Business law principles and applications

Collateral contract is one in which a party agrees to enter into a contract with another party, contingent on a third party's performance. The consideration in a collateral contract is the promise to enter into the second contract. If the third party fails to deliver on his or her performance, then the collateral contract is voidable -- the party is not bound to the second contract because the terms of the collateral contract are upheld. It is important to get the collateral contract in writing so that all parties understand the terms of the collateral contract, and that it is a collateral contract. The collateral contract need not be in writing under the terms of the law, but failure to put the collateral contract in writing leave the possibility of legal action if the plaintiff can demonstrate that an oral collateral contract exists. Putting it in writing is therefore the best way to protect oneself. It is more definite, and can be used as evidence in a court.

The collateral contract may take the form of a guarantee. For example, a enters into a contract with B, but only if C. makes a guarantee on behalf of B. Without the collateral contract, a and B. would not have a contract. But by virtue of C. entering into the collateral contract, a and B. are able to form their contract. Another form of collateral contract can be with respect to performance. A could enter into a contract with B. For the purchase of a good so long as C. delivers that good to B. under certain conditions. If C. fails to meet these conditions, then there is no contract between a and B. If C. meets the conditions, then a and B. do have a valid and enforceable contract. The guarantor case is the most typical of collateral contracts.

2. I would not make an exception for leading rule cases. Technically, under the main purpose rule the promise to pay the debt of another does not need to be in writing if the promisor was motivated by a desire for benefit. However, it is bad business practice to make promises without putting that promise in writing. From the perspective of the party relying on the collateral, it may not legally be required that the collateral contract be in writing but it is highly recommended as there may be little legal recourse should the third party fail to live up to the terms of an oral contract.