McGILL LAW JOURNAL
REVUE DE DROIT DE McGiLL
Volume 27
Montreal
1982
No. 3
Parol Evidence, Misrepresentation and Collateral Contracts
Francis Dawson*
Introduction
A and B are conducting negotiations with a view to entering into
contractual relations. In the course of their negotiations, A makes a promise
to B, on the faith of which B enters into a written contract. The contract
contains a term which is inconsistent with the oral promise made to B. Does
the parol evidence rule preclude B from leading evidence of the promise?
As authority stands at present the question is a difficult one to answer.
On the one hand there exists a line of cases which have held that evidence of a
separate collateral contract is inadmissible if the oral contract is inconsistent
with the later written contract. On the other hand, over the past thirty years
or so, there has developed a line of cases which stands for exactly the
converse of the above proposition.2 These cases state that if the contest is
between an oral assurance given at or before the time for contracting and a
term in a later standard-form written contract,.it is the oral assurance that
* Of the Faculty of Law, University of Auckland, New Zealand.
‘Ly’snar v. National Bank of New Zealand Ltd [1935] N.Z.L.R. 129 (P.C.); Carter v.
Sahnon(1880) 43 L.T.490 (C.A.); Henderson v. Arthur[1907] I K.B. 10(C.A.); Horncastle
v. The Equitable Life Assurance Soc. of the U.S.A. (1906) 22 T.L.R. 735 (C.A.); Hoyt’s Pty
Ltd v. Spencer(1919) 27 C.L.R. 133 (H.C. Aust.); Maybur, v. Atlantic Union Oil Co. (1953)
89 C.L.R. 507 (H.C. Aust.); Hawrish v. Bank of Montreal[1969] S.C.R. 515; Donovan v.
Northlea Farms Ltd [1976] 1 N.Z.L.R. 180 (N.Z.S.C.); Bradshaw v. Fitzgerald [1919]
G.L.R. 78 (N.Z.S.C.): Hammond v. C.LR. [1956] N.Z.L.R. 690 (N.Z.S.C.); Steine v.
Mathieu [1923] 3 W.W.R. 493 (Sask. C.A.); Canadian Fur Auction Sales Co. v. Neely
[1954] 2 D.L.R. 154 (Man. C.A.); Kaplan v. Andrews [1955] 4 D.L.R. 553 (Ont. C.A.).
2 Couchman v. Hill[ 1947] K.B. 554 (C.A.); Harling v. Eddy[ 1951] 2 K.B. 739 (C.A.); City
and Westminster Properties (1934) Ltdv. Mudd[1959] Ch. 129; Mendelssohn v. Normand
Ltd [1970] 1 Q.B. 177 (C.A.); J. Evans & Son (Portsmouth) Ltdv. Andrea Merzario Ltd
[1976] 1 W.L.R. 1078 (C.A.); Brikom Investments Ltd v. Carr [1979] Q.B. 467 (C.A.);
Canadian Acceptance Corp. v. Mid- Town Motors Ltd (1970) 72 W.W.R. 365 (Sask. D.
Ct); Findlay v. Couldwell(1976) 69 D.L.R. (3d) 320 (B.C.S.C.); Lister (Ronald Elwyn) Ltd
v. Dunlop Canada Ltd (1978) 85 D.L.R. (3d) 321 (Ont. H.C.); Roberts v. Montex
Development Corp. (1979) 100 D.L.R. (3d) 660 (B.C.S.C.).
McGILL LA WJOURNAL
[Vol. 27
prevails and not the later inconsistent term. The reason advanced for this
conclusion is said to be that it is illusory to say,”We promise to do a thing, but
we are not liable if we do not do it.” 3 Although these latter cases do not
square easily with the former, they at least ensure that promisors do not snap
their fingers with impunity at the undertakings that they have given.
In recent times this problem has come to the attention of appellate courts
in two Commonwealth countries, where opposing conclusions have been
reached. In Bauer v. Bank of Montreal,4 the Supreme Court of Canada has
held that evidence of a promise given prior to the time of entering into the
written contract is inadmissible if inconsistent with the later writing. By
contrast, in Fletcher Bernard-Smith Ltd v. Shell, B.P. & Todd Oil Services
Ltd,5 the New Zealand Court of Appeal has indicated that it considers such a
rule to be excessively rigid and that it does not think that a claim based on an
inconsistent collateral contract is bound to fail.
Closely related to, but conceptually distinct from these cases, is yet a
third line of cases holding that a party who misrepresents (albeit innocently)
the contents or effect of a clause inserted in a written contract cannot rely on
the clause in the face of this misrepresentation. 6 Although these cases are
generally thought to have been rightly decided, it has never been made clear
how they fit in with the parol evidence rule or quite what their conceptual
basis is.7 The representations are generally thought to be too vague to found
an estoppel8 and the cases are sometimes explained as laying down a
principle of interpretation. 9 Now in Bauer v. Bank of Montrealthe Supreme
Court of Canada has held that the parol evidence rule operates to keep out
evidence of such misrepresentations if they are inconsistent with the terms of
the written contract. Clearly, if this decision is correct, many of the decisions
3 Mendelssohn v. Normand Ltd, ibid., 184 per Lord Denning M.R. citing Firestone Tyre
and Rubber Co. v. Vokins & Co. [1951] 1 Lloyd’s Rep. 32, 39 (K.B.D.) per Devlin J.
4[1980] 2 S.C.R. 102, affg (1978) 19 O.R. (2d) 425 (C.A.), rev’g (1977) 15 O.R. (2d) 746
(H.C.).
5(1979) 5 N.Z. Recent Law (N.S.) 161 (unreported, C.A. 9/78).
6 Curtis v. Chemical Cleaning and Dyeing Co. [1951] 1 K.B. 805 (C.A.); Jacques v. Lloyd
D. George & Partners Ltd [1968] 1 W.L.R. 625 (C.A.); Mendelssohn v. Normand Lid,
supra, note 2; Royal Bank of Canada v. Hale(1961) 30 D.L.R. (2d) 138 (B.C.S.C.); Bank of
British Columbia v. Wren Developments Lid(1973)38 D.L.R. (3d)759 (B.C.S.C.); Brieau
v. Gravel (1959)5 D.L.R. (3d) 89 (N.B.S.C., App. Div.); Free Ukrainian Socie.’ (Toronto)
Credit Union Ltd v. Hnatkit’ [1964] 2 O.R. 170 (C.A.); Ballard v. Gaskill[1955]2 D.L.R.
219 (B.C.C.A.). For further cases see S. Waddams, The Law of Contracts (1977), 205,
fn. 64.
7 See Note (1952) 11 Cambridge L.J. 288; Spencer, Signature, Consent, and the Rule in
L’Estrange v. Graucob [1973] Cambridge L.J. 104, 117-9, in particular at fn. 82.
8 Curtis v. Chemical Cleaning and Dyeing Co., supra, note 6, 809 per Denning L.J.
9 See Note(1951) 67 L.Q.R. 152; NeuchatelAsphalte Co. v. Barnett [1957] 1 W.L.R. 356,
360 (C.A.) per Denning L.J.; Royal Bank of Canada v. Hale, supra, note 6, 150-1 per
Munroe J.
1982]
PAROL EVIDENCE
in the misrepresentation line of cases may have been wrongly decided.10 In
these circumstances it seems worthwhile to see how these matters stand in
principle. Part I of this article will consider the position on inconsistent
collateral contracts. Part II will be devoted to discussing whether, and if so
why, oral evidence is admissible to prove that one contracting party
innocently misrepresented the contents of a writing which the other party
subsequently signed.
I.
