Collateral Agreements: Definition, Principles and Leading Ca...

Introduction

A collateral agreement (often called a collateral contract) is a separate, enforceable promise that sits alongside a main contract. It has its own offer, acceptance, and consideration, and is usually made to persuade a party to enter into the primary agreement. Because it is a distinct bargain, it can be enforced independently if the promisor fails to do what was promised.

Collateral agreements appear across commercial life: sales and hire-purchase, leases and licences, auctions, franchising, tenders, and finance. They also feature in mortgage law as “collateral advantages”, where a lender seeks benefits beyond repayment and interest.

This guide sets out what counts as a collateral agreement, how consideration works, how the parol evidence rule and entire agreement clauses interact with such promises, and the leading cases you should know.

What You'll Learn

• What a collateral agreement is and how it forms alongside a primary contract
• How consideration can be satisfied (including entering the main contract or placing a bid)
• When oral promises can be enforced despite a written contract (parol evidence rule)
• The effect of entire agreement and non-reliance clauses
• How courts treat collateral advantages in mortgages and the “clog” on the equity of redemption
• Key cases: Andrews v Hopkinson, Barry v Davies, City & Westminster v Mudd, L’Estrange v Graucob, Curtis, Howard Marine, Inntrepreneur, Kreglinger, Cityland v Dabrah, Jones v Morgan
• Practical drafting and litigation tips, plus a summary checklist and quick reference

Core Concepts

What is a Collateral Agreement?

A collateral agreement is a separate contract that accompanies a main contract.

Key features:

• Separate promise: A specific assurance intended to have legal effect, not merely sales talk.
• Inducement: The promise is made to persuade entry into the main contract.
• Distinct consideration: Something of value supports the promise (often the act of entering the main contract).
• Independence: It is legally distinct from the main agreement and can be enforced on its own.

Promissory vs representation:

• A collateral agreement is promissory (a commitment), not just a statement of fact.
• If the statement is not promissory, it may still found a misrepresentation claim rather than a collateral contract.

Consistency with the main contract:

• Courts are cautious where the alleged collateral term conflicts with express written terms.
• Some older cases enforced collateral promises that clashed with the written deal (see Mudd). Modern practice, especially with entire agreement clauses, makes this far harder to establish.

Third-party collateral agreements:

• The collateral promise can be given by someone who is not a party to the main contract if they provide a promise that induces entry into it. A classic example (often discussed in textbooks) is where a manufacturer makes a warranty to a buyer to persuade purchase through a distributor.

Consideration for Collateral Agreements

Consideration for the collateral promise may differ from the consideration for the main contract.

Typical forms:

• Entering the main contract: Agreeing to the primary deal at the promisor’s request can be valid consideration.
• Participation in a process: For auctions without reserve, placing a bid can amount to consideration for the auctioneer’s promise to sell to the highest bidder.
• Instructing a third party: Directing a contractor to buy a particular product from a supplier after the supplier’s assurance can provide consideration for a collateral warranty.

Requirements:

• Consideration must move from the promisee.
• It must not be past consideration.
• It need not be adequate, but it must be real.

Parol Evidence Rule, Entire Agreement and Non-Reliance Clauses

Parol evidence rule:

• Where parties have a written contract, extrinsic evidence is generally not admitted to add to, vary, or contradict the written terms.
• Exception: A separate collateral contract can be proved by extrinsic evidence because it is a distinct bargain.

Entire agreement clauses:

• These clauses state that the written contract is the whole agreement. They often aim to prevent parties from relying on prior statements as terms.
• Effect: They make it harder to establish that a separate collateral promise was intended. The stronger and clearer the clause, the more difficult it is to show a collateral contract.

Non-reliance and misrepresentation:

• Clauses stating that no reliance was placed on pre-contract statements target misrepresentation claims.
• Under section 3 Misrepresentation Act 1967, provisions that exclude or restrict liability for misrepresentation must satisfy the reasonableness test (often applied under the Unfair Contract Terms Act 1977 framework).
• A non-reliance clause may be scrutinised and may not defeat a claim if it is not reasonable in the circumstances.

Practical point:

• If you want a pre-contract promise to be enforceable, put it in writing in the main contract, or execute a short, clear, written collateral warranty.

Collateral Advantages in Mortgages

Collateral advantages are benefits a lender seeks in addition to repayment and interest, often by a linked agreement.

General principles:

• Equity protects the borrower’s right to redeem. Any term that effectively prevents redemption or penalises it may be a “clog” on the equity of redemption and be struck down.
• A collateral advantage is likely to be valid if it is a genuine, independent commercial bargain, is not oppressive, and is not repugnant to the right to redeem.
• Some collateral advantages can survive beyond redemption if they are truly separate and fair.

Examples:

• Valid: A time-limited supply agreement negotiated alongside a loan, where it is not tied to redemption and is commercially sensible.
• Invalid: An option that gives the lender an unfair ability to acquire the property as a condition of refinancing, or an oppressive premium that cannot be justified commercially.

Key Examples or Case Studies

Andrews v Hopkinson [1957] 1 QB 229

• Context: A car dealer told a buyer, “It’s a good little bus. I would stake my life on it,” leading the buyer to enter a hire-purchase agreement with a finance company.
• Holding: The statement was treated as a collateral warranty supporting a separate promise by the dealer.
• Use: Promissory statements by sellers can create collateral obligations that sit alongside the main finance or sale contract.

