Collateral 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 a specific engine type for the craft sighting an ? estimated cruising speed of 15 mph’. The final contract specified the said engine, but made no reference to cruise speed and Blakney sued for breach of an alleged contract, when the cruiser failed to attain the estimated cruise speed. Blakney lost, as the assurance he relied on was a mere opinion rather than a firm promise.

LIMITATIONS TO THE LIKELYHOOD OF SUCCESS IN AUSTRALIAN COURTS There are both English and Australian cases that significantly limit the possible success of the collateral contract argument in court. These cases have established that: ?the collateral warranty cannot be inconsistent with the terms of the main contract; and ? the collateral warranty must be promissory in nature. This is illustrated in Hoyt’s Pty Ltd v Spencer. A lease contained a term providing for termination by the lessor giving at least four weeks notice in writing of the intention to terminate the lease.

The lessees alleged the existence of a collateral contract from the lessor not to exercise this contractual right unless requested or required by the head lessors to do so, and tried to sue using the promise as the basis for a claim for damages when the lessor exercised the right to terminate despite not having had any such request. The High Court held that no contract existed on the basis that the promise was not consistent with the terms of the contract. Because the promise was not consistent with the contract, the action failed.

To have held in favour of Hoyt’s would have been ?to make the collateral contract the ? dominant’ contract. Lingren and Carter’s view is that “the requirement of consistency applicable where the collateral contract is between the same parties, does not apply where the contract is with a third person. ” This stance is also supported by Cheshire and Fifoot While the general rule is that the collateral contract must be consistent with the (relevant term of the) main contract, there appears to be an exclusion clause. The effect of exclusion clauses on collateral contracts came to light in the case of J.

Evans & son (Portsmouth) v Andrea Merzario, where Merzario, a sea carrier, changed the conditions of carriage with Evans. Merzario, in converting to carriage in containers, agreed to carry Evans’ goods below deck, this was the alleged collateral promise. When Evans goods were lost at sea, Merzario sought to rely on an exemption clause that would effectively exempt him from liability, and gave him total control as to where he chose to stow goods on the vessel. There appeared to be a direct conflict or inconsistent terms within the alleged collateral promise.

If the general rule of inconsistency were applied, Evans would be unable to rely on the collateral promise. The court found in favour of Evans, holding that Evans’ collateral contract with Merzario, if rejected would be totally without meaning. This approach, taken by Lord Denning, is not consistent with the approach taken by the High Court in Hoyt’s v Spencer. The limitation of consistency is not reasonable.

The intention of the parties should determine their rights and obligations. It was asserted in Hoyt’s Pty. Ltd.v Spencer, that to give effect to a collateral promise that is inconsistent detracts from the consideration that supports it. This is an unsound assertion for two reasons. First, it is the act of entering into the main contract that provides consideration for the collateral contract, and second, the court is not required to examine the adequacy of consideration. The English courts, in adopting a wider approach, give significance to what is meant by entry into the contract. The rule in Mudd is preferable as it looks more at what the parties intended.

“Evidence of a collateral contract is not meant to determine the content or meaning of a written document, but to give effect to an independent agreement. There is no logical reason why this agreement should not contradict the written contract”. The doctrine of collateral contract should be changed to allow for inconsistency with main contract, and widened to allow a greater alternatives to the remedies offered by promissory estoppel and the trade practices act. “A prospective tenant is negotiating with a landlord for a lease. He is assured by the landlord that a specific clause in the standard form lease agreement will not be enforced.

Not being a lawyer, and not wishing to appear mistrusting, the prospective tenant does not ask the landlord to strike out the clause in question. On the strength of the landlord’s word, the prospective tenant signs the lease. Later, the landlord wishes to rely upon the clause; the tenant on the other hand wished to rely upon the oral assurance. In Australia, the landlord wins: Hoyt’s v Spencer. In England the tenant wins: City and Westminster Properties (1934). ” CONCLUSION It is from English cases that most inconsistent application of the rule from Hoyt’s Pty Ltd v Spencer can be drawn.

Mudd’s case is factually very similar to Hoyt’s. In Mudd’s, the land lord sought forfeiture on a lease agreement as the tenant wanted to continue to reside in a premises that had a covenant that the premises would be used “as and for show rooms, work rooms and offices only”. Mudd had been residing on the premises at the time of renegotiation, and sought to continue, and in fact would not sign a new lease until he had been assured he could. The landlord refused his request in fear that the premises would then come under the Rent Restriction Acts.

Herman J.examined the wording of the covenant and found that to reside on the premises was clearly a breach of the covenant. He accepted Mudd’s evidence that he had entered into the contract on the basis of an agreement that he be allowed to continue to reside on the premises. Harman J. relied on Re William Porter &Co. Ltd. and Cairncross v. Lorimer in finding this sufficient to constitute an action for forfeiture of the lease. Mudd’s case aside, there is a growing body of authority that supports the proposition that a collateral contract can be contradictory to the main contract and still be enforced.

See It is arguable that plaintiffs could use promissory estoppel to prevent the other party denying their promises are binding, though promissory estoppel is generally limited to a suspension of the promisor’s rights, and does not normally terminate them. In Australia, recognition of the tripartite collateral contract has only occurred with respect to hire purchase agreements. Gay R Clarke argues that there is no reason why Australian courts should not follow the English decisions in which a manufacturer was held as liable under collateral contract, because the principles are the same.

There is no logical difference between that and holding a dealer liable under a hire purchase agreement. English and Australian cases have been mostly concerned with the factual situation of direct communication between the two parties to the alleged collateral contract. Miller and Lowell stated there “is no doubt in such cases that a promissory intent can be established” There is scope to establish a collateral contract between the manufacturer and the purchaser where direct contact occurs between the parties.

Even where there is no direct contact, it is possible to establish grounds for the application of a collateral contract remedy e. g. a manufacturers advertising or sales brochure which could satisfy the element of promissory intent, and not representation or mere puff. Miller and Lovell also state “an offer of a unilateral contract may be made to the world at large and hence there is scope for movement towards a liability based on general advertising claims as in American law” See The application of the Hoyt’s Pty.

Ltd. v Spencer rule should be broadened to give effect to both the collateral and main contracts, regardless of consistency. The rule treats collateral contracts as a sui generis or unique separate agreement, in that it does not impinge on that agreement given in consideration. Any other separate agreement may. Its value as a remedy in product liability actions should be explored, and the limitations to its application should be broadened in line with the decisions in both Brittan and America.