Inconsistent Collateral Contracts
As classically formulated, the parol evidence rule states that “if there be a
contract which has been reduced into writing, verbal evidence is not allowed
to be given of what passed between the parties, either before the written
statement was made, or during the time that it was in a stage of preparation,
so as to add to or subtract from, or in any manner to vary or qualify the
written contract.”‘” The rule dates back to at least Lord Coke’s time12 and
was originally conceived as being founded on the superiority of written
evidence.’ 3 Towards the middle of the last century, however, another
justification began to be advanced. It was said that to admit parol evidence
when the parties had decided to reduce their agreement into writing and to
have their rights and obligations determined by the writing was to act
contrary to their declared intention.14 As a result, at the present day, the
parol evidence rule does not apply to every contract of which there is written
evidence but only applies “where the parties to an agreement reduce it to
writing, and agree or intend that that writing shall be their agreement.” 5 The
difficulty, of course, lies in ascertaining when contracting parties can be said
to have intended their writing to constitute their agreement.
The traditionally accepted way of ascertaining the intention of the
parties is to say that their intention must be gathered from the four corners
10 On the assumption that the contracts in question involved contracts in writing.
11 Goss v. Lord Nugent (1833) 5 B. & Ad. 58, 64-5, 110 E.R. 713,716 (K.B.)per Denman
C.J.; and see the formulation in Bank of Australasia v. Pahner [1897] A.C. 540,545 (P.C.)
per Lord Morris.
12 The Countess of Rutland’s Case(1604) 5 Co. Rep. 25b, 26a-b, 77 E.R. 89,90 (K.B.)per
Popham C.J.: “Also it would be inconvenient, that matters in writing made by advice and on
consideration, and which finally import the certain truth of the agreement of the parties
should be controlled by averment of the parties to be proved by the uncertain testimony of
slippery memory.”
13Salmond, The Superiorit’ of Written Evidence (1890) 6 L.Q.R. 75, 81. And see
Guardhousev. Blackburn (1866) L.R. I P. & D. 109, 117 (P.D.A.)per Wilde J.: “The general
rule … is based on the proposition tliat written testimony is of a higher grade- more certain,
more reliable –
than parol, and that resort should be had to the highest evidence of which a
subject is capable to the exclusion of the inferior class.”
14See Inglis v. Buttery & Co. (1878) 3 App. Cas. 552, 577 (H.L.) per Lord Blackburn;
Wake v. Harrop (1862) 30 L.J. Exch. 273, 277 per Bramwell B.
15 Harris v. Rickett (1859) H. & N. 1, 7, 157 E.R. 734, 737 (Ex.) per Pollock C.B.
REVUE DE DROIT DE McGILL
[Vol. 27
to
reduce
their agreement
of the written instrument itself. If, on its face, the written document appears
to contain the whole contract, parol evidence is excluded to add to, subtract
from or vary the writing. 16 The argument seems to be that since the parties
could have left their rights and liabilities to be determined by oral testimony,
their decision
into writing necessarily
demonstrates an intention to regard that writing as providing the best
evidence of their agreement. ‘ 7 Put in a slightly different way, as their reason
for executing a written instrument can only be to ensure that their rights and
obligations are to be determined by the writing, their agreement is to be
found in that writing. So the only question is whether or not, looking at the
matter objectively, the parties can be said to have reduced their agreement
into writing. And to determine that question, one looks at the writing’itself
against the background of the surrounding circumstances.
Hutton v. Watling’8 and Beckett v. Nurse 9 are perhaps the best modern
illustrations of this approach to the parol evidence rule. In Hutton v.
Watling, the defendants sold a dairy business to the plaintiffs. The
agreement contained a series of unnumbered paragraphs including the
following provision: “In the event of the purchaser wishing at any future time
to purchase property in which the business is situated, she has the option of
purchase at a price not exceeding 450.” The purchaser subsequently sought
to exercise the option, and on the vendor’s refusal to implement it, brought
proceedings for specific performance. The vendors sought to adduce oral
evidence
the document was intended as a
memorandum of an agreement to sell the goodwill of the business together
with the stock and fixtures to be ascertained at a valuation, some of its
provisions (including the clause relied on by the plaintiffs) had been inserted
without having been intended to be contractually binding. The Court of
Appeal affirmed Jenkins J.’s decision to refuse to admit the oral evidence to
contradict the apparent agreement signed by the defendant. The kernel of
the Court’s reasoning is to be found in Lord Greene M.R.’s opinion:
to show that although
The first thing we have to do … is to construe that document. The true construction of a
document means no more than that the court puts upon it the true meaning, being the
meaning which the other party, to whom the document was handed or who is relying
upon it, would put upon it as an ordinary intelligent person construing the words in a
proper way in the light of the relevant circumstances. This document, on the face of it,
was intended to be handed to the purchaser, and it is produced by the purchaser.
Indeed, the whole tenor of the document indicates that it is to be the purchaser’s
document. What then would the purchaser when she received the document have
j6 LG. Thorne & Co. v. Thomas Borthiwick & Sons (Australasia) Ltd (1956) 56 S.R.
17 See Comment, The Parol Evidence Rule: A Conservative View (1952) 19 U. Chi. L.
Rev. 348, 352-3 where this point is most forcefully made.
(N.S.W.) 81 (S.C., in banco).
18[1948] Ch. 398 (C.A.).
19[1948] I K.B. 535 (C.A.).
1982]
PAROL EVIDENCE
thought it meant as an ordinary reasonable person, intelligently understanding the
English language and construing it in the light of the relevant circumstances? She could
only have understood that the vendors were deliberately and solemnly recording the
terms of an agreement into which they were prepared to enter, or indeed, into which
they had entered ….
In my opinion, when once the document is construed and understood it is only
susceptible of one interpretation. This is that it was intended by the signatories to be… a
true record of the contract …. When once that is ascertained it appears to me that the
idea of letting in parol evidence to prove an antecedent oral agreement different in its
terms fails. 20
By contrast, in Beckett v. Nurse2′ the plaintiff as administratix of her
husband claimed specific performance of an agreement to sell him a plot of
land. The document on which she relied stated, “Received from Mr E.
Beckett of Thorpe Cottages, Thorpe Audlin, the sum of seventeen pounds
being a deposit for a field situate near the Fox Inn. Sold for fifty pounds.”
Across a twopenny stamp was the signature “T. Nurse”. Lower down on the
document there was a small sketch plan showing the position of the inn and
the field. The defendant vendor sought to show that various other terms not
contained in the note or memorandum had been agreed to and that the
agreement was unenforceable as a result of the Statute of Frauds.22 At first
instance, the trial judge refused
to hear such evidence holding that the
document was an agreement in writing and that evidence to contradict or
vary it was not admissible. The Court of Appeal upheld an appeal against
the trial judge’s decree of specific performance, holding that on its face the
wording of the document did not show that it was intended to contain all the
terms of the contract. Amongst the factors that the Court of Appeal took
into account in reaching this conclusion were that the document was signed
by one party only and purported to be no more than a receipt. Accordingly,
oral evidence of other terms was admissible and the case had to go back to
the County Court judge to decide what agreement the parties had in fact
made.
The reason usually advanced for approaching
the question of
ascertaining the parties’ intentions in this way is that it promotes certainty
and predictability in commercial transactions. As one American judge has
put it, “[i]f we may go outside of the instrument to prove that there was a
stipulation not contained in it, and so that only part of the contract was
put in writing, and then, because of that fact, enforce the oral stipulation,
there will be little of value left in the rule itself.” 23 Nevertheless, the
20 Supra, note 18, 403 per Lord Greene M.R.
21 Supra, note 19.
22 The Statute of Frauds requires all essential terms to be evidenced in writing: see
Hawkins v. Price [1947] Ch. 645.
