Collateral contract
Encyclopedia
A collateral contract is a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 where the consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...

 is the entry into another contract, and co-exists side by side with the main contract. For example, a collateral contract is formed when one party pays the other party a certain sum for entry into another contract. A collateral contract may be between one of the parties and a third party.
A party to an existing contract may attempt to show that a collateral contract exists if their claim for a breach of contract fails because the statement they relied upon was not held to be a term
Contractual term
A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the...

 of the main contract. It has been held that for this to be successful, the statement must have been promissory in nature (J J Savage & Sons Pty Ltd v. Blakney (1970) 119 CLR 435).

A collateral contract, if forged between the same parties as the main contract, must not contradict the main contract i.e. If the term was agreed upon prior to the completion of the formal contract (but was still included as a term, and could not be executed until completion of the second term), the first term will still be allowed (Hoyt's Pty Ltd v. Spencer (1919) 27 CLR 133).

Collateral contracts are an exception to the Doctrine of Privity of Contract (Shanklin Pier Ltd v Detel Products Ltd
Shanklin Pier Ltd v Detel Products Ltd
Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854 is a leading judgment on the subject of collateral contracts in English contract law. In it the High Court of Justice King's Bench Division created the principle of collateral contracts, an exception to the rule of privity of contract where a...

(1951) 2 KB 854)
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