Parol evidence rule in construction contracts

Where it is clear that the parties intended the whole of their agreement to be set out in one document or a series of documents, the operation of the parol evidence rule will prevent the parties from relying on extrinsic evidence to try and amend the terms of their agreement. For example, evidence of negotiations that took place prior to the conclusion of the contract will not be admissible.

The parol evidence rule applies both to oral evidence and to documentary evidence, for example letters and minutes of meetings. It is not an absolute rule however and there are exceptions as the courts adopt a commonsense approach to the question of interpretation of contracts. In particular, if there is some uncertainty or ambiguity as to the intentions of the parties then the courts are prepared to look at what has been described as the matrix of a contract, that is to say the surrounding circumstances, background and commercial purpose of the agreement (see Prenn v Simmonds).

A statement of the 'modern approach' to formation of contract and construing the contractual terms was made by Lord Hoffman in the case of Investors Compensation Scheme Ltd v West Bromwich Building Society.

Lord Hoffman stated five principles:

1. ‘Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation which they were at the time of the contract.
2. The background is the "matrix of fact" but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man ...
3. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent ...
4. The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax ...
5. The "rule" that words should be given their "natural and ordinary meaning" reflects the commonsense proposition that we do not easily accept other people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had’

On the facts of the Investors case the House of Lords held (Lord Lloyd dissenting) that the words in a document stating that 'Any claim (whether sounding in rescission for undue influence or otherwise)’ was intended by the parties to mean 'Any claim sounding in rescission (whether for undue influence or otherwise)', i.e. a much more restrictive construction of the word 'claim'. In Cargill International SA v Bangladesh Sugar & Foods Industries Corp, the court considered that in general they should look to the intention of the parties rather than the strict letter of the contract's stipulations, and in interpreting their intention, the courts look at the factual matrix of the contract:

‘…modern principles of construction require the court to have regard to the commercial background to the context of the contract and the circumstances of the parties and to consider whether against that background and within that context to give the words a particular or restricted meaning would lead to an apparently unreasonable and unfair result.’

[edit] Related articles on Designing Buildings

• Contract.
• Construing a contract.
• Essentials of a contract.