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Elements in a Contract - Collateral Contracts

Updated on July 12, 2017

A collateral contract is a subsidiary contract which induces another party to enter into the main contract. A collateral contract is often an oral agreement or an undertaking given prior to the formalization of the main contract and is accepted as part of the contract on the basis that the parties came to an agreement in reliance of the promise or the oral undertaking.

In Bannerman v White (1861), the plaintiff (claimant) agreed to purchase some hops from the defendant for brewing purposes. The plaintiff stipulated that the hops must not be treated with sulphur prior to the purchase because it was intended for use in the manufacture of a consumable product.

The defendant assured the plaintiff that the hops had not been treated with sulphur but as it turned out they were. The defendant argued that the representation was not a term in the contract but the courts determined otherwise because the plaintiff had emphasized the importance of the term, prior to formalizing the agreement. The defendant’s oral assertion was a collateral contract.

In Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd (1965) the plaintiffs were looking for a Bentley car and had certain criteria that they based their selection upon. The defendant a car dealer who was an expert on Bentley cars sold them a car based on the criteria that the plaintiffs had set. It later turned out that the car in question did not fit the criteria the plaintiffs had set and the plaintiffs sued. The courts held that the oral statements made prior to the formalization of the contract were indeed a part of the contract and the plaintiffs were successful in their claim. The main contract was dependent on the oral assertion being satisfied.

In J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd (1976) the defendant assured the plaintiff that the goods, will be ferried below deck, and entered into the contract based on the undertaking or in reliance of the promise, when in actual fact the goods were stored on the deck and were damaged in a storm. The plaintiff sued and was successful. The oral agreement was held to be a collateral contract i.e. a subsidiary contract which induced the party to enter into the main contract.

In Heilbut Symons v Buckleton (1913) the plaintiffs were rubber merchants who underwrote a large number of shares in the defendant company on the basis that they were bringing out a rubber company and the details were confirmed in a telephone conversation. It later turned out that the defendant did not bring out a rubber company i.e. the company couldn’t be described as a rubber company and the plaintiffs sued. The plaintiffs were successful.

In City and Westminster Properties Ltd v Mudd (1934) the tenant was party to a lease that stipulated that the premises the tenant was on could only be used for business purposes. Prior to that however the landlord had assured the tenant that, the tenant in addition to using the premises for business purposes could also reside on the premises and the tenant signed the lease based on the assurance.

The tenant used the premises for 10 years during which time he not only used it for business but he also used it as a residence before the landlords attempted to vacate him. It was held that the promise that the tenant could reside on the property was a collateral contract and the tenant was successful.

In Shanklin Pier Ltd v Detel Products Ltd (1951) the plaintiffs needed to have their pier painted and contacted Detel Products and made inquiries as to the paint. The defendants assured them that their paint would last for 7 years when in fact after 3 months of the pier being painted the paint began to deteriorate. The plaintiffs sued and were allowed to adduce the prior oral contract as evidence that they had entered into the contract based on the reliance of the oral promise and the oral contract was held to be a collateral contract.

In Wells (Merstham) Ltd v Buckland Sand and Silica Co Ltd (1965) the plaintiffs were chrysanthemum growers who purchased sand from the defendants based on its chemical composition. The sand did not contain the chemical composition that the plaintiffs were told it would and as a result the crop failed. It was held that the plaintiffs had signed the contract based on the defendants assurances and the plaintiffs were successful in their claim.

In Esso Petroluem v Mardon (1976) the plaintiff’s representative assured the defendant that his new petrol station would be able to sell at least 200,000 gallons of petrol per year. Following the representation, the local council made some changes to the site and as a result it was estimated that the sales would fall and would be lower than what was initially projected but the plaintiff’s representative failed to communicate the changes made by the local council and the ensuing changes in the estimated sales to the defendant.

As a result, the defendant fell in arrears and Esso Petroleum sued for the outstanding payment. The defendant made a counter claim and he was successful. In addition to negligent misrepresentation there was also a collateral contract in place in that the defendant had entered into the contract based on Esso’s estimates and projections.

© 2017 Kathiresan Ramachanderam and Dyarne Jessica Ward

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