This article defines and describes collateral contract as an argued exception to the parol evidence rule. This common law rule was developed by the courts to allow plaintiffs to sue on a "separate contract" argument.
The Parol Evidence Rule
In answering the question “which promises are part of a contract?” the courts have developed a rule which is concerned with contracts which have been reduced to writing. This rule is called the parol evidence rule.
- If the parties have deliberately reduced their contract to a formal written document, and it is not some vague arrangement which is hard to interpret, then the courts say that the written document is the sole record of the parties' rights and obligations.
The parol evidence rule says that extrinsic evidence, that is evidence outside the document itself, cannot be used to add to, vary or contradict the terms of that document. The rule applies to all extrinsic evidence not just spoken words. So, for example, the rule could be used to exclude a promise that was in a letter written by one party to the other during negotiations.
Readers will now benefit from viewing The Parol Evidence Rule and Its Exceptions.
Collateral Contract as an Exception to the Parol Evidence Rule
One exception to the parol evidence rule is called the collateral contract. A collateral contract is a separate contract, which exists alongside or parallel to the main contract.
Suppose two parties have made a contract and they have reduced their agreement to writing. Suppose one party alleges that an important promise was made which was not written into the contract document. The initial answer to that kind of argument is the parol evidence rule, which says that you cannot add an extra term to the written document. If it was so important, then it should have been put into the written agreement. One answer to this might be that the extra promise was not really part of the original agreement. It was a separate issue from the written agreement. In this perspective, the parol evidence rule is not violated because the party wishing to rely on the extra promise is not attempting to add to the written agreement but is, instead, arguing that there is a second separate agreement.
This was illustrated in De Lasalle v Guildford [1901] 2 KB 215, in which the tenant sought an assurance from the landlord before signing the lease contract (the main contract): "Can you guarantee that the drains are in proper working order?" The landlord replied that they were. The tenant then signed the lease contract, which said nothing in it about the drains. However, the drains were in poor condition and the tenant had to pay money to fix them. The landlord's oral guarantee about the drains was a collateral contract and the tenant wanted to sue the landlord for damages for breach of this contract.
The tenant, with pen poised above the main agreement, almost ready to sign it, asked the important question and received a positive reply - a collateral contract. Satisfied with this, the tenant then signed the main contract (the lease). Entering into the main agreement was in exchange for, and in response to, the extra promise about the state of the drains.
A court would require clear and convincing evidence to prove the existence of a collateral contract. It is easier to prove a collateral contract if the promise deals with something quite separate from the main contract, particularly if it deals with something you would not expect to find in the main contract.
In Australia, there is a restrictive rule concerning collateral contract and that is the so-called rule in Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133. This was a High Court case, which said that a collateral contract cannot stand if it contradicts the main agreement.
Summing-up
Collateral contract is explained generally in De Lasalle v Guildford [1901] 2 KB 215 and limited specifically by the rule in Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133. It is an exception to the parol evidence rule because it allows the plaintiff to argue the existence of a separate contract from the main contract.
Sources:
De Lasalle v Guildford [1901] 2 KB 215.
Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133.
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