42 collateral contracts 421 definition occasionally

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4.2 Collateral Contracts 4.2.1 Definition Occasionally, statements that were intended to be contractually significant are not formally included into the contract as terms, usually because of some technicality. Where that happens, any party aggrieved by the non-inclusion can argue that the statement formed its own quite separate ‘collateral contract’. If the promise is not honoured, there will be a breach of the collateral contract and the innocent party will be able to take action — not under the main contract (because the promise was not a term of that contract) but under the collateral contract. 4.2.2 Rules governing collateral contracts Collateral contracts are difficult to prove and the ‘promisee’ must show: that the collateral statement was promissory in nature; that legal consequences were intended; that the main contract was entered into because of the statement and in reliance on it; and that the collateral promise is not inconsistent with any term of the main contract.
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© Stephen Graw 2012 Collateral contracts only exist if all four elements are present. 5.1 Defects in the Contract 5.1.1 Factors affecting contractual capacity Capacity to contract The term ‘contractual capacity’ refers to a party’s ability to enter into legally enforceable agreements. In some very limited cases a party who is under some ‘legal disability’ may be exempted from the legal consequences of the agreements that he or she enters into — mainly on public policy grounds — because of his or her inability to fully understand the nature and effect of those agreements. Such protection from contractual liability is normally restricted to minors (those under 18 years of age), the insane and the intoxicated (at least while they are so under the influence of drink that they are incapable of understanding their actions in a legal sense). Privity of contract The word ‘privity’ simply refers to any relationship between two parties that is recognised by law. ‘Privity of contract’ therefore refers to the relationship that exists between parties to the same contract. So, if A contracts to sell his business to B and B then contracts to sell a half- share in that business to C privity of contract exists between A and B (in respect of the first contract) and also between B and C (in respect of the second contract). But there is no privity of contract between A and C (because there is no direct contractual relationship between them — even though the same subject matter is involved in both contracts). Privity of contract is important because it recognises that contracts exist only between the contracting parties and that, in normal circumstances, they should be the only ones entitled to enforce any rights or obligations under those contracts. That is, only the original parties can enforce or be bound by a contract’s terms — and only they may sue or be sued under it.
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