Definition of collateral contract
A collateral contract is a contract where the consideration 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 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 (1951) 2 KB 854)
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