Parol evidence is the legal term generally used to describe verbal or oral promises made during negotiations that are not ultimately included in the final form of written agreement. The basic parol evidence rule states, in part, that parol evidence extrinsic to a written contract may not be admitted if the effect of that evidence would be to contradict the contract.1 This aspect of the parol evidence rule was recently confirmed in the context of a loan agreement by the British Columbia Supreme Court in the case of Pacific Paragon.2

In Pacific Paragon, the plaintiffs advanced to the defendant the sum of $82,500 in three tranches, with a written loan agreement and promissory note executed for each tranche. The loan agreements described the advances as “loans” payable on demand, provided that demand was not to be made prior to Oct. 31, 2010. Demand was made in June 2013, but the advances were not repaid by the defendant in response to that demand. 

Each of the loan agreements also contained an amendment provision that read, in part:

“No amendment, modification or waiver of any condition of this agreement or consent to any departure by the borrower therefrom, shall in any event be effective unless the same shall be in writing signed by the Lender.”

The defendant claimed that the written loan documents did not contain the entire agreement between the parties. It alleged that there was a representation by or a collateral agreement with the plaintiffs that the advances were not actually to be repaid on demand, but rather would only be reimbursed to the plaintiffs from any funds raised through a third party, Bi-Optic Ventures Inc. (Bi-Optic), in taking the defendant public pursuant to a letter of intent between the defendant, Bi-Optic and the principal of the plaintiffs. 

In deciding in favour of the plaintiffs, the Court referred to the British Columbia Court of Appeal decision in Bradshaw,3 which set out the existing case law in support of the principle that a collateral contract will not be admissible if it contradicts the main written contract. The Court also noted that while the loan agreements did not contain an express entire agreement clause, the amendment provision was tantamount to such a clause by stating that the conditions of each loan would not be varied from the terms set out in the loan agreements unless done so in writing signed by the plaintiffs as lenders.

This decision serves as a reminder to lenders and borrowers alike of the importance of putting into writing all salient components of an initial agreement, as well as how any subsequent changes to that agreement should be documented.