A collateral contract is a contract where the parties to one contract enter into or promise to enter into another contract. It is connected to the main contract but may be enforced separately.
Key Facts
- Definition: A collateral contract is a contract where the parties to one contract enter into or promise to enter into another contract. It is connected to the main contract but may be enforced separately.
- Parol Evidence Rule: The parol evidence rule states that when a contract is entirely in writing, extrinsic evidence (such as oral statements or written documents) cannot be used to change the terms of the written contract.
- Contract Wholly in Writing: A contract is considered entirely in writing when it appears to be complete and fully written. However, parties can argue that oral agreements were also meant to be included in the contract. The circumstances and context of the contract’s creation can be taken into account.
- Nature of Extrinsic Agreement: To prove an oral statement is collateral to the main contract, it must be promissory, indicating an intention to promise something, rather than a mere representation or passing comment.
- Intention and Reliance: The statement or document forming the collateral contract must intend to induce a person to enter into the main contract, and the other party must have relied on that extrinsic agreement.
- Time of Conclusion: The extrinsic agreement, whether an oral statement or external written document, must be finalized before the main contract is completed.
- Consistency: A collateral contract must be able to stand together with the main contract independently and cannot alter the main contract. It can only add to it.
Elements of a Collateral Contract
For a collateral contract to be valid, it must meet the following elements:
Promissory in Nature
The statement or document forming the collateral contract must intend to induce a person to enter into the main contract, and the other party must have relied on that extrinsic agreement.
Intention to Induce
The statement or document forming the collateral contract must intend to induce a person to enter into the main contract, and the other party must have relied on that extrinsic agreement.
Consistency
A collateral contract must be able to stand together with the main contract independently and cannot alter the main contract. It can only add to it.
Exceptions to Other Legal Rules
Parol Evidence Rule
The parol evidence rule states that when a contract is entirely in writing, extrinsic evidence (such as oral statements or written documents) cannot be used to change the terms of the written contract. However, this rule does not apply to collateral contracts.
Privity of Contract
Privity of contract is a legal doctrine that states that only the parties to a contract can enforce or be bound by its terms. However, in some cases, third parties may be able to enforce a collateral contract.
Conclusion
Collateral contracts can be valuable tools for parties to a contract to add additional terms or conditions that are not included in the main contract. However, it is important to ensure that the collateral contract meets the necessary elements to be valid and enforceable.
Sources
- Collateral Contract – Wikipedia
- Everything You Need to Know About Collateral Contracts – Lawpath
- Collateral Agreement – Finance Strategists
FAQs
1. What is collateral?
Collateral is an asset that is pledged as security for a loan or other obligation. If the borrower defaults on the loan, the lender can seize and sell the collateral to satisfy the debt.
2. What types of assets can be used as collateral?
Almost any type of asset can be used as collateral, including real estate, vehicles, equipment, inventory, and securities.
3. How is the value of collateral determined?
The value of collateral is typically determined by an appraisal or other valuation method. The lender will want to ensure that the value of the collateral is sufficient to cover the amount of the loan.
4. What happens if the value of the collateral declines?
If the value of the collateral declines, the lender may require the borrower to provide additional collateral or to make a payment to reduce the loan balance.
5. What are the risks of using collateral?
The main risk of using collateral is that the borrower could lose the asset if they default on the loan. Additionally, the borrower may have to pay additional fees or charges related to the collateral.
6. What are the benefits of using collateral?
Using collateral can help the borrower to obtain a lower interest rate on the loan. Additionally, collateral can provide the lender with peace of mind knowing that they have a way to recover their losses if the borrower defaults.
7. What is a collateral contract?
A collateral contract is a separate agreement that is entered into in conjunction with a loan or other obligation. The collateral contract typically specifies the terms and conditions related to the collateral, such as the type of collateral, the value of the collateral, and the rights and obligations of the parties in the event of a default.
8. What is the difference between a collateral contract and a security agreement?
A collateral contract is a separate agreement that is entered into in conjunction with a loan or other obligation. A security agreement is a document that creates a security interest in collateral. The two documents are often used together, but they are not the same thing.