A collateral contract...

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 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 inn the event of a dispute.


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.


Collateral contract is a concept which has gradually evolved since its inception. However, collateral contract has been applied in a limited fashion in Australia, compared to other jurisdictions.

In this essay, I will argue that collateral contract has outlived it usefulness and currency in legal practice in Australia. To remain current, the broadening of its application is essential.

To support my argument, I will discuss:

• The concept of collateral contract;

• When collateral contract may be argued; and

• The limitations upon the likelihood of its success in the Australian courts.


The concept of collateral contract may be defined as ‘a contract where the consideration is entry into another contract, and co-exists side by side with the main contract’. A promise that was not included in the principal contract may be enforced as a collateral contract, as clearly illustrated by Lord Moulton in Helibut, Symonds & Co v Buckleton:

‘It is evident, both on principle and on authority, that there may be a contract, the consideration for which is the making of some other contract. “If you will make such and such a contract, I will give you one hundred pounds,�? is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract.’

Collateral means “by the side of�?. This was an important innovation used to evade:

• The parol evidence rule (e.g., City of Westminster Properties v Mudd) ;

• The formerly limited remedies for misrepresentation (e.g., Esso Petroleum v Mardon) ; and

• Privity of contract (e.g., Shanklin Pier v Detel Products)


The parol evidence rule assumes that when the contract is in writing, and looks to be entire, then it is assumed that all the relevant terms of the contract are included, and no further evidence or discussion of previous contractual terms may be included, that would verify of add to it.

The word “parol�? in the context of the rule, therefore, simply means any intrinsic evidence.

The collateral contract rule “allows oral statements to be enforced as collateral contracts�?. J. Pascoe & H. Anderson state that ‘to overcome the parol evidence rule, promisees can argue that, in consideration of the oral promise, the promisee entered into a written contract with the promisor’. Therefore there are two contracts for the court to enforce: one wholly written and another wholly oral.

There are a number of ways of avoiding the parol evidence rule. If the parties intend their agreement be affected by other unwritten factors, then the rule must bend to accommodate those factors. The parol evidence rule will not be strictly applied in partly written and partly oral contracts, contracts that are implied subject to some trade usage or custom,

contracts which are suspended by verbal agreement, invalid contracts, contracts where some mistake has been made in reducing the contact to writing, and where the parol evidence rule is required to solve some ambiguity or uncertainty.


The essence of the doctrine of privity of contract is that only an original party to a contract may sue or be sued in it. That is, only an original party may enforce or be bound by the terms of that contract.

However, a form of the collateral contract may circumvent this: ‘Where the collateral contract is in tripartite form….then the privity of contract rule is avoided’.

There are two contexts in which we can discuss collateral contracts. The first being “bipartite�? involving contracts between the same two parties, as in JJ Savage & Sons Pty Ltd v Blakney, Secondly, there is the “tripartite�? situation, involving three parties, where the parties to the main contract are not the same as the parties to the collateral contract, as in the case of Shanklin Pier Ltd v Detel Products Ltd, where the plaintiff owned a pier and had arranged for it to be painted. Detel induced the owner to demand that its paint be used, by promising that their paint was suitable for the application. The contractors purchased and used Detel’s paints, but it proved unsuitable. The plaintiff sued Detel for breach of the alleged collateral contract. It was held that Detel’s assurance of suitability was a collateral contract.


In order to argue the existence of a collateral contract, there are several principles that must be present:

• A makes a verbal statement which B would reasonably interpret as a promise.

• A made a sta...

Consideration and estoppel

Consideration is known as 'the price of a promise' and is a requirement for contracts under common law. The idea behind consideration is that both parties to a contract must bring something to the bargain. A party seeking to enforce a contract must show that it conferred some benefit or suffered some detriment (though it might be trivial, see below) that is recognized by law. For example, money is often recognized as consideration, but in some cases money will not suffice as consideration (for example, when one party agrees to make partial payment of a debt in exchange for being released from the full amount).[18]

Some common-law and civil-law systems[19] do not require consideration, and some commentators consider it unnecessary—the requirement of intent by both parties to create legal relations by both parties performs the same function under contract. The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of the combining by 19th century judges of two distinct threads: first the consideration requirement was at the heart of the action of assumpsit, which had grown up in the Middle Ages and remained the normal action for breach of a simple contract in England & Wales until 1884, when the old forms of action were abolished; secondly, the notion of agreement between two or more parties as being the essential legal and moral foundation of contract in all legal systems, promoted by the 18th century French writer Pothier in his Traite des Obligations, much read (especially after translation into English in 1805) by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially John Stuart Mill's influential ideas on free will, and got grafted on to the traditional common law requirement for consideration to ground an action in assumpsit.[20]

Although several rules govern consideration, the following are the principal rules.

