← The hardest concepts in Australian law
In one breath
When parties record their agreement in a written contract, the parol evidence rule stops them using earlier or outside material to add to, vary or contradict it, and the contract is read objectively, for what a reasonable person in the parties’ position would take the words to mean. Surrounding circumstances can help to understand the words, but the parties’ private intentions and their negotiations generally cannot.
The picture
The darkroom print and the contact sheet
A photographer shoots a roll of film and prints one frame. The contact sheet shows every exposure, including the abandoned poses and the blurred shots. The print is the picture that is hung on the wall. If a buyer later says, “I thought the print was meant to include the dog from frame five,” the answer is that the print is what was agreed. The contact sheet of negotiations may explain how the picture came about, but it does not change what is on the wall.
Still, a buyer may hold the print up to the light. If the image is truly unclear, it is natural to look at where it was taken, who was there and what everyone knew at the time: the surrounding circumstances, known to both. The court does the same to see what the words meant to a reasonable person in the parties’ shoes. What it will not do is go through the contact sheet hunting for what each side privately hoped. The contact sheet may still be used for other purposes, such as proving a mistake in the printing (rectification) or a promise that induced reliance (estoppel).
Where the picture stops working
A print is a fixed image, but written words can be read in more than one way, and the point at which surrounding circumstances may be used, on one leading formulation only if the words are ambiguous or open to more than one meaning, has been argued over. The picture also hides statute: prohibitions on misleading conduct in trade apply to what was said before signing, and an entire agreement clause does not simply cancel them.
How it really works
- 1Place the rule. It is general contract law and is the same across the country. The statutory prohibitions mentioned are Commonwealth and State laws that differ in detail.
- 2Decide whether the contract is wholly in writing, meant to be the complete record. An entire agreement clause is strong evidence. If it is, the rule excludes earlier statements and negotiations offered to add to, vary or contradict the terms.
- 3Interpret objectively. Read the words in their natural meaning, in the light of the contract as a whole and its commercial purpose, asking what a reasonable person in the parties’ position would understand.
- 4Use surrounding circumstances with care. If the words are ambiguous or open to more than one meaning, the court may consider the known background and the purpose of the transaction, but not what the parties said to each other in negotiation as proof of what they meant.
- 5Look for the exceptions: rectification, estoppel, a collateral contract, a condition about whether the contract has taken effect, custom, and misrepresentation.
Why people get it wrong
- Thinking that negotiations are always inadmissible. They are excluded for interpretation, not for every purpose.
- Reading the words with literal rigidity. Commercial common sense and purpose count.
- Treating “ambiguity” as needing an obvious error. A word open to more than one meaning is enough.
- Assuming an entire agreement clause bars every claim, including statutory ones.
- Confusing the parol evidence rule, which concerns evidence of terms, with the reading of the terms that are there.
A worked example
The facts are invented
A written contract says that Harlan Orchards will supply “all of its apples” to Dunmore Cannery for the season. Before signing, Harlan’s manager said, “We only grow Pink Lady and Fuji.” The contract does not mention varieties. In a later dispute Dunmore says Harlan must also deliver cider apples. The manager’s remark was part of the negotiation, so it cannot be used to interpret the contract. But the background known to both, that the cannery buys table fruit and that Harlan grows only those two varieties, may be used to read “all of its apples.”
Change the facts: the contract names “Harlan Pty Ltd” by mistake, when both sides had always meant “Harlan Orchards Pty Ltd.” Rectification allows the court to look at the parties’ common intention, and the negotiations become relevant for that different purpose.
Try it
A written contract says the supplier will deliver “all produce.” The buyer wants to show that, in negotiations, both sides agreed “produce” meant only fruit. The contract is silent on the point. What is the position?
Landmark authorities
Read the sources themselves; this list is a starting point.
- Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, (1982) 149 CLR 337
- Pacific Carriers Ltd v BNP Paribas, (2004) 218 CLR 451
- Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, (2004) 219 CLR 165
- Electricity Generation Corporation v Woodside Energy Ltd, (2014) 251 CLR 640
Where to go next
More hard concepts in Australia law
- Implied terms (Contract law)
- Occupiers’ liability (Tort law)
This page is an educational overview. It is not legal advice and not a substitute for the sources: the statute, the rule, the case itself. Australia is a federation: the Commonwealth, the six States and the Territories each make law, and the High Court is the final court for all of it. The common law, by contrast, is one law across the country. Each page says whether the rule is constitutional, federal or common law shared by every jurisdiction, or State-by-State legislation that varies, and flags where the States and Territories differ. Each page states the usual formulation of the rule and names landmark decisions; check the primary sources of your own jurisdiction before relying on any rule.