Collateral Contract & Parol Evidence Rule PDF

COLLATERAL CONTRACT  Introduction Chitty on Contracts (24 th edition) A promise given during negotiations which can create a contractual obligation, as long as the intention to be bound can be shown … the promise is a separate contract, but collateral to the...

COLLATERAL CONTRACT  Introduction Chitty on Contracts (24 th edition) A promise given during negotiations which can create a contractual obligation, as long as the intention to be bound can be shown … the promise is a separate contract, but collateral to the main transaction. A collateral contract will be created, especially in a situation where one party would refuse to enter into a contract unless the other party agrees to the promise. © Izura M Zakri (UM) 2  Kluang Wood Products Sdn Bhd & Anor v Hong Leong Finance Berhad and Anor 1 MLJ 193 To establish presence of collateral contract: 1. Defendants made a statement with the intention that it is to be relied upon 2. The statement induced the signing of the contract 3. Statement is a warranty © Izura M Zakri (UM) 3  Take note: Warranty is used in two meanings: 1. As a collateral ‘guarantee’ that is legally binding (external, and subsidiary to the main contract). 2. As an unimportant term of a contract (condition/warranty) Tan Chong & Sons Motor Co. Sdn Bhd v Alan McKnight © Izura M Zakri (UM) 4  Elements of a Collateral Contract 1. An ORAL contract 2. Exists side-by-side, YET is independent from the main contract 3. If terms contradict, Collateral contract > written contract BUT cannot destroy the main contract 4. Exception to parol evidence rule Note: A statement by third party can still create a collateral contract (Shaklien Pier Ltd. v Detel Products Ltd. 2 KB 854) © Izura M Zakri (UM) 5  Establishing it is not the elements Establishing collateral contract Elements of collateral contract 1. Defendants made a statement with 1. An ORAL contract the intention that it is to be relied upon 2. Exists side-by-side, YET is independent from the main contract 2. The statement induced the signing of 3. If terms contradict, Collateral the contract contract > written contract BUT cannot destroy the main contract 3. Statement is a warranty 4. Exception to parol evidence rule © Izura M Zakri (UM) 6  1. Exists side-by side Tan Swee Hoe v Ali Hussain Brothers A orally agreed to allow R 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 did not refer to the oral agreement. Dispute arose. R received notice to quit the premises. Argued that they were allowed to say in the premises for as long as they paid the rent regularly. © Izura M Zakri (UM) 7  2. Can contradict / Overrides Tan Chong and Sons Motor Co v Alan McKnight Statement made by salesman that car complied with Australian Design Regulations. Signed, buyers order, Clause 5: no guarantee/warranty given by company. Held … the representations made by A’s salesman that the car complied must be given an overriding effect and the printed condition must therefore be rejected. © Izura M Zakri (UM) 8 but cannot destroy main contract … © Izura M Zakri (UM) 9  Industrial & Agricultural Distribution Sdn Bhd v Golden Sands Construction Sdn Bhd 3 MLJ 433 D bought two units of excavators from P to use on its worksite. After 2 months, D returned them claiming it was unsuitable. Relied on ‘oral collateral warranty’ [collateral contract] that if excavators were unsuitable, can be returned without incurring any financial liability. © Izura M Zakri (UM) 10 3. PAROL EVIDENCE RULE  Introduction S.91 and s.92 Evidence Act 1950 Prohibits a person from giving any oral evidence that will contradict, vary, add to, subtract from a written contract To prevent a person from trying to bring in oral terms which will vary a written contract Protects the integrity of the written contract contents 12 S.91 When the terms of a contract … have been reduced by or by consent of the parties to the form of a document … no evidence shall be given in proof of the terms of the contract … except the document itself S.92 When the terms of such contract … have been proved according to section 91, no evidence of any oral agreement or statement shall be admitted as between the parties to any such instrument or their representatives in interest for the purpose of contradicting, varying, adding to or subtracting from its terms Parol Evidence Rule 13  Exceptions: 1. S.92(a) – (c) 2. Collateral contract 3. Promissory estoppel Note: Oral contracts Only if it falls under the exception under s.92(a) – (c), or If it is a collateral contract Parol Evidence Rule 14 (I) EVIDENCE ACT EXCEPTIONS  16 S.92(A) Any fact may be proved which would invalidate any document which would entitle any person to any decree or order relating thereto, such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, the fact that it is wrongly dated, want or failure of consideration, or mistake in fact or law; Parol Evidence Rule  17 S.92(B) “ any separate oral agreement, as to any matter on which a document is silent and which is not inconsistent with its terms…” Parol Evidence Rule  18 S.92(C) “ any separate oral agreement constituting a condition precedent to the attaching of any obligation under any such contract …” Parol Evidence Rule (II) COLLATERAL CONTRACT  20 INTRODUCTION Collateral contract is a separate oral agreement that is part of the main agreement In other words, oral + written = entire contract Thus, the primary reason evidence is being brought in is to prove the existence of the oral agreement, not to contradict/vary/add to/subtract the main agreement Technicality Parol Evidence Rule  21 TAN SWEE HOE CO LTD V ALI HUSSAIN BROTHERS 2 MLJ 16 (FC) This device of collateral contract does not offend the extrinsic evidence rule because the oral promise is not imported into the main agreement. Instead it constitutes a separate contract which exists side by side with the main agreement. Parol Evidence Rule (III) PROMISSORY ESTOPPEL  INTRODUCTION 23 When one of the party in an existing contractual relationship, makes a promise to the other party in the contract, to relieve him of a previous obligation See previous lecture notes Conditions parties are in a contractual relationship a promise/statement had been made one had depended on it and changed his position the promisor is able to withdraw the promise by giving reasonable notice Parol Evidence Rule  24 CHUAN HONG PETROL STATION PTE LTD V SHELL SINGAPORE (PTE) LTD 1992] 2 SLR 729 The rule against parol evidence varying a written contract does not exclude the operation of the doctrine of promissory estoppel. The doctrine of promissory estoppel does not seek to contradict, vary, add to or subtract the terms of a contract It only operates to prevent a party, temporarily, from enforcing a contract So long as the conditions for the operation of the doctrine are fulfilled. Parol Evidence Rule  25 Pre-contractual statements Parol Evidence Rule Representations Collateral Contract Terms END