Consideration must be "sufficient" (i.e., recognizable by the law), but need not be "adequate" (i.e., the consideration need not be a fair and reasonable exchange for the benefit of the promise). For instance, agreeing to sell a car for a penny may constitute a binding contract.[21]

Consideration must not be from the past. For instance, in Eastwood v. Kenyon,[22] the guardian of a young girl obtained a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise because taking out the loan to raise and educate the girl was past consideration—it was completed before the husband promised to repay it.

Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

The promise to do something one is already contractually obliged to do is not, traditionally, regarded as good consideration. The classic instance is Stilk v. Myrick[23], in which a captain's promise to divide the wages of two deserters among the remaining crew if they would sail home from the Baltic short-handed, was found unenforceable on the grounds that the crew were already contracted to sail the ship through all perils of the sea. (The case has been much criticized on grounds that the ship was in port at the time of the promise.) A very specific example is the "rule in Pinnel's Case"[24], brought into the modern law of consideration by the House of Lords in Foakes v. Beer[25]. This rule is to the effect that a smaller sum of money cannot be good consideration for the release of a larger debt, though if the smaller sum is accompanied by something non-monetary in addition, for instance "a horse, a hawk or a robe", or payment is to be made early or in some special place or way, then there will be good consideration for the promise to discharge the debt. This rule has suffered some inroads recently. In Williams v. Roffey Bros & Nicholls (Contractors) Ltd[26] the English Court of Appeal held that a promise by a joiner to complete the contracted work on time, where this was falling behind, was good consideration for the contractor's promise to pay extra money. The reasoning adopted was that the strict rule of Stilk v. Myrick was no longer necessary, as English law now recognized a doctrine of economic duress to vitiate promises obtained when the promisor was "over a barrel" for financial reasons. Therefore, where the promise to pay extra could be seen as conferring a practical benefit on the promisor, that could be good consideration for a variation of the terms. The rule in Pinnel's Case has also been effectively sidestepped in England by the Court of Appeal in the case of Collier v. P & MJ Wright (Holdings) Ltd[27] which held that a promise to accept less in discharge of a pure debt (as opposed to, say, accepting reduced rent, which has long been recognized) could give rise to a promissory estoppel.[28]

The promise must not be to do something one is already obliged by the general law to do - e.g., to give refrain from crime or to give evidence in court: Collins v. Godefroy.[29]

However, a promise from A to do something for B if B will perform a contractual obligation B owes to C, will be enforceable - B is suffering a legal detriment by making his performance of his contract with A effectively enforceable by C as well as by A.[30]

Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book, and I accepted your offer without giving anything in return, I would have a legal right to the book and you could not change your mind about giving me it as a gift. However, in common law systems the concept of culpa in contrahendo, a form of 'estoppel', is increasingly used to create obligations during pre-contractual negotiations.[31] Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance [disambiguation needed] and the other has relied on the assurance to his detriment. A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts.[32] However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind."[33]

See also: Consideration under English law and Consideration under American law

The collateral contract essentially amounts to the creation of a contract between persons who are not parties to the main contract in order to impose liability e.g. for statements/promises made. (1) The consideration for this contract is the making of the main contract. (1) Examples include Shanklin Pier v Detel and the collateral contract between e.g. car dealers and customers covering statements made by the dealer which induce the hire purchase contract between the customer and the finance company. The making of the hire purchase contract is the consideration for the collateral contract. [(1) for an example].

Following the 1999 Act the significance of the collateral contract device will be reduced only if the third party is covered by the Act and can enforce the provision directly, i.e. expressly identified in the contract by name, a class member or by a particular description and only if the test of enforceability is satisfied (s.1(1)-(3)) – i.e. it must be clear that the parties’ intended this third party to be able to enforce a particular provision or purported to give him some benefit (2). That may be unlikely in the typical scenario in which the collateral contract is useful, e.g. statements by car dealers when the contract is between the customer and the finance company.

“A collateral contract does not require any form of consideration."

I disagree with the statement as collateral contract is defined as a contract where consideration is entry in to another contract and co-exist side by side with the main contract.

“Finders are keepers."