Introduction
A collateral agreement, in contract law, represents a secondary contract that exists alongside a primary one. It possesses its own distinct consideration, which is usually tied to the performance of an obligation within the main agreement. This secondary agreement operates on technical principles that differentiate it from the primary contract, often providing additional assurances or obligations. Key requirements for a valid collateral agreement involve the presence of a clear offer and acceptance, as well as distinct consideration that supports its enforceability. This formal structure establishes it as an independent agreement despite its close connection to the main contract.
Definition and Formation of Collateral Agreements
A collateral agreement, sometimes referred to as a collateral contract, is a separate contractual arrangement that is connected to, but legally distinct from, a main contract. It typically serves to induce one party to enter into the primary agreement. The crucial element in establishing a collateral agreement is demonstrating the intention to create a legally binding obligation, separate from the primary agreement. This intent must be supported by consideration, which may consist of a promise to enter the primary contract or another separate action or promise. Unlike conditions or warranties within a primary contract, a collateral agreement functions as an independent contractual undertaking.
For example, in Andrews v Hopkinson [1957] 1 QB 229, a car dealer's statement "It’s a good little bus. I would stake my life on it," was considered a collateral contract. The claimant agreed to a hire-purchase agreement with a finance company because of this promise made by the car dealer. This exemplifies how a statement separate from the primary hire-purchase contract can create a binding collateral agreement.
Consideration in Collateral Agreements
The principle of consideration is of utmost importance for the formation of a collateral agreement. Consideration is the benefit or detriment exchanged between parties, which makes a promise legally enforceable. In a collateral agreement, this consideration often takes the form of one party entering into the main contract, influenced by the assurances or promises of the other party. This approach diverges from the direct exchange of goods or services that often characterizes the consideration in the primary contract.
For instance, in Barry v Davies (t/a Heathcote Ball & Co.) [2001] 1 All ER 944, the auctioneer's promise to sell to the highest bidder was deemed a collateral contract. The consideration from the bidder was the act of placing a bid. The auctioneer benefitted from the increased bidding potential and thus the bidding process itself. This demonstrates how the act of participation, directly related to but not part of the main sales contract, acts as consideration for the collateral agreement between the auctioneer and the highest bidder.
Collateral Agreements and the Parol Evidence Rule
The parol evidence rule dictates that when a contract is reduced to writing, extrinsic evidence, such as prior oral agreements, cannot normally be introduced to alter, contradict, or add to the written terms. However, collateral agreements are often cited as an exception to this rule. This exception arises because a collateral agreement is treated as a separate, distinct contract, and not merely a variation of the primary written contract. The ability to introduce parol evidence to establish a collateral agreement depends on its independence from the primary written agreement.
For example, in City & Westminster Properties v Mudd [1959] Ch 129, a tenant was told orally he could sleep on the premises, despite the written lease stating the premises were for business use only. The court accepted the tenant's evidence of a collateral contract, distinct from the lease itself, to permit residential use. This illustrates that a clear, separate collateral agreement can serve as an exception to the parol evidence rule, demonstrating the distinct nature of a collateral agreement.
Case Examples and Collateral Agreements
Several cases further illustrate how collateral contracts operate:
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L’Estrange v Graucob [1934] 2 KB 394: While this case highlights that signing a document generally binds the signatory, it also serves as a backdrop against which collateral contracts can be distinguished. A signed contract typically excludes implied conditions unless a collateral contract has been formed via an oral misrepresentation such as that in Curtis v Chemical Cleaning Co [1951] 1 KB 805.
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Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574: This case, while concerning misrepresentation, highlights how a pre-contractual statement may be deemed as a collateral contract if the facts show a clear intention of such to be the case, although on these facts that was not found. However, the company was still liable under the Misrepresentation Act. This indicates the potential for pre-contractual statements to form collateral agreements.
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Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611: This case affirmed that pre-agreement representations are not binding if a written contract includes an "entire agreement" clause. However, it also suggests that absent such a clause, a collateral agreement may be formed. This suggests that collateral agreements can be excluded with specific clauses, but otherwise may bind parties to promises made before the main contract.
Collateral Advantages and Mortgage Agreements
The discussion of collateral agreements extends to mortgage contracts, where "collateral advantages" can sometimes be seen. This concept explores situations where the mortgagee seeks benefits or rights beyond mere repayment of the loan. Courts scrutinize such arrangements to prevent unfair impositions on the mortgagor, and to stop "clogs" on the equity of redemption.
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Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25: The House of Lords determined that an option to buy sheepskins for five years, granted with a loan, was a valid collateral advantage. It was not tied to the mortgage, but a separate commercial agreement. This shows collateral agreements, distinct from the primary mortgage contract, can have separate obligations and timelines.
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Cityland and Property (Holdings Ltd) v Dabrah [1968] Ch 166: This case deals with the unconscionability of some mortgage premiums. The court considered the premium a collateral advantage and deemed it unreasonable, due to its high interest rate, thus reducing it to a reasonable rate. This case shows the court will prevent unreasonable collateral advantages attached to mortgage agreements.
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Jones v Morgan [2001] EWCA Civ 995: In this case, an option to buy half a mortgaged property was deemed a "clog" on the equity of redemption, as it was an integral part of the refinancing agreement. This case illustrates that a collateral agreement cannot undermine the borrower's right to redeem their property.
Conclusion
Collateral agreements function as separate, binding contracts that exist alongside primary agreements. They are characterized by their distinct consideration, their ability to operate outside the parol evidence rule under specific conditions, and their importance in various commercial contexts. The case law demonstrates that courts view them as independent contracts, and therefore legally enforceable. Consideration, intent, and distinct subject matter are required for a valid collateral contract. These agreements may serve as an exception to the parol evidence rule and must be independently substantiated. Furthermore, the principles concerning collateral advantages in mortgage law show that courts will look at the substance rather than the form of any agreement. The application of collateral contracts is not straightforward. It relies on a thorough understanding of contract law principles and a close analysis of relevant case law.