23 Eighmie v. Tavlor 98 N.Y. 288, 294 (C.A. 1885) per Finch J., cited in S. Williston,
Contracts, 3d ed. (1957), vol. 4, 633.
McGILL LA WJOURNAL
[Vol. 27
inevitable concomitant of stating the rule in this way is that it is seen to be
subject to many exceptions, not all of which are easy to reconcile with the
basic rule. The recent working paper of the English Law Reform
Commission lists eight, 24 and as one distinguished commentator has
observed these exceptions go far to undermine the basic objectives of
stating the parol evidence rule in the manner set out above. 25
Partly as a result of difficulties such as these and partly as a result of a
growing recognition of the very different bargaining process that occurs
when parties enter into contracts on standard-form agreements, some
theorists have been prompted to reassess the traditional way in which the law
ascertains the intention of the parties for the purposes of determining
whether the parol evidence rule applies. 26 Of the studies of the rule that have
been undertaken recently, much the most comprehensive is that of Mr
McLauchlan in his book The Parol Evidence Rule.27 Building upon the
foundations laid down by the earlier work of Professor Corbin 2s and of
Professor Wedderburn, 9 Mr McLauchlan shows that although the rule has
often been stated and applied in wide exclusionary terms, evidence has in fact
been admitted in a whole host of cases to add to, vary and sometimes even to
contradict the terms of the writing. The significant thing about these cases is
that in the vast majority of them it is not made clear whether the evidence is
admitted by way of exception to the rule or because, when properly
understood, the rule does not extend to them. Mr McLauchlan points out
that as there has been no modern leading case which has attempted to collect
all the authorities and definitively restate the rule, the true scope and nature
24 Great Britain: Law Commission, Law of Contracts: The Parol Evidence Rule (1976).
[Working Paper No. 70] paras 10 ei seq.: vitiating factors; conditions precedent;
rectification, specific performance and rescission; damages for misrepresentation: non-
exclusiveness of writing; collateral contract, custom and implied terms.
25 G. Treitel, The Law of Contract. 5th ed. (1979), 143.
26 See,
in particular, D. McLauchlan, The Parol Evidence Rule (1976), 67-79;
McLauchlan, The Inconsistent Collateral Contract
(1976) 3 Dalhousie L.J. 136;
Wedderburn, Collateral Contracts [1959] Cambridge L.J. 58. The American literature is
voluminous and valuable discussions can be found in the following: Corbin, The Parol
Evidence Rule (1944) 53 Yale L.J. 603; Calamari & Perillo, A Plea for a Uniform Parol
Evidence Rule and Principles of Contract Interpretation (1967) 42 Ind. L.J. 333; Sweet,
Contract Making and Parol Evidence: Diagnosis and Treatment of a Sick Rule (1968) 53
Cornell L. Rev. 1036; Hale, The Parol Evidence Rule (1925) 4 Ore. L. Rev. 91; McCormick,
The Parol Evidence Rule as a Procedural Device for Control of the Jun’ (1932) 41 Yale L.J.
365; Murray, The Parol Evidence Rule: A Clarification (1965) 4 Duquesne U.L. Rev. 337;
Strahorn, The Unity of the Parol Evidence Rule (1929) 14 Minn. L. Rev. 20; Comment, The
Parol Evidence Rule: A Conservative View, supra, note 17; Note, The Parol Evidence Rule:
Is It Necessary?(1969) 44 N.Y.U. L. Rev. 972; J. Wigmore, Evidence, 3d ed. (1940), vol 9,
2400-78.
27 Ibid.
28 Corbin, supra, note 26.
29 Wedderburn, supra, note 26.
1982]
PAROL EVIDENCE
of the parol evidence rule is a question that still remains to be settled and one
that is open to be considered on principle.
Mr McLauchlan proceeds to show that when considered as a question of
principle, it is evident that the question whether the parties intended a written
document to contain all the terms of the agreement cannot be determined
solely by construing the written document. Contracting parties are not, as a
general rule, required to reduce their agreements into writing, unless the
contract is of a class governed by the Statute of Frauds or similar statute, and
there is, therefore, nothing in principle to prevent their concluding a contract
which is partly oral and partly in writing. Ex hypothesi, then, a document
may not have been intended to constitute the final record of the parties’
agreement. Mr McLauchlan argues that the view that a writing can
somehow be intrinsically self-determinative of the parties’ intent is an
impossible one not only because this is to apply the parol evidence rule in the
course of determining whether it does apply but also because, as Corbin has
pointed out, before the parol evidence rule can apply, considerable oral
testimony must be given by the contracting parties to prove the genuineness
of the writings:
The difficulty is that the court’s assumption or decision as to the completeness and
accuracy of the integration may be quite erroneous. The writing cannot prove its own
completeness and accuracy. Even though it contains an express statement to that effect,
the assent of the parties thereto must still be proved. Proof of its completeness and
accuracy, discharging all antecedent agreements, must be made in large part by the oral
testimony of parties and other witnesses. 30
Mr McLauchlan’s conclusion is therefore that the question whether the
parties intended a written document to contain all the terms of their
agreement is a question of fact for the trial judge to decide rather than a
question of construction. The parol evidence rule should be viewed as
raising a presumption that a document which looks like the whole contract
does in fact contain the whole contract, but the trial judge must hear all
relevant testimony to determine whether or not as a matter of fact it was the
intention of the parties that the instrument contain all the terms of the
agreement. The key is thus to distinguish between hearing the oral evidence,
and giving it effect. In determining whether or not to give effect to the
evidence, the court must take into account such factors as the form of the
writing (is it formal and detailed or a mere memorandum), the manner in
which the agreement was prepared (is it one party’s standard form or not),
the nature and effect of the oral testimony, and whether or not the writing
contains a merger clause. 31
30 Corbin, supra, note 26, 630.
31 As Professor Williams observed in his work on the Statute of Frauds, the extent to
which the courts may rely upon extrinsic circumstances in drawing an inference as to the
intention of the parties does not seem to be very definitely laid down in the authorities: J.
Williams, The Statute of Frauds, Section 4 (1932), 155, fn. I. It seems to be fairly inferable
REVUE DE DROIT DE McGILL
(Vol. 27
This new perspective on the nature and scope of the parol evidence rule is
of considerable importance in determining the true boundaries of the
collateral contract exception to the parol evidence rule, and the extent to
which a contracting party is permitted to adduce evidence to prove an oral
undertaking inconsistent with the terms of a subsequent writing. The use of a
collateral contract as a way of circumventing the parol evidence rule is well
known and is premised on the idea that whereas oral evidence is inadmissible
for the purpose of adding to, subtracting from or varying the written
document, it is admissible to prove a separate prior agreement the
consideration for which is the entry of the subsequent written contract.
However, since the consideration for the prior oral contract is the entry of
the later written contract, some judges have considered
it “logically
impossible to assume the existence of a valid preliminary or collateral
contract containing terms not consistent with the settled provisions of the
subsequent main contract”. 32 This reasoning can be traced back to Hoyt’s
Pty Ltdv. Spencer,33 a decision of the High Court of Australia, in which the
plaintiff had subleased certain premises from the defendant on the
understanding that the defendant would not exercise a contractual right to
give notice to terminate the lease. In breach of the agreement the defendant
exercised his contractual rights and gave notice to terminate. It was held that
even assuming the prior oral agreement had been made, evidence of it was
inadmissible on the ground of its inconsistency with the subsequent writing.
