Collateral Contract

COLATERAL CONTRACT

Collateral contract is a concept which has gradually evolved since its inception. However, collateral contract has been applied in a limited fashion in Australia, compared to other jurisdictions.

In this essay, I will argue that collateral contract has outlived it usefulness and currency in legal practice in Australia. To remain current, the broadening of its application is essential.

To support my argument, I will discuss:

* The concept of collateral contract;

* When collateral contract may be argued; and

* The limitations upon the likelihood of its success in the Australian courts.

COLLATERAL CONTRACT DEFINED

The concept of collateral contract may be defined as 'a contract where the consideration is entry into another contract, and co-exists side by side with the main contract'. A promise that was not included in the principal contract may be enforced as a collateral contract, as clearly illustrated by Lord Moulton in Helibut, Symonds & Co v Buckleton:

'It is evident, both on principle and on authority, that there may be a contract, the consideration for which is the making of some other contract. "If you will make such and such a contract, I will give you one hundred pounds," is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract.'

Collateral means "by the side of". This was an important innovation used to evade:

* The parol evidence rule (e.g., City of Westminster Properties v Mudd) ;

* The formerly limited remedies for misrepresentation (e.g., Esso Petroleum v Mardon) ; and

* Privity of contract (e.g., Shanklin Pier v Detel Products)

PAROL EVIDENCE RULE

The parol evidence rule assumes that when the contract is in writing, and looks to be entire, then it is assumed that all the relevant terms of the contract are included, and no further evidence or discussion of previous contractual terms may be included, that would verify of add to it.

The word "parol" in the context of the rule, therefore, simply means any intrinsic evidence.

The collateral contract rule "allows oral statements to be enforced as collateral contracts". J. Pascoe & H. Anderson state that 'to overcome the parol evidence rule, promisees can argue that, in consideration of the oral promise, the promisee entered into a written contract with the promisor'. Therefore there are two contracts for the court to enforce: one wholly written and another wholly oral.

There are a number of ways of avoiding the parol evidence rule. If the parties intend their agreement be affected by other unwritten factors, then the rule must bend to accommodate those factors. The parol evidence rule will not be strictly applied in partly written and partly oral contracts, contracts that are implied subject to some trade usage or custom,

contracts which are suspended by verbal agreement, invalid contracts, contracts where some mistake has been made in reducing the contact to writing, and where the parol evidence rule is required to solve some ambiguity or uncertainty.

DOCTRINE OF PRIVITY

The essence of the doctrine of privity of contract is that only an original party to a contract may sue or be sued in it. That is, only an original party may enforce or be bound by the terms of that contract.

However, a form of the collateral contract may circumvent this: 'Where the collateral contract is in tripartite form....then the privity of contract rule is avoided'.

There are two contexts in which we can discuss collateral contracts. The first being "bipartite" involving contracts between the same two parties, as in JJ Savage & Sons Pty Ltd v Blakney, Secondly, there is the "tripartite" situation, involving three parties, where the parties to the main contract are not the same as the parties to the collateral contract, as in the case of Shanklin Pier Ltd v Detel Products Ltd, where the plaintiff owned a pier and had arranged for it to be painted. Detel induced the owner to demand that its paint be used, by promising that their paint was suitable for the application. The contractors purchased and used Detel's paints, but it proved unsuitable. The plaintiff sued Detel for breach of the alleged collateral contract. It was held that Detel's assurance of suitability was a collateral contract.

WHEN COLLATERAL CONTRACT MAY BE ARGUED

In order to argue the existence of a collateral contract, there are several principles that must be present:

* A makes a verbal statement which B would reasonably interpret as a promise.

* A made a statement, the motivation behind which was the inducement of B to enter into some other different or 'main' contract.

* B relied upon A's statement to some degree in deciding to enter the main contract.

* The intention to guarantee the truth or falsity of a statement.

* The intent that the promise be legally binding.

This suggests that collateral contract is relevant only when a person wishes to rely on a verbal promise that has not been included in the written contract.

For instance, a successful argument for collateral contract was mounted in the case of De Lassalle and Guildford, where the parties had negotiated the lease of a house. The terms were already agreed but the tenant refused to conclude the deal with out the assurance that the drains were in good working order. The landlord gave the assurance, but the drains proved not to be in order. The tenant sued, but that landlord claimed that as the warranty was not included as a term of the contract, he could not be sued for breach. It was held that the assurance was a contract, collateral to the main contract, and the tenant won.

On the other hand, an example of an unsuccessful case is in JJ Savage & Sons Pty Ltd v Blakney, where during negotiations to build a cruiser, JJ Savage and Sons wrote a letter recommending