Lecture 8 Collateral Contracts - Notes

Collateral Contracts | Contract Law

In order to answer this question one must assess and consider the law relating to contracts with
particular emphasis on the notion known as collateral contracts.

For a contract to be legally enforceable in this jurisdiction there has to be four principles that are
adhered to. These are that an offer has to be made by the contractor to the contractee; this offer must
be accepted and must contain something that both parties will benefit from. This is known as the
doctrine of consideration.

The final requirement is known as the intention to create legal relations. This means that both
parties are intending to be bound by the terms of the contract. If all of these items are present then
the contract is legally enforceable. A further requirement was also present in the past. This was
known as the doctrine of privity. This meant that only the parties to the agreement could benefit
from it or rely upon the terms of it if a dispute arose. This has since been modified by the Contracts
(Rights of Third Parties) Act of 1999. This in effect has given non original members to the agreement
rights and responsibilities arising out of the contract. The notion of privity was also side-stepped by
the earlier tortious case of Donoghue v Stevenson [1932] AC 562. In that case a lady drank a
bottle of ginger beer which contained the remains of a decomposed snail.

The drink had been bought by her friend and as such the contract was between the lady who bought
the drink and the company who were selling it. Thus, if the notion of privity was enforced, then the
claimant would not have had any legal redress. This case founded when a duty of care was to be owed
and by whom in the tort of negligence. The notion of privity is crucial in the idea of collateral
contracts.

A Collateral contract

A collateral contract is one where the parties to one contract enter into or promise to enter into
another contract. Thus, the two contracts are connected and it maybe enforced even though it forms
no constructive part of the original contract. According to Lord Denning MR in the case of Evans &
Sons Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 a collateral contract is ‘When a person
gives a promise, or an assurance to another, intending that he should act on it by entering into a
contract, we hold that it is binding'. Thus, no term of the collateral contract is found in the original
one, but nevertheless it is enforceable for the original one.

A collateral contract usually takes the form of a unilateral contract. A unilateral contract is where
only one party to it makes a promise. This promise is usually in the form of doing something in
return for something else. The offer and acceptance of the agreement is the original intention of the
first contract that is in place. The consideration of the collateral contract is the promise to enter into
the original agreement. Whereas in a three way agreement it can be used as a means to evade the

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notion of privity. A collateral contract was evidenced in the case of Shanklin Pier v Detel
Products [1951] 2 KB 854. In this case the plaintiffs were owners of a pier and were promised by
the paint manufacturers, who were the defendants, that their paint has a life span of seven years.
This was said in the attempt to induce the plaintiff into buying the defendant's paint.

Due to this representation the plaintiff instructed the decorators to purchase the paint and use it to
decorate the pier. This was duly done, however the paint only lasted three months. During the
inception of the case the plaintiff's did not appear to have a remedy as they had not provided the
defendants with any consideration for the promise. The only contract in force was between the
defendant and the decorators for the purchasing of the paint, this did not include the plaintiffs.
However, it was held that the plaintiffs could recover damages on the basis of a collateral contract.

It was held that the consideration for the promise as to the life of the paint was sufficiently inductive
to render it effective in the chain of purchase. The contract in existence in this case was to purchase
paint in order to re-decorate the pier. However, according to the case of Wells (Merstham) Ltd v
Buckland Sand and Silica Co Ltd [1965] 2 QB 170, the construction of a collateral contract can
be used even when there is not a contract specified at the time the promise was made. In this specific
case the plaintiffs were chrysanthemum growers and bought sand from a third party that was
produced by the defendants. This sand was purchased on the undertaking from the defendants over
its iron oxide content. This undertaking proved to be incorrect and the plaintiffs sued on the basis of
the loss suffered. It was held that they could claim damages, even though no main contract was in
existence, due to the fact that one was in contemplation. Thus, a collateral contract is a creation of
the courts to allow certain pre-contractual comments to be relied upon in the event of a dispute.

Conclusion

In conclusion, a collateral contract is one that is a second agreement that pertains to the original
agreement. It is used to insert an intention that the goods bought by the claimants should reflect the
pre-contractual statements made as to their durability and quality.

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Lecture 8 Collateral Contracts - Notes

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Lecture 8 Collateral Contracts - Notes