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Challenges of Parol Evidence in Construction Contracts: Benefits and Failures

Writer's picture: Adebowale OyinleyeAdebowale Oyinleye
Dec 4, 20249 min read

Introduction

The admissibility of written or spoken remarks made before or concurrently with a written contract is governed by the legal principle known as parol evidence. The use of such extrinsic information to change or contradict the provisions of a fully integrated written agreement is generally prohibited by the Parol information Rule. The application of this rule is frequently controversial in the construction sector, since contracts are extremely codified and precise. This article examines the difficulties, advantages, and drawbacks of using parol evidence in construction contracts.


Understanding Parol Evidence in Construction Contracts

Construction contracts are often regarded as thorough and detailed papers, frequently prepared using standard formats such as FIDIC, JCT, or NEC. According to the Parol Evidence Rule, it is assumed that all parties have consented to put their whole agreement in writing. As a result, any earlier discussions, agreements, or verbal declarations that were not part of the contract are typically not admissible in court. There are, however, some circumstances, such as situations involving fraud, ambiguity, or illegality, when parol evidence may be used to elucidate or refute the written conditions.


The following rules apply to parol evidence:

  1.   The parol evidence rule applies only after the parties have drawn up their final agreement in writing

  2.   The parties have intended for the written contract to be compete and final

  3.    No parol evidence of a contradictory or modifiable nature will be allowed

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Challenges of Parol Evidence in Construction Contracts

  1. Ambiguity in Contract Terms


    Construction projects often involve technical, financial, and operational complexities that may lead to ambiguities in contract terms. When disputes arise, one party may argue that prior communications clarify ambiguous provisions. Courts, bound by the Parol Evidence Rule, may exclude these clarifications, leading to interpretations that do not reflect the parties' true intentions.

  2. Dynamic Nature of Construction Projects


    Construction contracts must adapt to evolving circumstances such as design changes, unforeseen site conditions, and schedule adjustments. These changes often arise through informal discussions or correspondence not captured in the formal contract. Excluding such evidence can hinder equitable dispute resolution.

  3. Power Imbalances During Negotiation


    Contractors or subcontractors may feel pressured to accept terms without fully documenting ancillary agreements made during negotiations. The Parol Evidence Rule can disadvantage less powerful parties by ignoring pre-contractual understandings that might mitigate unfair outcomes.

  4. Complexity in Applying Exceptions


    While exceptions to the rule exist (e.g., proving fraud or correcting a mutual mistake), they often involve high legal costs and uncertainty. Establishing that parol evidence is admissible requires proving the exception, which can prolong disputes and complicate resolutions.



 

Balancing Parol Evidence in Construction Contracts

To mitigate the challenges while leveraging the benefits, the construction industry can adopt strategies such as:


  • Integrated Contract Management Systems: Using collaborative platforms ensures that all changes and communications are formally recorded, minimizing reliance on informal agreements.

  • Regular Contract Updates: Incorporating supplemental agreements or addenda can formally capture evolving understandings.

  • Drafting Clauses to Allow Contextual Evidence: Parties can include terms explicitly permitting the use of parol evidence to resolve ambiguities, providing flexibility without undermining the contract's integrity.

 

 


 

Case Law Examples on Parol Evidence in Construction Contracts

Case law provides valuable insights into the practical application of the Parol Evidence Rule, particularly in the context of construction contracts. Below are key examples that highlight the challenges, benefits, and failures associated with the rule:

1. Henderson v. Arthur (1907) 1 KB 10

  • Facts: This case involved a written lease agreement, where the landlord sought to exclude evidence of prior oral agreements that contradicted the written terms.

  • Ruling: The court applied the Parol Evidence Rule, holding that prior oral agreements could not be used to contradict the clear terms of the written lease.

  • Relevance to Construction: It underscores the rule's strict application in favor of written agreements, which can disadvantage parties relying on oral assurances not reflected in the contract.

2. Gillespie Bros. & Co. v. Roy Bowles Transport Ltd. [1973] 1 QB 400

  • Facts: A dispute arose over an oral agreement that was alleged to supplement a written contract regarding freight services.

  • Ruling: The court held that oral evidence could not contradict the written contract, reinforcing the primacy of the written terms.

  • Relevance to Construction: Construction projects often rely on supplementary agreements, but this case demonstrates how such oral agreements may be excluded if not documented.

3. Chartbrook Ltd v. Persimmon Homes Ltd [2009] UKHL 38

  • Facts: A dispute arose over the interpretation of terms in a written construction contract. Persimmon Homes sought to introduce pre-contractual negotiations to clarify an ambiguity.

