Collateral contract

The concept of the collateral contract, as a means of evading the doctrine of privity, brings apparent third parties into a contractual relationship. However, the collateral contract can also be used between parties who themselves subsequently enter into a main contract. The collateral contract will take the form of one party expressly, or impliedly, saying to the other «if you enter into the main contract, I will promise you X». It can thus provide a remedy for pre-contractual statements which have not been incorporated into the main contract. It has the advantage over the remedies for misrepresentation in that it is not limited to statements of existing fact. A promise to act in a particular way is clearly covered. Using the computer contract example, a statement that «we will answer all service calls within six hours» could not be a misrepresentation, but could found an action for breach of a collateral contract. A statement of fact, or even opinion, may also give rise to a collateral contract, if it can be said that the maker of the statement was guaranteeing its truth.

An example of the use of a collateral contract in a two-party situation is City of Westminster Properties v Mudd. Atenant had been in the practice of sleeping in the shop which he rented. When the lease was renewed, the landlord tried to insert a clause stating that the premises should not be used for lodging, dwelling or sleeping. The tenant objected, but was assured orally that if he signed the lease, he would be allowed to sleep there. In fact, probably due to an oversight, the new clause was omitted, but a provision containing an obligation only to use the premises for the purposes of trade remained. The landlord subsequently tried to rely on this clause to forfeit the lease, claiming that the tenant was in breach of it through sleeping on the premises. It was held that the tenant could rely on a collateral contract giving him the right to sleep on the premises which, in effect, overrode the clause in the lease itself.

In Esso Petroleum Co Ltd v Mardon, a representative of Esso had given a prospective tenant of a petrol station an estimate of the potential throughput, which was put at 200,000 gallons a year. This failed to take account of the fact that the local planning authority had required the petrol pumps to be sited on a side street, invisible from the main road. The tenant was dubious as to the accuracy of the estimate, but accepted it as being based on Esso’s superior knowledge of the petrol-retailing business. He entered into a lease, but the throughput never exceeded 78,000 gallons a year. It was held by the Court of Appeal that the tenant was entitled to recover damages from Esso on the basis of a collateral contract. Although the estimate was an expression of opinion, rather than a statement of fact, or a promise as to the throughput which would be achieved, it contained the implied promise that it was made with reasonable care and skill. As Lord Denning commented:

They [Esso] knew the facts. They knew the traffic in the town. They knew the throughput of comparable stations. They had much experience and expertise at their disposal. They were in a much better position than Mr. Mardon to make a forecast. It seems to me that if such a person makes a forecast - intending that the other should act on it and he does act on it - it can well be interpreted as a warranty that the forecast is sound and reliable in the sense that they made it with reasonable care and skill.

The consideration for the promise that the estimate was made with due care and skill was Mr. Mardon’s agreement to enter into the lease. Contract collateral to the lease was thus created, and Mr. Mardon was entitled to recover damages for Esso’s breach of this.

(As will be seen from these examples, the collateral contract is a very flexible device. Its disadvantage as compared to the action for misrepresentation is that it will only provide a remedy in damages, and will not allow the claimant the possibility of rescinding the main contract. Moreover, the level of damages which can be awarded is more restricted than in the case of actions for deceit, or under s 2 (1) of the Misrepresentation Act (MA) 1967.)

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