Collateral contracts

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A collateral contract is formed when one party makes a promise (independent to the main contract) to which the consideration is the other party entering the main contract.

  • For example, A is selling a car to B. B is reluctant to buy contract he unsure over the car's performance. A makes a promise, or an assurance, that the car can go from 0 to 100 km/h in 8 seconds.
  • The purchase of the car main contract. A's assurance amounts to a collateral contract, which exists alongside the main one.

Collateral contracts need to be 'strictly proved'.[1] A collateral contract can only arise if it satisfies all the following requirements:

  1. Promissory in nature.[2]
  2. Made with the intention to induce the other party's entry into the contract.[3]
  3. Must be consistent (and not directly contradict) the terms of the main contract.[4]
    • i.e, a collateral promise cannot deprive party A of a right under the contract, since the consideration for that promise was that party B enters the contract in full and therefore assents to Party A having that particular right as well.
  4. Made before or at the time of formation.[5]."

The requirements were established and dealt with extensively in Hoyt's Pty Ltd v Spencer. Its rationale was is follows:

  • Collateral contracts by definition involve the entrance into a contract as consideration for a promise.
  • However, this also means by definition that the "main contract, when utilised to form the consideration for the collateral contract, must be taken exactly as it is...the parties shall have and be subject to all (not some only) of the respective benefits and burdens of the main contract[6]."
  • Thus - a collateral promise cannot deprive party A of a right under the contract, since the consideration for that promise was that party B enters the contract in full and therefore assents to Party A having that particular right as well.

This article is a topic within the subject Contracts.

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 394-398 [14.35-14.50].

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. This is because "too often the collateral warranty out forward is one that you would expect to find its place naturally in the principle contract":Shepperd v Muncipality of Ryde (1952) 85 CLR 1, [13]. In other words, the assurances alleged to be a collateral contract should have been in the main contract. The fact that they are not makes them suspect.
  2. JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435
  3. JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435
  4. Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133
  5. Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133, 147
  6. (1919) 27 CLR 133, 146-7
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