  • Ruling: The House of Lords ruled that pre-contractual negotiations are generally inadmissible under the Parol Evidence Rule, though they acknowledged the exceptions for ambiguity or fraud.

  • Relevance to Construction: Highlights how courts are reluctant to admit pre-contractual discussions, even when ambiguities in construction contracts arise.

4. J. Evans & Son (Portsmouth) Ltd v. Andrea Merzario Ltd [1976] 1 WLR 1078

  • Facts: A written contract for shipping goods included standard terms limiting liability, but oral assurances contradicted these terms.

  • Ruling: The court admitted the oral evidence, holding that it formed a collateral contract alongside the written one.

  • Relevance to Construction: Demonstrates an exception to the Parol Evidence Rule where oral assurances create collateral agreements, which can be relevant in construction disputes involving assurances made during negotiations.

5. Shogun Finance Ltd v. Hudson [2003] UKHL 62

  • Facts: In a hire-purchase agreement, a fraudulent individual presented false identification. The defendant sought to admit oral evidence to challenge the written contract's validity.

  • Ruling: The court upheld the Parol Evidence Rule but acknowledged exceptions for fraud.

  • Relevance to Construction: Shows how parol evidence may be admissible in cases involving fraud or misrepresentation, a common issue in construction disputes when fraudulent claims arise.

6. Esso Petroleum Co Ltd v. Mardon [1976] QB 801

  • Facts: Esso gave oral assurances about the profitability of a petrol station, which contradicted the written agreement.

  • Ruling: The court allowed oral evidence, stating that the pre-contractual assurances amounted to a collateral warranty.

  • Relevance to Construction: Reflects the importance of documenting pre-contractual assurances to avoid reliance on exceptions like collateral warranties in disputes.

7. Inntrepreneur Pub Co. v. East Crown Ltd [2000] 2 Lloyd's Rep 611

  • Facts: A tenancy agreement contained a clause expressly stating it was the entire agreement. The defendant sought to introduce evidence of prior negotiations.

  • Ruling: The court upheld the Parol Evidence Rule, noting that the entire agreement clause excluded any prior negotiations.

  • Relevance to Construction: Highlights how "entire agreement" clauses in construction contracts strengthen the enforceability of written terms while excluding parol evidence.

                    

8. Nova Group/Tutor-Saliba v. United States (2023)

  • Summary: Nova Group/Tutor-Saliba was awarded a contract by the U.S. Navy to construct a maintenance pier. During construction, differing site conditions were encountered, leading to disputes over contract interpretation and the admissibility of extrinsic evidence.

  • Ruling: The Federal Circuit Court emphasized the strict application of the Parol Evidence Rule, limiting the consideration of extrinsic evidence to instances where the contract terms are ambiguous or incomplete. The court held that, in this case, the

  • Relevance: This case underscores the importance of clear and comprehensive contract drafting in construction projects and highlights the limitations imposed by the Parol Evidence Rule on introducing external evidence to alter or interpret contract terms.


 

Benefits of the Parol Evidence Rule


  1. Promotes Certainty and Finality


    By focusing on the written contract, the Parol Evidence Rule provides a clear and reliable basis for interpreting agreements. It discourages parties from relying on informal understandings that might be subjective or unreliable.

  2. Encourages Comprehensive Drafting


    The rule incentivizes parties to draft clear and complete contracts, reducing the scope for future disputes. This benefit is particularly relevant in construction, where detailed documentation is essential.

  3. Prevents Fabrication of Evidence


    Allowing parol evidence might lead to false claims of prior agreements. The rule protects against the introduction of unverifiable or fabricated evidence that could undermine contractual integrity.


 

Failures of the Parol Evidence Rule

  1. Overlooks the Realities of Construction Practices


    In practice, construction projects involve significant informal communications, including emails, site instructions, and verbal agreements. Strict application of the rule may exclude evidence essential to understanding the actual performance expectations of the parties.

  2. Ignores Power Dynamics


    The rule can perpetuate inequities by upholding contracts that were negotiated under pressure or duress. Subcontractors, for instance, may not have the resources to document every ancillary agreement made with dominant contractors or clients.

  3. Fails to Account for Evolving Conditions


    Construction projects are rarely static. Excluding parol evidence can lead to outcomes that disregard the practical realities of project execution, especially when written contracts fail to reflect the necessary adaptability.



