Some of the most common disputes about contracts relate to how they are to be interpreted. Words are malleable and can mean different things to different people depending on their perspective, values and intention at the time of creating the contract. For example, if you have a written contract with someone to cut down ‘three trees’ on your property, you may assume the other party knows the particular trees you’re referring to due to your previous discussions. However, unless it’s specified in the written contract, they may be able to argue they have contracted to cut down any three trees on your property.
The courts have formulated numerous principles to assist them in interpreting contracts, many of which are beyond the scope of this article. This article briefly examines one of these principles – the ‘parol evidence rule’.
What is the parol evidence rule?
Basically, the parol evidence rule restricts the use of extrinsic evidence in interpreting written contracts. Extrinsic evidence is any type of evidence which is not contained within the contract itself, such as emails, letters or conversations about the contract.
The parol evidence rule only applies to written contracts which are intended to be the conclusive agreement between the parties. Thus it doesn’t apply where contracts are only oral, partly oral and partly written or written agreements which are not intended to record the whole transaction.
If, however, there is a conclusive written contract, its terms and how they apply can only be ascertained by objectively reading the written terms of the contract. The parol evidence rule operates to exclude extrinsic evidence which attempts to add to, vary or contradict the written terms or is advanced for the purpose of interpreting the written terms. Therefore, the parol evidence rule would exclude evidence of:
· the actual intention of the parties;
· prior negotiations between the parties; and
· the parties’ subsequent conduct.
Exceptions to the parol evidence rule – ‘factual matrix’
The main exception for the use of extrinsic evidence to assist in interpreting a contract is when language in the contract is ambiguous. In this case, the court will look to the ‘factual matrix’ –the surrounding circumstances leading up to and at the time of the contract.
This could include the commercial context, the market in which the parties are operating or the aim or object of the transaction. However, the factual matrix can only be utilised if the surrounding circumstances are in the mutual knowledge of the parties.
Therefore, referring to our earlier example above, a court may look at the object of a contract to have trees cut down. If the object is to remove dangerous trees, the court might interpret that the customer and not the tree cutter must be able to indicate which trees they want cut down. However, if firewood is the objective, the court may again interpret the term differently.
How do I avoid an unintended interpretation of my contract?
The main things to keep in mind when drafting contracts are potential ambiguities in terms and whether everything agreed on in negotiations is contained within the written contract. Never assume the party with whom you are negotiating is on the same page as you.
As the manipulation of words is the speciality of lawyers, we would highly recommend you seek legal advice when negotiating any substantial contract. A lawyer will ensure your contract is drafted as precisely as possible, to ensure your intentions are unambiguously conveyed and hopefully avoid later disputes. If you require any assistance drafting or interpreting contracts please do not hesitate to contact us.