As we have seen, however, a number of more recent cases suggest that
the collateral contract exception is much broader than has generally been
recQgnized.
to
notwithstanding its inconsistency with the later written contract. Canadian
Acceptance Corp. v. Mid-Town Motors35 provides a useful illustration of
the lengths to which some trial judges are prepared to go in applying this line
of authority. In that case the plaintiff agreed to hire out a mobile brake shop
the oral promise
is given effect
In
these cases 34
from Lord Watson’s observations in Mercantile Bank ofSydney v. Tay’lor [1893] A.C. 317,
321 (P.C.) that the Judicial Committee was prepared to look outside the writing to determine
whether the parties intended it to be a complete statement of their contract. To this can be
added an important opinion of Blackburn J.’s in giving advice to their Lordships in Peek v.
i E.R. 1109, 1126-7 which
North Staffordshire Ry Co. (1862) H.L.C. 472, 516-8,
approaches the application of the parol evidence rule in this way. See also Allen v. Pink
(1838) 4 M. & W. 140, 144, 150 E.R. 1376, 1378 (Ex.) where Abinger C.B. held the
parol evidence rule to be inapplicable in the absence of evidence of any agreement by the
plaintiffs that the whole contract should be reduced into writing by the defendant. For
contrary authorities see supra, notes 16-20.
32 See, e.g., Donovan v. Northlea Farms Ltd, supra, note 1, 184per Mahon J.; Ho yt’s Pt.t’
Ltd v. Spencer, supra, note 1, 147 per Isaacs J.
33 Supra, note 1. And see Carter v. Salmon, supra, note 1; Henderson v. Arthur, supra,
note 1; Horncastle v. The Equitable Life Assurance Soc. of the U.S.A., supra, note 1.
34 Supra, note 2.
35 Ibid., discussed in Goodale & Goodie, Comment (1970) 35 Sask. L. Rev. 192.
1982]
PAROL EVIDENCE
for a period of five years at a certain monthly rental. During the negotiations
leading up to the conclusion of the contract the plaintiff through its agent
had orally promised the defendant that it would supply an advertising and
promotional programme to go into effect on the installation of the machine.
The written agreement entered into, however, contained no such provision
and included a clause purporting to negative all oral agreements. The
plaintiff failed to honour its promise and as a result the machine was hardly
used. In an action by the plaintiff to recover the monthly rentals owed, the
trial judge admitted the oral evidence and dismissed the plaintiffs claim. It
can be seen that the result in this case was that the written contract was
discharged for breach of the oral promise-a dramatic example of
Professor Burrows’ observation that the effect of this line of cases is to work
a complete reversal of the parol evidence rule placing the emphasis exactly
the other way. 36 Is this line of authority an aberration?
It is at this point that one’s view as to the true conceptual basis of the
parol evidence rule becomes critical. If one subscribes to the traditional
approach, one must regard this line of cases as anomalous. The reason is
that the parties, having once determined to put their agreement into writing,
must be taken to have intended that their rights and obligations be contained
in the writing. To allow in evidence of any oral promise, let alone one that
contradicts the writing, is therefore to go against this intention. It is also
highly illogical, since the consideration for the alleged oral contract is the
entry of a written contract one of whose terms is inconsistent with the alleged
oral contract.
If, on the other hand, one accepts that the parol evidence rule can be
formulated in the way that Mr McLauchlan and other theorists suggest,
these cases can be supported. The starting point is to point out that there is
no a priori reason why the validity of the oral undertaking should be
conditioned on its consistency with the subsequent written contract. The
reasoning to the contrary contained in such cases as Hoyt’s Pty Ltd v.
Spencer37 is premised on the view that the parties must always intend that the
subsequent written contract be the dominant one. While this may have been
a true reflection of the intention of the parties in the Hoyt’s case itself, it is
manifestly unreal to believe that this will be the case every time parties enter
into written standard-form agreements on the faith of a prior oral
undertaking. Indeed, the intention of the parties in such cases is likely to be
exactly the other way around, as the modern cases reflect. In these cases, the
likely intention of the contracting parties is that the prior oral undertaking
should govern the subsequent writing. Once this is accepted, there is no
conceptual difficulty in supporting these cases. One way of doing so is to
36 Note [ 1969] N.Z.L.J. 556.
37 Supra, note 1.
Mc GILL LAW JOURNAL
(Vol. 27
adopt a two contract analysis. In such cases one will view the consideration
for entering into the written contract as the assumption of all the obligations
contained in the written contract except those which are inconsistent with
the oral contract. Another way of justifying this line of cases is to say that it
was the intention of the parties to enter into one composite agreement, partly
oral and partly in writing. 38 This approach is useful because not all of the
cases can be justified using the collateral contract reasoning. Thus the
“partly oral, partly written” approach would explain the results in those cases
which have held that one contracting party is discharged from an obligation
contained in a written agreement because of a plaintiffs breach of a prior
oral promise.39
From the foregoing discussion it is apparent that cases which have held
that an oral promise is admissible even though inconsistent with a later
writing cannot be dismissed out of hand as necessarily wrong or as logically
untenable. Whether this line of cases can be said to be rightly decided,
however, must ultimately depend on the view of the parol evidence rule to
which one subscribes.
In principle, the view propounded by Mr McLauchlan and other modern
authors as to the scope of the rule appears to be the preferable one. It should
not be forgotten that despite the inroads that have been made on the
autonomy of the contracting parties,40 the prime objective of a court in a
contract dispute remains to ascertain what the parties’ agreement was, and
within the bounds of public policy, to give effect to that agreement.
Wherever possible, rules of evidence ought to facilitate and not hinder that
objective. A parol evidence rule which is seen in terms of a presumption that
the writing is intended to constitute the parties’ agreement does have the
necessary flexibility to separate those cases where the writing is intended to
constitute the agreement from those where it is not. That cannot be said of
the orthodox approach,as Hutton v. Watling4′ all too aptly demonstrates.
For these reasons it is respectfully submitted that the view of the New
Zealand Court of Appeal that oral evidence to prove the existence of a
collateral contract inconsistent with a later written contract is not necessarily
inadmissible, is to be preferred to the view of the Supreme Court of Canada
38 J. Evans & Son (Portsmouth) Ltd v. Andrea Merzario Ltd, supra, note 2, 1083 per
Roskill L.J.
39 See, e.g., Canadian Acceptance Corp. v. Mid-Town Motors, supra, note 2.
40National Carriers Ltd v. Panalpina (Northern) Ltd [1981] 2 W.L.R. 45, 60 (H.L.) per
Lord Wilberforce: “I think that the movement of the law of contract is away from a rigid
theory of autonomy towards the discovery-or I do not hesitate to say imposition – by the
courts of just solutions, which can be ascribed to reasonable men in the position of the
parties.”
41 Supra, note 18.
1982]
PAROL EVIDENCE
recently expressed in Bauer v. Bank of Montreal42 that such evidence is
invariably inadmissible.
II. Parol Evidence and Misrepresentation
Is oral evidence admissible to prove that one contracting party
innocently (in the sense of non-fraudulently) misrepresented the contents of
a writing which the other party subsequently signed? In Bauer v. Bank of
Montreal the Supreme Court of Canada has held that such evidence is not
admissible. 43
In Bauer, the respondent bank brought its action against the appellant
on a guarantee. The appellant had given the guarantee in connection with an
extension by the bank of a line of credit to a company of which the appellant
was the controlling shareholder. As part of the transaction, that company
assigned its book debts to the respondent bank. At the time of entering into
the contract of guarantee the bank told the appellant that upon his paying
the amount secured under the guarantee, the book debts would be reassigned
to him. The written contract of guarantee was in the bank’s standard form
and contained a clause providing that the bank “may abstain … from
perfecting securities of the customer.” The bank negligently registered the
assignment in the wrong county, so that when the company went into
bankruptcy the assigned accounts became available to the general creditors
and were of little value in recouping the defendant’s loss under the guarantee.
