This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
If the instrument does not show on its face what its purpose was, extrinsic evidence is admissible to show what that purpose was, if such evidence does not contradict the terms of the contract.1 A mortgage purports upon its face to be a deed upon condition subsequent which by its terms is to become absolute unless a certain event which is usually the payment of a specified debt occurs at a specified time. When equity treats such instrument as a mortgage and treats the mortgagor as the real owner of such property after breach of condition, and treats such conveyance as merely made for the purpose of securing such debt, it ignores the express provisions of the conveyance in order to enforce the actual intention of the parties as inferred from the entire transaction, rather than from the express language of the conveyance. It is but a slight extension of this principle, if indeed it is any extension at all, to hold that an instrument which conveys title and which on its face appears to be absolute, may be shown by extrinsic evidence to have been given as a mortgage in order to furnish security to the creditor for certain obligations.2 If an instrument is executed by joint grantors, extrinsic evidence is admissible to show that it was a mortgage as to one of them.3 The purpose of any contract which purports only to transfer legal title may thus be shown.4 If the lessor brings an action for rent against successive assignees of a lease, extrinsic evidence is admissible to show that one of such assignments was made by way of collateral security for an advance made to enable such assignor to purchase such lease from the owner thereof.5 The grantee may show that a deed was given to secure certain notes and not in payment of them.6 So a mortgage which recites that it is to secure a certain note, may be shown to be an indemnity mortgage.7 So a mortgage to A may be shown to be in part for A's benefit and in part in trust for X.8 So a bill of sale given by a debtor may be shown to have been given with the consent of creditors and for their benefit.9 An assignment of an interest under a contract may be shown by extrinsic evidence to be as security.10 Thus an assignment of a contract to purchase realty,11 a building contract,12 an insurance policy,13 assignment by orders drawn on a debtor,14 or an assignment of accounts,15 may in each case be shown to have been made, not absolutely, but merely as' security. An assignment of a claim for damages may be shown to have been made as a security only and not absolutely.16 An indorsement may be shown to have been for the purpose of collection only." As between the immediate parties the endorser may show that he took the note as agent for the endorsee and that he endorsed such note in order to transfer title and not to incur any liability as endorser.11 A power of attorney and an assignment of stock may be explained by extrinsic evidence.19 Extrinsic evidence is admissible to show such facts as create an implied trust of realty.20 Thus the recital in a deed that the consideration was paid by A, does not prevent evidence that it was paid by B.21 Neither the parol evidence rule nor the Statute of Frauds prevents this. Unless such evidence were admissible, no available remedy would be given for much of the fraud that is thus met. Extrinsic evidence is admissible to prove trusts concerning personal property.22 Thus if A gives a note to B, extrinsic evidence is admissible to show that it is charged with a trust in favor of C.23 If the instrument shows its purpose on its face, the rule admitting evidence of the intention of the parties to show the purpose of the instrument does not apply, since such intention would be used in such case to contradict the intention as expressed in the writing.24 Thus extrinsic evidence can not be received to show that C is the beneficiary intended in a deed of trust which names B as beneficiary.25 So under a conveyance which reserves a life estate to the grantor, such reservation can not be shown to be intended only as security for the performance by the grantee of his contract to support the grantor.26 If the written instrument sets forth upon its face the purpose for which it was executed, extrinsic evidence is usually inadmissible to contradict such written provision.27 If a lessor accepts from his lessee a note in which the contract of lease is set forth, the lessor can not avoid the effect of such provision by showing that it was intended for collateral security only.28 If an instrument provides for the execution of a warranty deed for placing it in escrow and for its becoming absolute upon the grantor's failure to perform certain conditions, such provisions show that such instrument was intended as an absolute conveyance and they can not be varied by extrinsic evidence tending to show that such instrument was executed as a mortgage.29 If an express agreement in writing is entered into between the parties under which a deed is given as security, extrinsic evidence is inadmissible to show the purpose for which such deed was given.30 An apparent rather than a real exception to the rule that the purpose of an instrument can not be shown if it contradicts the express provisions of the instrument, is to be found in cases in which an instrument is given as security by way of mort-gage, and the parties, in order to cut off the equity of redemption, insert in such instrument express provisions to the effect that it is not given by way of security and that the grantor does not possess any equity of redemption. The rule that the mortgagor can not deprive himself of his equity of redemption by an agreement which is entered into at the same time that he delivered the mortgage, is a rule which rests upon the policy of the law and not upon the intention of the parties. Accordingly, as in other cases,31 the parties can not prevent the operation of rules with reference to the subject-matter, which rules are intended to defeat the intention of the parties by inserting in their written contract specific provisions which are intended to prevent the operation of such rules of law.