The Issue of Collateral Contract: The Example of Such Contract In the Australian Context

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Table of Contents

Introduction
Main Features of a Contract
Collateral Contract
Situations Demanding the Use of Collateral Contract
Example of Cases Where Collateral Contract Has Been Applied
Limitations of Success of Collateral Contracts in Australian Courts
Conclusion
References

Introduction

It is a fact that people, organizations, or even governments are not able to perform all the tasks that are required of them. Therefore, these people usually delegate the performance of specific works to other parties that can effectively perform the work to the satisfaction of the other party. The performance of various works involving different parties usually necessitates the presence of an agreement that defines the expected outcome of the work and the methods of performance. Agreements are also required in the performance of other various transactions which involve different parties. Therefore, there must be necessary documentation to show proof of the agreement. The necessary documentation is usually in the form of a contract, which clearly defines the terms of association or agreement between the parties involved.

A contact can be generally defined as an obligation that can be legally enforced and is owed by a party to another due to a formal act or informal agreement. The contract must also satisfy specific terms for it to be legally valid (Klass, 2010, p. 27). The terms include whether the person making the contract was old enough for the contract to be valid. Most countries usually set 18 as the lower limit of the age in which a person entering into a contract with another should be. The parties involved in the contract should also be of sound mental status while entering into a contract with each other (Plimpton, 2007, p. 4).

The contracts do not necessarily have to be written to be valid; they may also be made verbally. A verbal contract is usually hidden and is in most cases only known by the parties who were present during the fulfillment of the agreement. Other people who were involved in the contract may not be aware of the contract until the other party tries to enforce the contract. This makes verbal contracts have the potential to hurt some of the parties involved, as there is no documentation to prove the existence of the agreement, hence making it hard for a party to effectively convince a judge or jury of the details of the agreement (Plimpton, 2007, p. 5). The above limitations necessitate the writing down of the agreements between different parties to avoid any dispute that may come up.

Contracts are mainly used to prevent future disagreements that may arise in the enforcement of certain agreements between different parties. The disagreements may be brought up as a result of a change of ownership of the company, changes in the financial situation of the company, or a change in the management of the company, which makes the company stop doing what the company is not obliged to do by a specific contract.

Main Features of a Contract

There must be intentions between the two parties to enter into legally binding relations before the creation of the actual contract. This is usually a determinant of the conditions or circumstances in which the agreement between the parties was made (Anon, 2011).

For a contract to be valid there must be a mutual agreement between the parties involved in the contract. In addition, the terms of the condition must be clear, complete, specific, and unambiguous. The parties involved in the formulation and enforcement of the contract must be easily identifiable (Gray, 2010). A contract can also be revoked before the actual signing of the contract by one of the parties writing to the other party, informing him of the intention not to enter into a contract with him. The parties entering into the contract must also be able to accept to sign the contract with full knowledge of the offer being made by the other party. If one of the parties is not aware of the offer while signing the agreement, the contract is deemed invalid (anon, n.d, p. 2)

The parties in the contract must also be in a capacity to enter into a legally binding contract for the contract to be valid (Cross, 2006, p. 193). The person must be an adult (18 years or more in most regions) for the contract to be valid. The parties involved in the signing of the contract must also not be in a situation that impairs their judgment on the agreement they are entering into. Impairment in the judgment may result in insanity, being under the influence of drugs or alcohol, or having diseases, all of which affect mental capacity. Moreover, a person entering into the contract must do so willfully without being threatened or intimidated (Gray, 2010).

For the contract to be deemed valid, something of value must be exchanged between the parties involved in the signing of the agreement. The valuable commodity, commonly referred to as consideration, is in most cases money. Services property or a promise to do something in exchange for something else being done by the other party (Gray, 2010).

The parties involved in the contract must also show that they have the intention to be bound by the agreements and conditions of the contract. In addition, the parties must intend to use the agreement in a court of law if a dispute between the parties with relation to the agreement arises (Gray, 2010).