Barry v Davies (t/a Heathcote Ball & Co.) [2001] 1 All ER 944

• Context: Auction without reserve; the auctioneer refused to sell to the highest bidder.
• Holding: There was a collateral contract between auctioneer and bidder to sell to the highest bidder. Damages were awarded.
• Use: Placing a bid can be consideration for a binding promise in an auction without reserve.

City & Westminster Properties v Mudd [1959] Ch 129

• Context: Lease stated business use only. The landlord orally assured the tenant he could sleep on the premises.
• Holding: Court upheld a collateral contract permitting residential use.
• Use: A separate oral promise can be enforceable even where a written lease says otherwise, although modern entire agreement clauses and writing requirements for land-related contracts now pose hurdles.

L’Estrange v Graucob [1934] 2 KB 394 and Curtis v Chemical Cleaning Co [1951] 1 KB 805

• Context: Generally, signing a contract binds you to its terms (L’Estrange). However, a misrepresentation about a clause can prevent the signer being bound by it (Curtis).
• Holding: A signed document usually prevails, but misleading statements about its effect can disapply terms or support separate liability.
• Use: Distinguish between a binding signature, a collateral warranty, and a misrepresentation. Get key assurances in writing.

Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574

• Context: Pre-contract statement about barge capacity proved wrong.
• Holding: Not a collateral contract on the facts, but liability arose under the Misrepresentation Act 1967.
• Use: Some pre-contract statements are better framed as misrepresentation claims than as collateral contracts.

Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611

• Context: Written agreement contained an entire agreement clause; tenant sought to rely on prior statements.
• Holding: Entire agreement clause prevented reliance on pre-contract representations as terms.
• Use: Entire agreement clauses may defeat claims that a collateral contract exists unless the collateral promise is clearly separate and the clause is ineffective for statutory or reasonableness reasons.

Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25

• Context: Loan accompanied by an option to sell sheepskins to the lender for five years.
• Holding: The option was a valid collateral advantage and could continue beyond redemption as it was independent and not oppressive.
• Use: Collateral advantages can stand if they are genuine bargains and do not clog redemption.

Cityland and Property (Holdings) Ltd v Dabrah [1968] Ch 166

• Context: Very high premium/interest rate on a mortgage.
• Holding: The premium, treated as a collateral advantage, was reduced as unconscionable.
• Use: Courts will control oppressive collateral terms linked to mortgages.

Jones v Morgan [2001] EWCA Civ 995

• Context: Refinancing deal included an option for the lender to acquire a half share in the property.
• Holding: The option was a clog on the equity of redemption.
• Use: A mortgage must secure repayment, not give the lender a path to ownership through side arrangements.

Practical Applications

Transactional drafting:

• Include promised assurances in the written contract or a short, signed collateral warranty. Avoid leaving important statements as informal side remarks.
• Use clear entire agreement wording where you wish to confine obligations to the written document. If excluding misrepresentation liability, ensure any non-reliance or exclusion clause is reasonable under the Misrepresentation Act 1967 and UCTA 1977.
• Write to confirm any pre-contract promises. Emails can be useful evidence if a dispute arises.

Sales and procurement:

• Train staff to avoid making promissory statements unless authorised; casual assurances can become enforceable collateral promises.
• Buyers should ask for written warranties if a particular assurance is important (quality, fitness, capacity, volume, or use permissions).

Auctions and tenders:

• For auctions without reserve, remember the promise to sell to the highest bidder can be a binding collateral commitment.
• For tender processes, be cautious about wording that may be read as a binding promise to follow certain procedures.

Leases and land:

• Since section 2 Law of Property (Miscellaneous Provisions) Act 1989 requires land contracts and variations to be in writing, oral collateral terms affecting land use are risky. Get them recorded in writing and signed.
• Entire agreement clauses in leases are common; rely on written side letters or deeds of variation rather than informal assurances.

Mortgages and finance:

• Scrutinise “collateral advantages”. Ask: Is the benefit independent, commercially sensible, and fair? Does it restrict or penalise redemption?
• Lenders should keep collateral advantages short, transparent, and clearly separate. Borrowers should challenge oppressive terms.

Litigation tactics:

• Plead collateral contract as an alternative to, or alongside, misrepresentation where the statement is promissory.
• Gather evidence of inducement: emails, brochures, oral statements, negotiation notes, and witness accounts.
• Check for entire agreement and non-reliance clauses and assess reasonableness under section 3 Misrepresentation Act 1967.

Common pitfalls:

• Relying on oral promises in land transactions.
• Assuming a signed contract always defeats collateral claims; context and statutory controls matter.
• Treating sales puff as a promise; look for clear, promissory language.

Summary Checklist

• Can you identify a clear, promissory assurance separate from the main contract?
• Was the assurance intended to induce entry into the main contract?
• Is there distinct consideration (e.g., entering the main contract, placing a bid, instructing a third party)?
• Does an entire agreement or non-reliance clause affect enforceability? If so, is it reasonable under the Misrepresentation Act 1967?
• For land-related deals, does section 2 LP(MP) Act 1989 require the term to be in writing?
• For mortgages, is any collateral advantage independent, fair, and not a clog on redemption?
• Have you preserved evidence of the collateral promise and the inducement?

Quick Reference