In an action by the bank on the guarantee, the trial judge dismissed the
bank’s claim on the basis that under the general law of guarantee and
suretyship, the bank was obliged to safeguard the security given to it and to
reassign it to the appellant on his honouring the guarantee. 44 The Ontario
Court of Appeal reversed the decision because the terms of the guarantee
permitted the bank to abstain from perfecting its security.45 On appeal to the
Supreme Court of Canada the appellant argued that the guarantee ought to
be set aside as
its execution had been procured by the bank’s
misrepresentation as to its nature and effect. The Supreme Court rejected
this argument. It held that as a result of the parol evidence rule there was no
admissible evidence of the misrepresentation. So far as material the opinion
reads as follows:
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 … . 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
42 Supra, note 4.
43 See also Hawrish v. Bank of Montreal, supra, note 1, and Waddams, Comment (1969)
47 Can. Bar Rev. 505 for a similar decision.
44 Bank of Montreal v. Bauer (1977) 15 O.R. (2d) 746 (H.C.).
45 Bank of Montreal v. Bauer (1978) 19 O.R. (2d) 425 (C.A.).
REVUE DE DROIT DE McGILL
[Vol. 27
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 …. 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 …. For reasons which will appear later in that part of this judgment
dealing with the collateral contract argument, I am of the view that there is no evidence
which would support any such finding against the bank…. The only evidence I can find
in the record … is a statement by the bank manager that the bank would have reassigned
the accounts on payment by the guarantor as normal practice, and the assertion by the
guarantor that he had been told by the bank manager that if he made good on his
guarantee the accounts would be reassigned to him…. There was then some evidence
for the finding of the trial Judge and its sufficiency is not for this Court to judge.
However, it seems clear to me that this evidence would go towards imposing a limit on
the bank’s rights with respect to the security given by the debtor. This would clearly
contradict the terms of the guarantee which, as has been pointed out, gave the bank the
right to abstain from registration and perfection of security. On this basis, it would be
inadmissible under the parole evidence rule …. 46
The result is that one contracting party may enforce a standard-form
contract against a party who misunderstood the effect of the form even
though that misunderstanding was induced by a misrepresentation made by
the party relying on the printed form. With very great respect to their
Honours this conclusion is as unjustified in principle as it is unsupported by
authority. To understand
the reasons why oral evidence of such a
misrepresentation may be adduced, however, requires an understanding not
only of the way in which misrepresentation was formerly treated at law and
in equity, but also of classical formation doctrine. This is necessary because
the reasons for allowing in evidence of misrepresentation to rescind a
contract are somewhat different from those which allow oral evidence to be
given in a case like Curtis v. Chemical Cleaning and Dyeing Co. 47 where, it
will be remembered, it was held that a contracting party was not entitled to
rely on an exception clause inserted by him into the contract as he had
misrepresented its terms or effect.
For the sake of convenience this part of the article will be divided into
two parts. Part A deals with the reasons why parol evidence is admissible to
set aside a contract entered into as a result of an innocent misrepresentation.
Part B will consider the slightly different grounds on which oral evidence is
admitted in a case like Curtis v. Chemical Cleaning and Qy’eing Co.
46 Supra, note 4, 430-2, per McIntyre J.
47Supra, note 6.
1982]
PAROL EVIDENCE
A. Rescission for Innocent Misrepresentation
rule
to prove
the making of an
At first sight some of the statements of the parol evidence rule in the great
treatises on the law of contract appear to suggest that there is no exception to
the parol evidence
innocent
misrepresentation.
In the relevant passage in Williston’s treatise, for
example, no mention is made of such an exception.48 The same is also true of
the American Restatement of the Law of Contracts.49 Why then is it
generally thought that oral evidence of an innocent representation is
admissible to set aside a written contract?50 The reasons are, it is submitted,
mainly historical and require an understanding of the developments that
occurred in the substantive law of misrepresentation towards the end of the
last century.
At common law the critical distinction in the substantive law was that
between fraudulent and innocent misrepresentations. If the plaintiff could
show that he had been induced to enter into an agreement as a result of the
defendant’s wilful deception he was entitled to sue in deceit for damages and
to set aside the contract.51 If, on the other hand, he was induced by a non-
fraudulent misrepresentation he had no claim for damages unless he could
make out a warranty.5 2 It might, of course, be the case that the truth of the
representation was imported into the contract as an implied condition of the
48 S. Williston, Contracts, rev. ed. (1936), vol. 3, 634 is as follows: “The parol evidence
rule does not become applicable unless there is an integration of the agreement or contract,
that is, unless the parties have assented to a certain writing or writings as the statement of the
agreement or contract between them. Accordingly, it may be shown by parol evidence not
only that a writing was never executed or delivered as a contract, or that the validity of the
agreement was impaired by fraud, illegality, duress, mistake, insufficiency of consideration,
or failure of consideration rendering it void or voidable.”
49American Law Institute, Restatement of the Law of Contracts (1932), 238:
“Agreements prior to or contemporaneous with an integration are admissible in evidence
(a) to establish the meaning of the integration when this is required for the application of the
standards stated in 230, 231;
(b) to prove facts rendering the agreement void or voidable for illegality, fraud, duress,
mistake or insufficiency of consideration;
(c) to prove facts in a suit for rescission or reformation of the written agreement showing
such mistake as affords ground for the desired remedy;
(d) to prove facts in a suit for specific performance showing such mistake, oppression or
unfairness as affords grounds for denying that remedy.”
50See Chitty, Contracts, 24th ed. (1977), para. 744; Treitel, supra, note 25, 135-6.
s1 Derryi v. Peek (1889) 14 App. Cas. 337, 347 (H.L.) per Lord Bramwell.
52 Heilbut, Svmons & Co. v. Buckleton [1913] A.C. 30, 47-51 (H.L.) per Lord Moulton.
This leaves out of account the subsequent development of the Hedley Byrne & Co. v. Heller
& Partners Ltd [1964] A.C. 465 (H. L.) line of cases, and also the possibility of liability for
“equitable fraud” arising out of special relationships as occurred in Nocton v. Lord
Ashburton [1914] A.C. 932 (H.L.) and Coleman v. Myers [1977] 2 N.Z.L.R. 297 (N.Z.C.A.),
rev’g [1977] 2 N.Z.L.R. 225 (N.Z.S.C.).
McGILL LAW JOURNAL
[Vol. 27
contract (this often occurred in marine insurance contracts) 53 and it was also
possible that the contract could be treated as non-existent on the ground of
common mistake arising out of innocent misrepresentation.54 But in general
an innocent misrepresentation gave the representee no rights. It is therefore
not surprising that it is difficult to find cases which establish an exception to
the parol evidence rule at common law allowing in oral evidence of innocent
misrepresentation.
Although, as a general rule, equity followed the common law on this
subject, 55 there were a number of refinements which were of significance in
its treatment of oral evidence seeking to establish the making of an innocent
misrepresentation. In the first place, the question whether a contract had
been entered into as a result of the making of an innocent misrepresentation
was a factor which a court of equity took into account in exercising its
discretion whether or not to award a decree of specific performance.5 6 Oral
evidence of the making of an innocent misrepresentation was accordingly
admissible to defend proceedings for specific performance of a written
agreement. Thus in Cadman v. Homer5 7 specific performance of a written
agreement for the sale of land was denied on proof of the making by the
plaintiff of certain oral representations as to the value of the estate that was
the subject of the sale, forming no part of the written contract. Similarly, in
Viscount Clermont v. Tasburgh,58 specific performance of a written contract
for an exchange of lands was denied on proof of the making of an innocent
misrepresentation by the plaintiff that the defendant’s tenants had consented
to the exchange. The clearest exposition of the principle on which such cases
proceeded is to be found in Lord Eldon’s opinion in Marquis Townshendv.
