The Concept of Collateral Contract

ABSTRACT

In this report the focus is to discuss the collateral contract. I will explain the concept of collateral contract through several precedent cases. I will discuss when collateral contract might be argued. This report also includes explanation of parol evidence rule, and exceptions to that rule are required. I also use cases to explain the rule and exception.

TABLE OF CONTENTS

ABSTRACT 3

INTRODUCTION 5

COLLATERAL CONTRACT DEFINED: 6

ELEMENTS OF COLLATERAL CONTRACT 6

BREACH: 8

BIPARITE COLLATERAL CONTRACT: 8

TRIPARTITE COLLATERAL CONTRACT: 8

THE PAROL EVIDENCE RULE: 9

EXCEPTIONS TO THE PAROL EVIDENCE RULE: 9

CONCLUSION: 12

REFERENCES: 13

INTRODUCTION

A collateral contract is a separate contract which exists beside the main contact. Largely, where a written contract, the tem of agreement base on the contract. Courts have been ready to find a collateral contract where one party refused to conclude the main contract unless certain assurance been given. For the court held by a collateral contract, its term must be consistence with the main contract. Collateral contract can be used to avoid the parol evidence rule. Parol means oral in law. The parol evidence rule only concerned when the contract is wholly written contract; it must in the judgment. However, there are some exceptions can be avoid parol evidence rule.

COLLATERAL CONTRACT DEFINED:

A collateral contract defined as a contract where the parties to one contract enter into or promise to enter into another contract. It is a promise which is not a term of contract. However, if without the main contract, it properly would not be existed. In another word, a collateral contact is independent and separate from but related to or in addition to the main contract. As a separate contract, a collateral contract is not strictly. The concept of a collateral contract was also clearly illustrated by Lord Moulton in Heilbut, Symons & Co v Buckleton [1] . “If you will make a contract, I will give you £100″ is in every sense a contract. It is collateral to the main contract, but each has independent existence. The main contract here, when taken as consideration for the collateral contract, must be taken exactly as it is. There are two general requirements of a collateral contract, there must have consistency stand together with the main contract and alleged collateral contract and it must be promissory. If these requirements are exist in the case, the courts may hold that a collateral contract has come into existence and become enforceable, not only as part of the main contract but as the substance of a quite separate, but related.

ELEMENTS OF COLLATERAL CONTRACT

In order to argue the existence of collateral contract, there are four elements necessary to establish collateral contract as follow: 1> the statement is promissory in nature; 2> the promise is followed by statement; 3> consistency between main contract and alleged contract; 4> the collateral contract must contain all elements of a contract.

The case of De Lassalle v Guildford [2] is a good example to explain that collateral contract is must be consistent with the main contract. In this case the parties negotiated a lease of house by the letter to the former. The tenant seeks an assurance (the drain in good order) from the landlord before signing. The terms of the lease were agreed by both parties However the tenant refused to conclude the deal unless he receive an assurance that the drain in order. This assurance was held to be a collateral contract. The landlord argued that they were in order, but it turned out that they were not in order and the plaintiff sued. The court held that the representation made by landlord as to the drain be in good order was a warranty which was collateral to the lease. A promise which is not a term of the main contract what could be enforced as a collateral contract

One of element for recognizing the existence of a collateral contract which is the collateral contract must be consistent with the main contract. There is a good example is to be found in Hoyts Pty Ltd v Spencer [3] . Hoyts subleased premises from Spencer. When sublease stated Spencer could terminate lease at any time by giving four weeks notice in writing. The parties agree on verbally Spencer would not terminate the lease unless he was given to the main lessor. Spencer subsequently terminated lease under none of specified circumstances. H claimed assurance was collateral contract. High court ruled against Hoyts because assurance was not consistent with main contract in any situation.

For a person who makes a collateral contract this person must show he/she entered into the main contract in consideration and not representational to be a collateral contract. As to the promissory nature of the statement see J.J Savage and Sons Pty Ltd v Blakney [4] . Blakney purchased a boat from J.J. J.J written in a letter that engine of boat would go maximum speed. However Blakney found out the engine was slower than what JJ’s written after completed deal. Blakney sued J.J breach of collateral contract. High court held the statement was only opinion which was made with the specific requirements into contract. Firstly, Blakney would have made the statement legally binding when letter was written. Secondly, Blakney would have required speed of boat to be inserted in specification as condition contract. The last option, he would have satisfied the maximum speed of engine by himself. This case was unsuccessful case for argue collateral contract.