Collateral Contract

Many things are usually said by the parties involved before the signing of the actual contract. Some of the things that are said do not form part of the contract; these things may be either promises or misleading information, which is mainly used to influence the other party to enter into a contract with the other party or parties. In addition, they form part of the collateral contract and may be used against the other party if they fail to abide by the conditions or information they gave before the actual signing of the contract (Heffey, Paterson & Hocker, 1998). There are other types of documentation recognized by law, which are usually given to show the existence of an agreement between two parties. Collateral contact is one such documentation and is usually used to facilitate the enforcement of the agreements made to support another contact. Collateral contacts are used in two situations:

To enforce a promise or agreement, which is made prior to the signing of another contract, without which, the other contact that binds the parties would not have been made (Barret, 2008, p. 63). This type of collateral contract is usually oral and can be proved through the existence of certain patterns in the execution of certain tasks between the two parties.
To enforce the promises that are made by two parties in support of another agreement the parties have. In this type, the collateral contracts are usually in written form and are sometimes referred to as “collateral warranties” or simply “warranties” (Barret, 2008, p. 63).

Since a collateral contract is related to the other contract, the terms of the collateral contract should not contradict the terms of the main contract that the two parties have signed. If the collateral contract contradicts the other contract, it may be deemed illegal or forged, and hence not admissible in a court of law. The parties making the collateral contract must therefore be very careful in the wording and details of the collateral contract. Sometimes, a collateral contract may be used to bring third parties into a dispute (Stone, 2009, p. 250).

A collateral contract is separate from the main contract between the parties; therefore, even if the main contract is illegal and hence cannot be enforced in a court of law, the collateral contract may still be enforceable. The collateral contract is still enforceable if the other contract is the one that is required to be in writing whereas the collateral contract is not included in the writing and is made verbally (CCH Australia Limited & Latimer, 2009, p. 400).

However, the collateral contract does not hold in all situations, as in some cases, the promises made by one party are not binding to him and may at times contradict the terms of the contract. An example is a situation where a bank offers to give financial advice on a loan, in which case, if the financial advice is generally not beneficial to the other party or the bank, fails to give financial advice, the other party cannot sue the bank with reference to the collateral contract (O’Donovan, 2005, p. 216).

Situations Demanding the Use of Collateral Contract

Collateral contracts are usually admissible in courts of law as evidence regarding the existence of certain promises between different parties. The collateral contracts are usually accepted in various countries. The situations which warrant the use of collateral contracts are usually varied. Most of the situations in which the collateral contracts are admissible are mainly business-related contracts. Contracts are made mostly by a party selling a specific product to another person.

The existence of an oral collateral contract may be shown in a situation where certain information regarding the features and the working of certain products provided by the party selling the product is used to make the other party purchase the product. Should the product fail to abide by the recommendations that the other selling party specified, the other party can take the seller to court and use the presence of a collateral contract that influenced the decision to enter into a contract with the buyer. This is usually admissible in court regardless of whether the specific details are in the final contract between the two parties (Chandler & Brown, 2007, p. 124).

The terms of the collateral contract are usually dependent on the nature of the assurances that the party selling the product gave the party buying the product in order to influence the other party to buy the product. The terms are also dependent on the circumstances in which the collateral contract between the two parties was made.

Nowadays, there are various fields requiring the presence of a collateral contract as support of the existence of another contract. The collateral contracts or warranties are used to show that the product meets certain standards which are generally desirable to the person buying or using the product. The written collateral contracts are much more enforceable as there is written proof of the agreement. This form of collateral contract is easily admissible in a court of law compared to the other oral collateral contract, which may be difficult to prove, and in some cases, are not admissible in a court of law as there is no written agreement to the promise made by one party to the other.

Example of Cases Where Collateral Contract Has Been Applied

There are various cases where the presence of a collateral contract has been used to make a judgment regarding a dispute between two different parties. An example is a situation where company A buys a machine from company B. In this case, before the actual sale of the machine, company B may have assured A that the machine has extra capabilities making it to be superior compared to the other similar machines available in the market. To ensure that A buys the machine, B may even offer to guarantee the machine and promise to make repairs over a certain period for free should the machine have any technical difficulties. The above oral agreements may influence A to buy the machine and thus enter into a contract with company B. If the machine fails to meet the standards that B had specified, A may sue company B for damages occurring as a result of a breach of the contract that the contract between the two is based on. This is usually regardless of whether the specific details regarding the capabilities and working of the machine have been stipulated in the main contract or whether there was a written collateral contract prior to A buying the machine from company B.