Stangroom where his Lordship said:
Upon the question as to admitting parol evidence, it is perhaps impossible to reconcile
all the cases …. It cannot be said, that because the legal import of a written agreement
cannot be varied by parol evidence, intended to give it another sense, therefore in
Equity, when once the Court is in possession of the legal sense, there is nothing more to
inquire into. Fraud is a distinct case, and perhaps more examinable at law; but all the
doctrine of the Court as to cases of unconscionable agreements, hard agreements,
agreements entered into by mistake or surprise, which therefore the Court will not
execute, must be struck out, if it is true, that, because parol evidence should not be
admitted at Law, therefore it shall not be admitted in Equity, upon the question,
Blackburn J.
53 Blackburn, Low & Co. v. Vigors(1886) 17 Q.B.D. 553,562 (C.A.)per Lord Esher M.R.,
rev’d (1887) 12 App. Cas. 531 (H.L.). See J. Salmond & J. Williams, Contracts, 2d ed.
(1945), 233-6.
-11 Kenned, v. The Panama, etc., Royal Mail Co. (1867) L.R. 2 Q.B. 580, 587 per
55 Woollam v. Hearn (1802) 7 Ves. Jun. 212, 32 E.R. 86 (Ch.); Clowes v. Higginson (1813)
1 V. & B. 524, 35 E.R. 204 (Ch.).
56 See, e.g., Davis v. Symonds (1787) 1 Cox 402, 29 E.R. 1221 (Ex.).
57(1810) 18 Ves. 10, 34 E.R. 221 (Ch.).
58(1819) 1 Jac. & W. 112,37 E.R. 318 (Ch.).
1982)
PAROL EVIDENCE
whether, admitting the agreement to be such as at Law it is said to be, the party shall
have a specific execution, or be left to that Court, in which, it is admitted, parol evidence
cannot be introduced. A very small research into the cases will shew general indications
by Judges in Equity, that that has not been supposed to be the Law of this Court…. I
do not go through all the cases…. In … Jovnesv. Statham … [Lord Hardwicke] … states
the proposition in the very terms; that he shall not confine the evidence to fraud; that it is
admissible to mistake and surprise; and it is very singular; if the Court will take a moral
jurisdiction at all, that it should not be capable of being applied to those cases; for in a
moral view there is very little difference between calling for the execution of an
agreement obtained by fraud, which creates a surprise upon the other party, and desiring
the execution of an agreement, which can be demonstrated to have been obtained by
surprise.59
Secondly, as is indicated in the passage above, courts of equity had an
extensive jurisdiction to grant relief where contracts had been entered into as
a result of fraud or mistake, and parol evidence was admissible to lay the
foundations for such claims. 60 The point of significance, so far as we are
concerned, is the ambit that courts of equity gave to “fraud”. Although this
has been rather lost sight of at the present day, courts of equity formerly
granted relief, either by way of compensation (order that the representation
be made good) or cancellation, on the ground of fraud even though the party
making the statement genuinely believed in the truth of that statement 6′ –
or
in modem terminology even though the misrepresentation was “innocent”.
Equity’s notion of what constituted fraud is described as follows by Story in
his treatise on Equity Jurisprudence:
Whether the party thus misrepresenting a material fact knew it to be false, or made the
assertion without knowing whether it were true or false, is wholly immaterial; for the
affirmation of what one does not know or believe to be true is equally in morals and law
as unjustifiable as the affirmation of what is known to be positively false. And even if
the party innocently misrepresents a material fact by mistake, it is equally conclusive,
for it operates as a surprise and imposition upon the other party.62
59(1801) 6 Ves. Jun. 328, 333-7, 31 E.R. 1076, 1078-9 (Ch.).
60 Henkle v. Royal Exchange Assurance Co. (1749) 1 Ves. Sen. 317, 318, 27 E.R. 1055,
1055 (Ch.) per Lord Hardwicke L.C.; Baker v. Paine (1750) 1 Ves. Sen. 456, 27 E.R. 1140
(Ch.); Davis v. Symonds, supra, note 56; Shelburne v. Inchiquin (1784) 1 Bro. C.C.
338, 350, 28 E.R. 1166, 1172 (Ch.) per Lord Thurlow; Ball v. Storie (1823) 1 Sim. & St. R.
210, 57 E.R. 84 (Ch.). And see J. Story, Commentaries on Equity Jurisprudence, 13th ed.
(1886), vol. 1, paras 153-6; W. Kerr, Fraud and Mistake, 5th ed. (1920), 512,521-2,526,531.
61 See, inter alia, Hobbs v. Norton (1682) 1 Vern. 136, 23 E.R. 370 TCh.); Hunsden v.
Cheyney (1690) 2 Vern. 150,23 E.R. 703 (Ch.); Pearson v. Morgan (1788) 2 Bro. C.C. 384,29
E.R. 214 (Ch.); Burrowes v. Lock (1805) 10 Ves. Jun. 470, 32 E.R. 927 (Ch.); Pulsfordv.
Richards (1853) 17 Beav. 87,94,51 E.R. 965,968-9 (Rolls Ct)per Romilly M.R.; Rawlinsv.
Wickham (1858)3 De G. &J. 304,44 E.R. 1285 (Ch.); Slim v. Croucher (1860) I De G.F. &
J. 518,45 E.R. 462 (Ch.); Re Overend, Gurne. & Co. (1867) L.R. 3 Eq. 576, 623-4per Malins
V.C.; Reese River Silver Mining Co. v. Smith (1869) L.R. 4 H.L. 64, 79; Ramshire v.
Boulton (1869) L.R. 8 Eq. 294, 300-1 per Malins V.C.; Eaglesfield v. Marquis of
Londonderry’ (1875) L. R. 4 Ch. 693,704-6 per Jessel M.R.; Mathias v. Yetts (1882)46 L.T.
497, 502 (C.A.) per Jessel M.R.
62 Story, supra, note 60, para. 193. And see Torrance v. Bolton (1872) L.R. 8 Ch. App.
118, 124 per James L.J.
REVUE DE DROIT DE McGILL
(Vol. 27
Slim v. Croucher63 is in every way representative of equity’s approach.
In that case a builder named Hudson, having completed the construction of
four houses on a piece of land, asked the plaintiffs solicitors if any of their
clients would lend him money on a mortgage of the houses. At the same time
Hudson informed the solicitors that Croucher had agreed to grant him a
lease of the land on which the houses were built. The solicitors read an
agreement for a lease and asked for an assurance from Croucher that he
would grant a lease according to the agreement. Croucher wrote back to the
solicitors in the following terms: “Post Office, Shadwell, December 7,
1856. –
I am quite agreeable to grant a peppercorn lease of
ground on which four houses are erected, and situate at Bromley to Mr.
