Collateral contract

A collateral contract is usually a single term contract, made in consideration of the party for whose benefit the contract operates agreeing to enter into the principal or main contract, which sets out additional terms relating to the same subject matter as the main contract. The collateral contract 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.

It can also be explained as: a collateral contract is one that induces a person to enter into the main contract. For example, if X agrees to buy goods from Y that will, accordingly, be manufactured by Z, and does so on the strength of Z's assurance as to the high quality of the goods, X and Z may be held to have made a collateral contract consisting of Z's promise of quality given in consideration of X's promise to enter into the main contract with Y.

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 of the main contract. It has been held that for this to be successful, the statement must have been promissory in nature. Remedies may be awarded for breach of a collateral contract.

A collateral contract is one where the parties to one contract enter into or promise to enter into another contract. Thus, the two contracts are connected and it may be enforced even though it forms no constructive part of the original contract. In JJ Savage and Sons Pty Ltd v Blakney a mere expression of opinion was held insufficient to be satisfied as a promise. In Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd a statement by a landlord made to intending tenants when negotiating a lease that they would be “looked after at renewal time”, would not bind the landlord to offer a further five year lease.

The promisor must have expressly or impliedly requested about the main contract and his promissory statement must have intended to induce the entry of the other party into the main contract. According to Lord Denning MR, a collateral contract is held binding "when a person gives a promise, or an assurance to another, intending that he should act on it by entering into a contract'.

A collateral contract, if forged between the same parties as the main contract, must not contradict the main contract. That is, 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. Essentially the collateral contracts cannot contradict any element of the main contract nor the rights created by it.

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