What Is a Collateral Contract in Law

A collateral contract, in law, is a legal agreement that is formed alongside a primary contract and acts as a support to it. It`s usually a separate and distinct agreement that is made between two parties with the intention of influencing the primary contract.

The key characteristic of collateral contracts is that they are not made directly between the contracting parties but rather, with a third party. This third party is usually involved in the transaction but not directly linked to the primary contract.

For instance, imagine a landlord wants to rent out their property to a tenant. The tenant is worried about the security of the house, and the landlord agrees to install a burglar alarm to allay the tenant`s concerns. In this scenario, the landlord and tenant have formed a primary contract, which is the tenancy agreement. However, they also have a collateral contract that specifies the installation of the burglar alarm as added security.

The key feature of a collateral contract is that it must be supported by valuable consideration; otherwise, it will not be enforceable. In other words, each party must receive a benefit in exchange for their promise to abide by the collateral contract.

Collateral contracts are typically used to provide assurances or guarantees to a party that a particular term of the primary contract will be adhered to. In the example above, the tenant has the added assurance that the landlord will install a burglar alarm, which will provide additional security to the rented property.

Overall, collateral contracts are an essential tool in law as they help to provide added security and reassurance to parties in a transaction. They are a way for parties to make additional agreements that support the primary contract and that are legally enforceable. However, it`s important to note that collateral contracts must be supported by valuable consideration, and they must not contradict the primary contract.