Hudson –
I am Sir, yours etc. –
Sir, –
J.T. Croucher. 63a
Subsequently Croucher granted Hudson a lease which was handed to the
plaintiff as security. The plaintiff then advanced money to Hudson. It
turned out that Croucher had previously demised the same premises for the
same term to Hudson who had since assigned it for value. A bill was filed
against Croucher and Hudson claiming that the plaintiff had been induced
to advance monies by fraud, misrepresentation and concealment on the part
of both the defendants; that Croucher had assisted Hudson in misleading
and deceiving the plaintiff and praying that Croucher might be ordered to
repay the sums advanced. Croucher denied the truth of the allegation of
fraud, misrepresentation and concealment and stated by way of defence that
at the time of granting the lease comprised in the plaintiffs security, he had
forgotten the grant by him to Hudson of the prior lease of the same premises
and had inadvertently granted the second lease. The plaintiff claimed to be
entitled to be indemnified for the loss occasioned by taking the security of an
invalid lease having relied upon Croucher’s representation that he had the
power to grant the lease. The Court of Appeal in Chancery (Lord Campbell
L.C., Knight Bruce, Turner L.JJ.) held that even though the defendant had
not been shown to have been guilty of wilful deception, or of having done
more than forgotten the previous lease when he granted the second, he was
liable for “fraud” and that this was a proper case for an order directing
payment by the defendant of the sum which the plaintiff had advanced.
Thus courts of equity formerly held a representor to be liable in “fraud”
for making a false statement as to a matter of fact even though the statements
were made in the belief that they were true. The remedy available was
moulded to fit the circumstances. Generally, it entailed a court ordering that
the representation be made good:64 but on occasions, a court might order
63 Supra, note 61.
63a Ibid., 463.
64 See, e.g., Burrowes v. Lock, supra, note 61; Slim v. Croucher, supra, note 61; Pearson v.
Morgan, supra, note 61. See generally R. Meagher, W. Gummow & J. Lehane, Equity:
Doctrines and Remedies (1975), paras 1709 et seq.; Jackson, Estoppel as a Sword[: Parts I
& 2] (1965) 81 L.Q.R. 84, 223.
1982]
PAROL EVIDENCE
rescission,65 or an injunction,66 or even that a representor’s security be
postponed to the representees. 67 The important point for our purposes is,
however, as Pollock pointed out, that “for a long time equity judges and text
writers thought it necessary or prudent for the support of a beneficial
jurisdiction
‘Fraud’ as nomen generalissimum.
‘Constructive fraud’ was made to include almost every class of case in which
any transaction is disallowed.” 68
to employ
the term
It was not until the developments that took place after the coming into
force of the Judicature Act69 that the modern law on relief for innocent
misrepresentation as we know it emerged. Space prevents a full discussion of
these developments in this article, but it suffices to say that after Derry v.
Peek70 decided that fraud required the absence of a genuine belief in the truth
of the representation it became established that warranty aside, a plaintiff
could not recover damages for innocent misrepresentation. 7′ As Derry v
Peek had decided nothing as to the right to rescind for nonfraudulent
misrepresentations, however, former equity cases which had held that rescis-
sion of a contract was available even though the misrepresentation was
innocent survived unscathed as authorities though, of course, they could no
longer be explained in terms of equitable fraud. 72 Even so it was for a long
time doubted that there was a general right to rescind for innocent
misrepresentation. It was thought that the common law rule illustrated in
such cases as Kennedy v. Panama Royal Mail Co. 73 and Riddiford v.
Warren74 prevailed except in respect of certain particular classes of
contracts, e.g., insurance contracts, suretyship and guarantee, sale of land,
family settlements, the contract of partnership and, by analogy, contracts for
the sale and purchase of shares. 75 In respect of these contracts the position
was thought to be different though the character and stringency of the duties
65 Pulsford v. Richards, supra, note 61, is a very useful exposition of the bisic principles
governing the granting of relief based on this principle of equity.
66 Piggott v. Stratton (1859) 1 De G.F. & J. 33, 45 E.R. 271 (Ch.).
67 Ibboison v. Rhodes (1706) 2 Vern. 554, 23 E.R. 958 (Ch.); Draper v. Borlace (1699) 2
Vern. 370, 23 E.R. 833 (Ch.). See the remarkable decision in Thomson v. Simpson (1870)
L.R. 9 Eq. 497, where the representee was given a priority over the other creditors of the
representor (in liquidation).
68 F. Pollock, Principles of Contract, 9th ed. (1921), 566-7.
69 Supreme Court of Judicature Act, 1873, 36 & 37 Vict., c. 66 (U.K.).
70 Supra, note 51.
71 Heilbut, Simons & Co. v. Buckleton, supra, note 52; Rutherford v. Acton-Adams
[1915] A.C. 866 (P.C.). And see Salmond & Williams, supra, note 53, 232.
72 See, e.g., Pulsfordv. Richards, supra, note 61; Redgrave v. Hurd(1881) 20 Ch. I (C.A.)
and Adam v. Newbigging (1888) 13 App. Cas. 308 (H.L.).
73 Supra, note 54.
74(1901) 20 N.Z.L.R. 572 (N.Z.C.A.).
75 Pollock, supra, note 68, 599. And see Riddiford v. Warren, ibid., 579-81 per Dennis-
ton J.
McGILL LAW JOURNAL
(Vol. 27
to
rescind
for
right
the broad equitable
imposed varied according to the specific risks of the type of contract in
question. However, and one suspects mainly as a result of an obiter dictum
of Lord Atkin’s, 76 opinion gradually swung round to the view that the
“equitable” right to rescind for innocent misrepresentation was of general
application throughout the law of contracts. 77 Modern texts78 usually cite a
short passage in the judgment of Jessel M.R. in Redgrave v. Hurd79 as
innocent
establishing
misrepresentation. Yet, when viewed in its historical perspective it is clear,
given the specific reference to Lord Cairns’ speech in Reese River Silver
Mining,80 that Jessel M.R. was doing no more than pointing out that the
right to rescind for misrepresentation was broader in equity than it was at
law because of the differing conceptions of fraud that prevailed in the two
jurisdictions. It is only to modern eyes brought up in the aftermath of Derry
v. Peek that this passage appears to establish a broad equitable right to
rescind for non-fraudulent misrepresentation. The truth is, however, that
the right to rescind for innocent misrepresentation derives from the old
equity cases on misrepresentation in which relief was given on the hypothesis
that the representation was fraudulent. And this in turn explains why parol
evidence has always been admissible to prove the making of the
representation, for courts of equity always recognized “fraud” as an
exception to the parol evidence rule.8′
For these reasons it is respectfully submitted that the Supreme Court of
Canada erred in Bauer v. Bank of Montreal in holding that the parol
evidence rule precluded the appellant from relying on the assurance that the
accounts would be reassigned
to him to establish the making of a
misrepresentation as to the nature and effect of the document. The claim
being one for
the ground of
misrepresentation,
the parol evidence rule ought to have been held
inapplicable.
rescission of the contract on
the
B. Curtis v. Chemical Cleaning and Dyeing Co.
In Curtis v. Chemical Cleaning and Dyeing Co.,82 the plaintiff took a
wedding dress to the defendants for cleaning and was asked to sign a
document headed “Receipt”. Before signing the document in question she
76 MacKenzie v. Royal Bank of Canada [1934] A.C. 468, 475 (P.C.).
77 See Salmond & Williams, supra, note 53, 240; Pollock, Principles of Contract, 10th ed.
(1936), 525, 555; 1 Ith ed. (1942), 432, 456, abandoning countrary opinion expressed in
earlier editions.
78 Chitty, supra, note 50, para. 392, fn. 81; Treitel, supra, note 25, 274, fn. 14.
79Supra, note 72, 13.
80 Reese River Silver Mining Co. v. Smith, supra, note 61.
81 See, e.g., Davis v. Symonds, supra, note 56, 1223 per Eyre C.B. and the cases cited,
supra, note 60.
82 Supra, note 6.
1982]
PAROL EVIDENCE
asked the assistant why she should do so and was told, quite innocently, that
the defendants would not accept liability for certain specified risks including
the risk of damage to beads and sequins with which the dress was trimmed.
