, a person is bound to conditions if there was reasonable notice of them

·  Decision in Tilden has not been largely upheld à courts continue to uphold standard form contracts and signed waivers of liability even when they have not been read

Case Briefs

·  Tilden Rent-A-Car Co. v. Clendenning (Ont. CA, 1978) à if there is an onerous provision in a contract, one party cannot rely on it if he/she does not alert the other party to the provision and knows that the other party has not read it

o  C signed contract to rent a car without really reading it (which clerk knew) so didn’t notice a clause that said he would be fully liable for damage if he drove after having consumed alcohol, consumed alcohol and drove, damaged the car

o  Court said Tilden cannot rely on provisions which it had no reason to believe were being assented to by C; no consensus ad item (meeting of the minds)

o  Dissent affirmed signature/signed documents rule and expressed concern for certainty, business efficacy, and market ordering

o  Note this has not been largely applied by courts

·  Parker v. South Eastern Railway (Eng. CA, 1877) à where a written document contains conditions but the document is not signed and the party did not know of the conditions, evidence is required to show assent to terms

o  Ticket received for storing a bag at a railway, the bag got lost, but the ticket limited damages to 10 pounds

o  Evidence required to prove assent to terms: may be actual knowledge that the document contains conditions or reasonable steps taken to provide notice that the document contains conditions

o  P held to be bound by the conditions on the ticket because he knew that it contained writing (though he didn’t read it), the ticket said “see back”, and there were posted notices to the same effect

·  Thornton v. Shoe Lane Parking Ltd. (Eng. CA, 1971) à notice that there is a condition is not sufficient; must also be knowledge of conditions generally or the particular condition specifically

o  Conditions posted in a parkade that people “park at their own risk”, T got in an accident on the premises

o  Court held that Shoe Lane could not rely upon this exclusion because there was insufficient notice and T did not have actual knowledge of the condition

·  Karroll v. Silver Star Mountain Resorts Ltd. (BCSC, 1988) à no general requirement to take reasonable steps to ensure that party signing onerous terms reads/understands them; such reasonable steps only required where a reasonable person should have known that signing party was not consenting to the terms (misrepresentation)

o  K sustained a broken leg while participating in a downhill skiing competition at Silver Star, but K had signed a contract protecting SS against all claims of injury

o  Court said the starting point is the L’Estrange rule: doesn’t matter if a party knew what the contract said as long as they signed it

§  EXCEPTIONS (L’Estrange): circumstances made signature not the plaintiff’s act, or where agreement was induced by fraud or misrepresentation