What is COLLATERAL CONTRACT?

Written or oral agreement associated as a second, or side contract made between the original parties, or between a third party and an original party. This typically occurs before or at the same time of the first or main contract is made. This collateral contract is independent and separate from the primary contract. A collateral contract is often done because (1). Its terms conflict with those of the main contract, (2). Its rules of evidence supersede its incorporation in the main contract, (3). The main contract is wrongly drawn or (4). There is a difference in the contracting parties, needing to involve a third party. It may also be used to avoid overstepping the privity of the main contract. A collateral contract is active along with the main contract and it may override or replace one or more of the main contract’s provisions, if triggered. For example, if ‘A’ enters into a construction contract with ‘B’ giving reason for ‘B’ to enter into a contract with ‘C’ for a material used in the construction, ‘A’ may have the right to sue ‘C’ for compensation if the material turns out to be defective. A collateral contract with three or more parties obligates each of the contracting parties to meet their individual accountability to each other party. Called also collateral warranty.

TLD Example: After signing the contract to purchase the home from the seller, the buyer immediately entered into a collateral contract to sell it to someone else for a profit.

More On This Topic




Link to This Definition

Did you find this definition of COLLATERAL CONTRACT helpful? You can share it by copying the code below and adding it to your blog or web page.
Written and fact checked by The Law Dictionary