The writing in fact contained a clause excluding all liability for damage
however caused. The dress came back indelibly stained. It was held that the
defendants could not rely on the exclusion clause since their employee had
represented the effect of the clause to be narrower than was in fact the case.
Central to the decision must have been the finding that oral evidence of the
misrepresentation was admissible. The Curtis decision is generally regarded
as having been correctly decided, 83 though on the assumption that it did
involve a contract in writing its relationship with the parol evidence rule has
always remained obscure. 84 Is the Supreme Court of Canada in Bauer v.
Bank of Montreal correct then in holding such oral evidence to be
inadmissible by virtue of the parol evidence rule?
With great respect it is submitted that, in principle, the answer to this
question must be “no”. Suppose that A and B are conducting negotiations
with a view to entering into contractual relations in respect of the cleaning of
B’s dress. Suppose that they are agreed in principle and that A says to B
“those are my terms on the blackboard over there. Go and read them and if
you assent to them tell me so and we will have a contract.” B does so and
returns. They specifically agree to contract on the terms written on the
blackboard. In the absence of any vitiating factors, the contract will be held
to contain the terms on the blackboard for B has manifested his assent to be
bound by them. 85
Now suppose that B, instead of walking over to the blackboard, says to
A “tell me what exempting terms there are and if they are reasonable I shall
accept.” A says to B “there is a term which exempts us from responsibility for
risk of damage to beads and sequins with which dresses are trimmed.
Otherwise the terms are all concerned with delivery dates, etc.” As a result of
this statement B does not go to the blackboard to read the terms, but agrees
to contract on
these
circumstances,
if the blackboard contains a broad exclusion clause
excluding liability for all damage to the dress, can it be said that B assented to
be bound by it? It is submitted that the answer to this question is “no”. On
classical formation theory, A would be taken to have offered and B to have
assented to an exception clause confined to excluding damage to beads and
sequins. 86
terms contained on the blackboard.
the
In
83 See Chitty, supra, note 50, para. 851; Treitel, supra, note 25, 177; Note, supra, note 9.
84 Supra, note 7, passim.
85 Causer v. Browne [1952] V.L.R. 1, 4 (S.C.) per Herring C.J.; Harris v. Great Western
Ryi Co. (1876) 1 Q.B.D. 515, 530-1, per Blackburn J.
86 Harrisv. Great Western Ri’ Co., ibik;-Simond & Williams, supra, note 53.73. And see
De Tchihzatchef v. 7he Salerni Coupling Ltd[1932] 1 Ch. 330.
REVUE DE DROITDE McGILL
(Vol. 27
if one considers the terms on the blackboard to constitute a writing it
seems self-evident that the writing does not constitute a true record of the
bargain that the parties struck. In principle the exception clause on the
blackboard should be deleted and the clause as represented to B inserted in
its place in proceedings for rectification. 87 In such proceedings oral evidence
will be admissible to lay the foundations for such a claim.88 Accordingly, it is
respectfully submitted that it is true to say that in our example A cannot rely
on the exception clause having misrepresented its contents. Strictly speak-
ing, however, the first step should be to seek rectification of the contract. 89
This appears to have been the conclusion that Munroe J. reached in
Royal Bank of Canada v. Hale,90 a case which on its facts is strikingly similar
to Bauer. In Hale the defendants executed a guarantee in favour of the
plaintiff bank for all direct or indirect liabilities owing by a certain company
to the bank. The defendants believed that they were only guaranteeing a
bank loan or direct debt made by the plaintiff to the company whereas under
the terms of the guarantee the plaintiff sought to hold the defendants liable
for indirect debts owed by the company to customers of the plaintiff and
assigned by them to the plaintiff.i It was held that -as’the defendants’
understanding of the legal effect of the guarantee was induced by the bank’s
misrepresentations, albeit innocent, the defendants were not liable under the
guarantee for the indirect debts. The defendants successfully resisted the
plaintiffs claim by pleading (1) that the guarantee in question was
understood and intended by both parties to relate only to direct debts in
which case there had been mutual mistake permitting rectification, or, in the
alternative, (2) that if the plaintiff did intend that the guarantees should
apply to the indirect debts as well as to the direct debts, the defendants were
87 Braund v. Mutual Life and Citizens’ Assurance Co. (1926) 45 N.Z.L.R. 529 (S.C.): A
contract for a combined life and accident insurance was effected between plaintiff and
defendant upon the basis of the proposal form ordinarily employed by defendant. In such
proposal form the term “accident” was defined in a general way, and was not limited by
specific exceptions. Some time after the acceptance of the risk the defendant issued to the
plaintiff a policy differing materially from the proposal in that it exempted defendant from
liability in respect of a variety of accidents. The plaintiffdid not read the policy, and had no
knowledge of the nature and extent of these exemptions. He subsequently sustained an
injury of a kind which fell within such exemptions, and in an action to recover under the
policy it was held: (I) that the plaintiff when he received the policy with’out any notification
of its departure from the terms of the proposal rightly assumed that it accorded substantially
with such proposal; (2) that reasonable notice of the introduction of new terms had not been
given to him; and (3) that the Court could rectify the policy so as to make it conform with the
proposal.
8 Treitel, supra, note 25, 140; Chitty, supra, note 50, para. 312.
89 In such a case, failure to plead rectification will not necessarily be fatal: Walker Property.i
Investments (Brighton) Ltdv. Walker (1947) 177 L.T. 204, 296 (C.A.); West v. Hoyl/e[1972]
N.Z.L.R. 996 (N.Z.S.C.).
9Supra, note 6.
1982]
PAROL EVIDENCE
induced to execute the guarantee as a result of a unilateral mistake induced
by a misrepresentation and were thereby entitled to equitable relief.
Munro J. admitted oral evidence of the misrepresentations because the
proceedings were for rectification and found that the latter of the two
alternatives represented the true situation. In holding that the bank could
not rely on the written clause in the contract guaranteeing all indebtedness
because it had misrepresented the contents and effect of the writing, he said:
There is ample authority founded in good sense, that the Courts will relieve a person of
his Contract where a misunderstanding as to its true effect was induced, even though
innocently, by the other party and where injustice would be done if performance were to
be enforced.91
Accordingly, it is respectfully submitted that cases such as Curtis v.
Chemical and Dyeing Co. can be supported in principle, and that the
Supreme Court of Canada was wrong in Bauer not to allow effect to be given
to oral evidence of a misrepresentation as to the contents and effect of the
guarantee to prevent the respondent bank from relying on the full terms of
the guarantee.
91 Ibid., 150. It is of course well settled that as a general rule there must be a common
mistake before rectification is permitted. Nevertheless, there are exceptions to this general
rule and it is established that a unilateral mistake induced by fraud (fraud being understood
in its broad equitable sense) will entitle the representee to rectification. For example,
rectification will be permitted where one party believes that a particular term has been
included in a contract and the other party omits the term from the concluded contract and
that omission is made in the knowledge that the first party believes the term to be included.
See Roberts & Co. v. Leicestershire Count’ Council [1961] Ch. 555, Thomas Bates and Son
Ltd v. W’ndhamn’s (Lingerie) Ltd[1981] I W.L.R. 505 (C.A.). and”Meagher, Gummow &
Lehane, supra, note 64, para. 2613. By analogy with the reasoning in Roberts & Co. v.
Leicestershire Counl’ Council, a case in which one party enters into a written contract as a
result of a misrepresentation by the other party as to its nature and effect should afortioribe
seen as a case of ‘fraud” in the equity sense, and rectification should again be permitted.
