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Collateral contracts:

Doctrine of Collateral Contract:


- To overcome the injustice that may result from
the Parole Evidence Rule
- A device to overcome the parole evidence rule to
admit pre-contractual statements which had not
been incorporated into the written agreement.
- To enable oral statements made to be admitted as
a separate oral contract and collateral to the
principle agreement.
- Confers certain rights not in the main contract.
Kluang Wod Products & Anor v Hong Leong Finance
Berhad & Anor
-To establish the presence of a collateral contract, the party
must show:
(i) A rep which was intended by the (D) to be relied upon)
(ii) The rep induced the signing of the contract
(iii) The rep itself must amount to a (w), collateral to the
main contract and existing side by side with it

Elements of a CC:
1) Exist side by side yet independent of main
contract.

- The statement must be promissory in nature and has


induced the party to enter into the contract.
a. A mere representational statement is an
insufficient basis upon which a collateral
contract is to be found.
b. Parties must have intended for the collateral
contract to be incorporated.

- The parties must have intended or must be taken to


have intended that the oral promise was to form
part of the basis of the contractual relations
between them.
2) Override any inconsistent written term.
- Where the collateral contract contradicts a written
term in the main contract, then it is said to
override the inconsistent written term.

Tan Swee Hoe Co Ltd v Ali Hussain Brothers

The appellants orally agreed to allow the respondents to


occupy their premises for as long as they wished on payment
of $14,000 as tea money. Two written tenancy agreements
were executed, but these did not refer to the oral agreement.
Later, a dispute on rent arose between the parties and the
appellants issued the respondent with a notice to vacate the
premises. The respondents argued that under the
agreement, they were allowed to stay in the premises for as
long as they wished so long as they paid the rent regularly.

Held: A collateral contract exists. An oral promise, given


at the time of contracting, which induces a party to
enter into the contract, overrides any inconsistent written
agreement. The collateral contract device does not offend
the parole evidence rule because the oral promise is not
imported into the main agreement.

3) Cannot destroy the main contract.


- The collateral contract cannot destroy the written
contract entirely, as it can only exist if there is
a written contract.
Tan Chong & Sons Motor Company Sdn Bhd v Alan
McKnight

The representations made by the appellants salesman that


the car complied with the Australian Design Regulations were
in conflict with condition No.5 printed on the reverse side of
the Buyers Order signed by the respondent. The condition
stated that no warranty was given by the company.
Held: The representations made must be given an
overriding effect and the printed condition must
therefore, be rejected.
Kandasami v Mohamed Mustafa

Held: A collateral contract existed under which the parties


agreed that the written agreement would have no legal
effect. It exists only to answer some other purpose and one
party represents while the other agrees that it shall not have
such effect between themselves.
- A collateral contract does not have the effect of
substituting the main contract.
- It merely confers certain other rights which
are not incorporated in the main contract.

NOTE: The burden of proving the existence of a collateral


contract
Industrial & Agricultural Distribution Sdn BHd v
is upon Golden Sands Construction Sdn BHd.
the
party
(D) purchased two excavators from (P). Post 2
months, (D) wanted to return it claiming a collateral
contract if the excavator was unsuitable, (D) could
return without any financial liability.
Held: Visu Sinnadurai J: If such collateral exist, there there is
no purpose for the main contract to exist as the cpntract of
sale would have been a conditional contract. A collateral
contract cannot exist without the main contract.
alleging its existence.

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