 

Application in Construction Disputes

  • Ambiguities: Chartbrook v. Persimmon Homes demonstrates the challenges of resolving ambiguities without admitting parol evidence. The issue was "additional residential payment" (ARP) owed to Chartbrook and how the ARP was calculated. Chartbrook argued for a higher payment based on their interpretation of the formula in the contract, while Persimmon argued that the contract should be read differently, resulting in a significantly lower payment.

  • Collateral Agreements: J. Evans & Son v. Andrea Merzario emphasizes the admissibility of collateral agreements in construction when oral assurances supplement the written terms.

  • Fraud and Misrepresentation: Shogun Finance v. Hudson and Esso Petroleum v. Mardon illustrate how exceptions for fraud and collateral warranties can be pivotal in construction disputes.


 

All about Engineer’s/ Architects’ Oral instructions.

Oral instruction on a project can potentially constitute parol evidence, depending on the circumstances and the terms of the written contract. This is of particular importance in Emerging markets and Developing economies [EMDEs] where there are usually a plethora of oral discussions and agreements that do not find themselves into the final agreements used for contract execution.

Whether it is admissible or enforceable depends on factors such as the nature of the instruction, the contract's provisions, and applicable legal principles.

When an Oral Instruction Constitutes Parol Evidence

Oral instructions may be considered parol evidence when:

  1. They Contradict the Written Contract: If the oral instruction modifies or contradicts the terms of the written contract, it is likely to be excluded under the Parol Evidence Rule. Courts generally uphold the written agreement as the final expression of the parties' intentions.

  2. There is an "Entire Agreement" Clause: Many construction contracts include an "entire agreement" clause, stating that the written document is the sole agreement between the parties. In such cases, oral instructions that modify or add to the written terms are typically barred as parol evidence.

  3. It Relates to Pre-Contractual or Contemporaneous Agreements: If the oral instruction occurred before or at the same time as the signing of the contract and is not reflected in the written terms, it is likely to be excluded as parol evidence.


 

Exceptions Where Oral Instructions May Be Admissible

Despite the general exclusion, there are exceptions where oral instructions may be considered:

  1. Ambiguities in the Written Contract:

    • If the written contract is ambiguous or unclear, oral instructions may be admitted as parol evidence to clarify the parties' intent.

    • Example: A specification is unclear, and an oral instruction provides clarification during execution.

  2. Subsequent Agreements or Modifications:

    • If the oral instruction constitutes a subsequent agreement (after the written contract was executed), it may be admissible. However, many contracts require that modifications be made in writing.

    • Example: A contractor and employer agree orally to expedite work due to unforeseen delays, and the contract allows verbal amendments.

  3. Customary Practice or Usage:

    • In some cases, oral instructions reflecting industry norms or customary practices may be admissible to explain or supplement the contract, provided they do not contradict the written terms.

    • Example: A verbal site instruction to address minor design changes during construction, typical in the industry, may not violate the contract.

  4. Waiver or Estoppel:

    • If one party relies on an oral instruction to their detriment and the other party knowingly allows it, courts may enforce the instruction under the doctrine of waiver or estoppel.

    • Example: A contractor receives verbal approval for a variation and completes the work based on that approval, with the employer later refusing to pay- quantum meruit.

  5. Fraud, Mistake, or Misrepresentation:

    • If the oral instruction reveals fraud, a mutual mistake, or misrepresentation, it may be admitted as parol evidence to challenge or supplement the written agreement.

Practical Implications in Construction

  • Construction Contracts and Oral Instructions: Construction projects often involve verbal site instructions issued by project managers, engineers, or clients. Standard forms like FIDIC or JCT typically require written instructions for contract variations or significant changes. If the contract mandates written instructions, oral instructions are generally not binding unless ratified in writing.

  • Record-Keeping: Contractors and subcontractors should document all oral instructions promptly (e.g., through confirmation emails, meeting minutes, or notices) to create a written record for potential disputes.


 

Conclusion

The Parol Evidence Rule is essential for the preservation of certainty in construction contracts; however, it frequently fails to incorporate evidence that is essential for the resolution of disputes. Lessons for construction professionals to document agreements exhaustively and reduce reliance on informal communications are offered by these cases, which illustrate how courts balance the rule's strictness with its exceptions.


Although the Rule promotes good drafting practices and provides certainty, it presents substantial obstacles in the context of construction contracts. The dynamic, collaborative, and frequently informal nature of construction initiatives may be overlooked by its strict application. In order to guarantee equitable and reasonable dispute resolution, it is imperative to strike a balance between practical realities and contractual integrity. The construction industry can mitigate the risks associated with parol evidence while maintaining the advantages of this enduring legal principle by implementing practices that formalize evolving agreements and minimize ambiguity.


 

References



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