D. The Parol Evidence Rule

AuthorJohn D. McCamus
ProfessionProfessor of Law. Osgoode Hall Law School, York University
Pages193-208

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1) Introduction

The rules of incorporation, examined earlier in this chapter153deter-mine whether terms set out in writing are to be included within the

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agreement entered by the parties. We now turn to consider whether the written document should be considered to be the exclusive source of the terms of the agreement. If the parties have a shared intention on this matter, of course, the issue is not a difficult one. A clear mutual agreement by the parties that a written document is to constitute the sole and exclusive expression of their contractual relationship will be effective. On the other hand, if the parties plainly agree that their agreement is to be constituted both by the terms set forth in a written document and by terms either agreed to orally or set forth in an additional document, effect will be given to that understanding. The difficult case, of course, arises where the parties have different understandings on this point. In the typical case, one party will assert that the written document constitutes the full expression of the agreement. The other party will insist that some prior and, typically, oral undertaking given by the other party also constitutes part of the agreement between the parties. The party wishing to rely on the prior oral undertaking must, however, be able to surmount the obstacle to such reliance presented by the parol evidence rule. That rule holds that, in certain circumstances, the party wishing to rely on the oral undertaking may be prevented from introducing evidence of an oral understanding that supplements or is inconsistent with the written agreement.

Although commonly referred to as the "parol evidence rule," this label is somewhat misleading. In the first place, the rule applies to all forms of prior communication, not just oral communication. The rule, if applicable, would also preclude reliance upon prior written undertakings of parties who enter a subsequent written agreement. Second, although the rule is often treated as an evidentiary rule in the sense that it provides a basis for excluding evidence at trial, the rule is more appropriately considered to be a substantive rule of contract law in that it is a rule that determines that undertakings given in certain circumstances are unenforceable. Further, even if it is true that the rule might have been inspired, in part at least, by a concern that testimony concerning oral undertakings might be generally less reliable than evidence consisting of written agreements, the rule cannot now be explained on this basis. There is, of course, no general proscription against the enforcement of oral undertakings. On the contrary, they are commonly enforced. Moreover, the various exceptions to the parol evidence rule render evidence concerning prior oral undertakings admissible. Further, evidence concerning oral undertakings given after the adoption of a written agreement is generally admissible. It would be very difficult, therefore, to defend the rule on the basis that evidence concerning oral undertakings is inherently unreliable and excluded as an evidentiary matter on that basis.

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As we shall see, application of the rule may, on occasion, lead to results that are perceived to be unjust. Accordingly, the rule has been subjected to criticism by various law reform bodies.154Some have recommended its abolition. At least one such body, however, has concluded that reform is unnecessary.155These differing views rest, to some extent, on different understandings of the scope and rationale of the rule. There are essentially two different versions of the rule found in the jurisprudence.156The first might be referred to as the "traditional" version of the rule. This version holds that where a written agreement appears on its face to be a complete agreement, parol evidence cannot be admitted that contradicts, varies, adds to or subtracts from the terms of the written agreement. Under this version of the rule, one must determine that the written agreement appears to be, in some sense, incomplete before one can turn to consider evidence of prior communications of the parties. The second or "modern" version of the rule places emphasis on the need to demonstrate that the parties actually intended to reduce their agreement into writing as a precondition to the application of the rule. In determining whether the parties actually did intend to reduce their agreement into written form, all evidence of their prior communications relevant to this issue, oral, written or otherwise, is admissible. Under this version of the rule, then, a party could lead evidence demonstrating that a written agreement that appears complete on its face is actually merely a component of an agreement that is intended by the parties to be partly oral and partly in writing. The modern version of the rule has achieved dominance in both English157and American158jurisprudence, but its status is less clear in common law Canada. This results, in part, from a general tendency on the part of courts to refrain from identifying which of the two versions of the rule is being applied in a particular case or is considered by the court to be the correct one.

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There is, however, some evidence of movement in the direction of the modern rule in recent Canadian jurisprudence.

The modern version of the rule can be defended on a number of grounds. First, the modern version substantially reduces the capacity of the rule to generate unjust results. Second, the modern version is more directly linked to the most defensible justification for the rule. As we have seen, the rule cannot be justified as a rule of evidence designed to exclude unreliable testimony concerning oral undertakings. The true explanation for the rule is that, properly applied, it gives effect to the intentions of the parties. If the parties indeed intended to reduce their agreement into written form, there does not appear to be a persuasive reason for refusing to give effect to that agreement, absent fraud or some other vitiating factor.159The modern version of the rule, then, which renders admissible all evidence concerning this issue, is thus more directly linked to the underlying rationale of the rule.

It is the traditional version of the rule that more commonly comes under attack by law reform bodies. The traditional form of the rule excludes, in a more arbitrary way, evidence concerning the prior communications of the parties and is thus more likely to produce unjust results. Accordingly, the rule has developed a number of exceptions that, cumulatively, create at least the impression of instability and uncertainty in the rule. Further, the traditional rule is often invoked for the convenient purpose of controlling the findings of fact at the first level of litigation. In the American experience, judges minded to withdraw from the jury the question of whether a particular oral undertaking was, in fact, made, could accomplish this objective through application of the rule.160A similar phenomenon may occur at the appellate level. An appellate court unimpressed by fact findings concerning oral undertakings at trial would normally be precluded from disturbing the fact findings as such. The trial judgment could be overruled, however, on the basis that the parol evidence rule should have been applied at trial to preclude the admission of evidence concerning the oral undertaking. Deployment of the rule in this fashion is obviously unrelated to the purpose underlying the rule. Indeed, this approach applies the rule to accomplish an ulterior or extraneous objective. As we shall see, there is some evidence suggestive of the occurrence of this phenomenon in Canadian appellate decisions concerning the rule.

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2) The Scope and Operation of the Rule

Although Canadian courts have not normally either articulated or distinguished between the traditional and modern approaches to the parol evidence rule, there are two decisions of the Supreme Court of Canada that appear to adopt the traditional approach. At the same time, these cases illustrate some of the difficulties inherent in the traditional view of the doctrine. In the first, Hawrish v. Bank of Montreal,161the defendant solicitor had signed a guarantee on the bank’s standard form guaranteeing the present and future indebtedness of a newly formed company in which he had an interest. It was the solicitor’s evidence that he had been given an oral assurance by the assistant manager of the bank branch that he would be released from this guarantee once the new directors of the company executed a joint guarantee of the debt. No such understanding was recorded in the bank’s standard form of guarantee executed by the defendant. In its own terms, the guarantee provided that it was "a continuing guarantee and secures the ultimate balance owing by the customer."162In due course, when the new company became insolvent, the bank resiled from the oral understanding and brought an action to enforce the guarantee. The trial judge admitted the evidence of the bank’s oral undertaking and, finding it credible, dismissed the claim. In the Supreme Court, however, Judson J., for a unanimous Court, held that the oral undertaking was inconsistent with the provision in the guarantee stipulating that it was a "continuing" one and allowed the claim to enforce the guarantee. Judson J. offered the further reason for this result that the oral evidence was also in plain contradiction of the terms of a further stipulation in which the guarantor acknowledged that "no representations have been made to him on behalf of the bank," a point to which we will return later.

The second case, Bauer v. Bank of Montreal,163also concerned the...

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