Collateral Contracts Definition


Collateral Contracts Definition: Understanding the Basics

Collateral contracts are terms and agreements that are not directly related to the main contract but are meant to support or supplement it. These terms are considered collateral because they are not essential to the main agreement and do not alter the core of the contract. They are secondary agreements that are made in conjunction with the main one, providing additional support and protection to the parties involved.

In order to better understand the concept of collateral contracts, it is important to differentiate them from terms that are considered as part of the main agreement. Main agreements are the essential terms and conditions of a contract that define the core of the deal, such as the goods or services to be delivered, the price, and the payment terms.

On the other hand, collateral contracts are additional terms that are not necessarily included in the main agreement, but are made in conjunction with it. They can provide support to the main agreement, clarifying the intention of the parties or establishing supplementary obligations.

Examples of collateral contracts include guarantees, warranties, and indemnity clauses. For instance, in a sale of goods contract, the seller may offer a warranty or guarantee on the goods sold, providing additional protection to the buyer. This collateral agreement does not impact the main agreement, which is the sale of the goods themselves, but provides added assurance to the buyer that the goods will meet certain standards.

Another example of a collateral contract is an indemnity clause, which is commonly used in construction contracts. The indemnity clause states that one party will hold the other party harmless from any claims, damages, or legal fees arising from the project. This clause provides additional protection to the parties beyond the main agreement to build and pay for the project.

In summary, collateral contracts are agreements that provide additional support and protection to the main agreement. They are not essential to the deal and do not alter its core elements, but rather supplement it. Understanding collateral contracts is important in order to ensure that all parties are aware of their rights and obligations under the contract.