A tenant leasing a house may request to know the conditions of the house from the landlord. The conditions include security and drainage of the house where the tenant intends to live. In the event that the tenant finds out that the house does not conform to the conditions that the landlord had specified before they entered into a contract, the oral assurance given by the landlord to the tenant may act as the collateral contract to the other contract which the tenant and the landlord entered into. In such cases, the plaintiff does not have to prove the statements made by either party were false; the statements must be false (Statsky, 2000, p. 203)

Limitations of Success of Collateral Contracts in Australian Courts

Australia is one of the jurisdictions that has rarely applied collateral contracts in a limited way when compared to the other jurisdictions. The limitations of the success of collateral contracts in Australian courts are due to the fact that it is difficult to calculate the damages arising as a result of the misrepresentation. In fact, there have been instances where the damages due to misrepresentation have been higher than those that would have resulted from a breach of the contract (Collins, 2003, p. 196).

Under s (21), a claimant in an action of negligent misrepresentation can be protected from rules that inhibit recovery in actions of breach of the contract between him and another party for claims relating to disappointment and inconvenience, and for losses that are remote and unforeseeable. The Australian courts generally have a sharp conceptual distinction in the measure of damages between a tort and a contract. This conceptualism usually ignores the context of the claims made by either party that is mainly concerned with the agreements the parties made before they entered into a contract (Collins, 2003, p. 196). These measures usually make it difficult to use the collateral contracts in Australian courts.

There is also a high cost involved in obtaining the remedy for damages that have been brought about by misrepresentation by one of the parties in a purchase contract. Sometimes, the cost of litigation may be much higher than the value of the item purchased. In addition, the outcome of the case is in most cases unsatisfactory to the party suing the other; this makes most people in Australia avoid suing other parties due to the misrepresentation thereby leading to more people being involved in the misrepresentation (Collins, 2003, p. 197).

Conclusion

The collateral contract is generally a legitimate ground, which a party may base his argument on suing another party due to its breach. Parties entering into the contract must therefore be very careful in what they say in order to convince the other party to enter into a contract with them. This would enable them to avoid litigation by the other relevant parties. Application of the collateral contract will continue to be limited in its application in Australian courts unless the government removes the clauses that hinder the application of the collateral contract. This will encourage more people to sue the parties who make false claims on products, hence increasing consumer protection.

References

Anon. N.d. Elements of a contract. Web.

Anon. 2011. The law handbook. Fitzroy Legal Service. Web.

Barret, K., 2008. Defective construction work and the project team. Oxford: John Wiley and Sons. Web.

CCH Australia Limited & Latimer, P., 2009. Australian business law, 28^th edition. Sydney: CCH Australia Limited. Web.

Chandler, A. & Brown, I., 2007. Law of contract: 2007 and 2008. Oxford: Oxford University Press. Web.

Collins, H., 2003. The law of contract. London: Cambridge University Press. Web.

Cross, F.B., 2006. West’s legal environment of business: text and cases: ethical, regulatory, international, and e-commerce issues. OH: Cengage Learning. Web.

Gray, D., 2010. Making Money in Real Estate: The Canadian Guide to Profitable Investment in Residential Property, Revised Edition. Ontario: John Wiley and sons. Web.

Heffey, Paterson & Hocker. 1998. Contract Commentary and Materials 8TH ED. LBC Information services. Web.

Klass, G., 2010. Contact law in USA. Alphen aan den Rijn: Kluwer Law International. Web.

O’Donovan, J., 2005. Lender liability. London: Sweet & Maxwell. Web.

Plimpton, L., 2007. Business Contracts: Turn Any Business Contract to Your Advantage. Wisconsin, Entrepreneur Press. Web.

Statsky, W. P., 2000. Essentials of torts. OH: Cengage Learning. Web.

Stone, R., 2009. The Modern Law of Contract: Seventh Edition. Oxon: Taylor & Francis. Web.

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