BREACH

Breach of a collateral contract, in fact, the innocent party only has the rights to claim damages. There is impossible for the innocent party terminate the main contract.

BIPARITE COLLATERAL CONTRACT

Bipartite collateral contracts are made by both parties who enter into the main contract. The consideration with the collateral contract is entering into the main contract. In the De Lassalle v Guildford plaintiff lease the house from the defendant based on assurances that the drainer is in good order.

TRIPARTITE COLLATERAL CONTRACT

Compare to bipartite it is a different type of collateral contract which is not affected by the rule in Hoyt’s v Spencer. In a sense, it is more related to the privacy problem. A tripartite collateral contract is one where the promissory statement which induced the innocent party to enter into the main contract may have been made by a third party who did not involve in the main contract. It has only occurred with respect to hire purchase agreement.

THE PAROL EVIDENCE RULE

The parol evidence rule is a principle to prevent changes the integrity of written document or agreements by forbid both parties attempting to alter the meaning of written documents or annul the documents through the use of prior oral or written that are not included in the document. In other words, the Parol evidence rules hypothesis contract in writing, and seems to be complete, then it is assumed that all the relevant contract terms are included, no more evidence or discussion of prior terms of the contract, it would discuss to add it. People who are involved in a contract may want to make changes to the contract. It relates to all forms of extrinsic evidence what most commonly present. These changes may be a verbally agreement. Under the parol evidence rule verbal changes cannot considered into evidence in a contract case.

EXCEPTIONS TO THE PAROL EVIDENCE RULE

However, the parol evidence is not absolute. There are several exceptions to the parol evidence rule including:

The first exception is to prove custom or trade usage demands what is part of contract. Evidence of custom is acceptable attach term to written contacts that only where the contracts are not included in the express term with respect to an existing custom. Hutton v Warren [5] is an example of custom. The defendant landlord gave the plaintiff, a tenant farmer, notice to quit, but insisted that the lessee should continue to farm the land during the notice period. The tenant asked for a fair allowance for seeds and labor from they were got no benefits. The tenant’s succeed. It was held by custom they were bound to farm the land until the end of tenancy, but they also get the right to a fair allowance for seed and labor.

The second exception is to show that operation of contract does not yet operate or has expired. Case: Pym v Campbell [6] – Pym was to sell his invention to Campbell. There was an agreement between the parties that defendant would only buy if the other engineer also examined it and approved it. The engineer did not approve it and thus defendant refuse conclude the agreement that they were not bound. The plaintiff sued. The court held this evidence was admissible as that was subject to condition precedent and this one of exception to the parol evidence rule.

The third exception is the written agreement is not intend to constitute the whole contract. There is a good example found in Van Den Esschert v Chappel [7] . The purchaser asked the seller, before buying a house, whether the house was affect by any white ants. The seller re-assured the purchaser there were none of white ants. There was no mention of this in the contract. Several months later, white ants damaged the house. The purchaser sued. The court held, the plaintiff provide evidence to convince the court there was partly oral and partly contract.

The fourth exception is that clarifies any ambiguous language. Ambiguity extends not only present on language that is capable of different possible meaning, or not clear by the other langue in the document, but also latent ambiguity where has specific meaning is shown to be ambiguous when external fact are been considered.

The fifth exception that contract has clearly wrong records the agreement of parties made when recorded in writing. It rectifies a mistake of the parties where the terms were not clearly expressed in the written contract.

The sixth exception is that the oral evidence will be required to give recognition to the parties to a contract. This is most of the time it happens if a company is not corporate yet.

Other exception that is the collateral contract, so the court still can find was a term of a collateral contract, if they could not find the statement was a term of main contract (Koffrman &Macdonald, 2007). The parol evidence rule only applies to the main contract. For further explanation of exception to the parol evidence rule see ‘the parol evidence rule’. See City & Westminster Properties v Mudd [8] . Landlord made an oral assurance that he would not enforce to conclude a covenant against residing on the premises was held to have constituted a collateral contract.

CONCLUSION

Collateral contract as a separate contract is a second agreement that follow to the main contract. There seems to be two requirement for establish a collateral contract. These cases have been commonly concerned with the factual circumstance of direct communication between the parites to allege collateral contract. Collateral contract is one of exceptions to avoid the parol evidence rule.