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A collateral contract is usually a single term contract, made in consideration of the party for whose benefit the contract operates agreeing to enter into the principal or main contract, which sets out additional terms relating to the same subject matter as the main contract.
Two requirements must be fulfilled to establish the existence of a valid and binding collateral contract:
- The representor must have intended the promise to be legally binding. (This merely fulfills the general requirement for legal intention to establish a contract in any case.)
- The representee must have entered into the main contract on the basis of the statement and in reliance upon it. (Without that, the entering into of the main contract would not be good consideration.)
If these requirements are met, the courts may hold that a collateral contract has come into existence and may enforce the promise, not as part of the main contract but as the substance of a quite separate (but related), collateral contract: Graw S, An Introduction to the Law of Contract (1998), 3rd Ed, Lawbook Company Information Services, North Ryde, pg 162.
Despite the close association between a collateral contract and the so-called principal contract to which it relates, both are contracts in their own right and therefore enforceable as such unless the obligations set out in either contract are expressed to be dependent or contingent on the performance of a corresponding obligation in the other contract.
An interesting situation arises where parties to an agreement execute one contract and then proceed to execute another contract over the same subject matter. The question then becomes which contract governs the relationship between the parties. In answering this question, one must look to the terms of each of the contracts. If the terms of the new contract are so inconsistent with the terms of the original contract such that both parties must be taken to have intended the original contract to no longer bind them, the court may be prepared to imply a release from the obligations under the original contract into the terms of the new contract.
In Morris v Baron & Co  AC 1, Morris agreed to sell Baron & Company 500 pieces of blue serge on terms set out in the written contract (thus complying with the writing requirements of section 4 of the Sale of Goods Act 1893 (UK)) Difficulties arose, the parties sued one another and, eventually, their actions were compromised by an oral agreement under which Baron & Company was to receive compensation for defective deliveries already made, was to be free to accept the remaining deliveries at its discretion and was to be permitted time to pay outstanding amounts then due. The question before the House of Lords was whether either of the agreements was enforceable: Graw S, An Introduction to the Law of Contract (1998), 3rd Ed, Lawbook Company Information Services, North Ryde, pg 322 - 323.
It was held in this case that the substitute agreement, being totally inconsistent with the original contract, impliedly abrogated it. The original contract had, therefore, been discharged and was no longer enforceable. The new contract, though required to be in writing, was not in writing and, accordingly, was also unenforceable. Neither agreement could be enforced: Graw S, An Introduction to the Law of Contract (1998), 3rd Ed, Lawbook Company Information Services, North Ryde, pg 322 - 323.
However, the situation is quite different where the original contract and the new contract are essentially the same except for the inclusion in the new contract of terms which alter the operation of the original contract in a small way. In these circumstances, the fresh terms in the new contract work to supplement the unchanged provisions of the original contract which remain on foot.
The critical question is whether what has been agreed is “entirely inconsistent” with the first contract or goes to “the very root” of the first contract so as to discharge it altogether; or, whether there has been a variation that qualifies or alters some of the provisions of the first contract but otherwise leaves the rest of it on foot. As Lord Sumner said in British & Beningtons Ltd v North West Cachar Tea Co Ltd  AC 48, what is central:
Is whether the common intention of the parties…was to “abrogate”, “rescind”, “supersede” or “extinguish” the old contracts by a “substitution” of a “completely new” and “self contained” or “self subsisting” agreement, “containing as an entirety the old terms, together with and as modified by the new terms incorporated”.
NC Seddon & JLR Davis, A Contract may be impliedly discharged when the parties have agreed to alter its terms so as to substitute a fresh contract (2006), The Laws of Australia - TLA, Lawbook Online, TLA [7.8.350].
The distinction between an alteration which is “entirely inconsistent” with the contract and therefore discharges it, and an alteration which merely varies the contract is very difficult to draw. In Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93, Dixon CJ and Fullagar J expressed their view that it was not a “satisfactory distinction” and that it was all “a matter of degree”. However, the consequences of a subsequent contract falling on one side of the line thus drawn or on the other are significant. In the case of a variation, all of the rest of the unvaried provisions of the original contract continue to remain in force. If an entirely fresh contract has come into existence, the terms of the original contract are discharged, This led Lord Dunedin to point out, Morris v Baron & Co [1918 AC 1, that:
The difference between variation and rescission is a real one, and is tested, to my thinking, by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject matter as the first but in a different way, it is impossible that the two should both be performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself.
NC Seddon & JLR Davis, The distinction between an alteration which is “entirely inconsistent” with the contract and therefore discharges it, and an alteration which merely varies the contract is very difficult to draw (2006), The Laws of Australia - TLA, Lawbook Online, TLA [7.8.360].
It is vitally important when interpreting the provisions of a contract, that due weight be given to the intention of the parties in bringing that contract into existence. The principles in construing a trust deed have been considered in Boranga v Flintoff (1997) 19 WAR 1, in which Parker J sought to identify a class of beneficiary under a trust deed. His Honour cited and applied the approach of the Full Court of the Supreme Court of Western Australia, per Ipp J (Walsh and Anderson concurring), in Clay v Clay (unreported, FCt SCt of Western Australia, 27 March 1996, Supreme Court Library No.960168):
“…it is trite that the primary task of construction is to endeavor to discover the intention of the parties from the words of the instrument. If the words used are unambiguous the Court must give effect to them: Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99 at 109. The general rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of a deed if the language is ambiguous. But evidence of surrounding circumstances is not admissible to contradict the language when it has a plain meaning: Codelpha Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 per Mason J at 347; Southern Resources Ltd v Technomin Australia NL  WAR 72. This rule is not absolute. Extrinsic evidence is admissible to identify the meaning of a word: Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78; Southern Resources v Technomin Australia NL at 84. In particular, evidence of mutually known facts is always admissible even where there is no apparent ambiguity – to prove the meaning of a descriptive term in a written instrument: Homestate Australia Ltd v Metana Mineral NL (1994) 11 WAR 435 at 447 and cases cited therein…”.
The primary consideration is to discover the intentions of the parties from the words of the relevant instruments. If the words used are unambiguous, the Court must give effect to them. Where the words used are ambiguous, evidence of surrounding circumstances is admissible to assist in the interpretation of the trust deeds.
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