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Collateral Contract

Discuss about the Principles Of Commercial Law for Rafia.

Rafia is an event manager who managed events for University of Sunshine Coast (USC). She was tasked with the management of a multi-cultural event which would also be undertaken during a visit from an Indian university. The primary purpose for this was to solicit an exchange program with the Indian university. Rafia has seen an advertisement for Indian cultural performances on a particular website and was impressed by the pictures on the same. She met with the principal of the dance school called Shastriya Nritya (whom the website belonged to) and approached her regarding a performance for the Indian visitors. Rafia made the purpose of the performance very clear to the principal (Kalpana) and explained to her that the purpose could only be achieved through a culturally appropriate performance. Rafia went on to specifically clarify that the dance performance would adhere to “traditional standards” as per prevailing ideologies in India, Kalpana had strongly agreed with the same and stated that the show would be traditionally appropriate. However this was not an explicit term that was included in the contract. Rafia had further stated that the dance should be like the traditional Indian dance videos available on Youtube because she was very impressed by them. Thus, a contract was formed between them concerning the traditional dance event. The dance event was widely advertised by Rafia and called a cultural show. However, once the performance was done the Indian delegates were unimpressed and it was stated that this was not a cultural dance but more inclined towards the Indian movie industry’s rendition of the same. Moreover, there were people who had purchased tickets for the event and asked for refunds for the same and this would be huge loss for the university. Subsequently, the contract regarding the exchange program also failed due to the disappointment of the Indian delegates.

The issue here is to determine if the oral assurance given by Kalpana would form a part of the contract.

Common law principles which are developed through judicial pronouncements are incorporated into the framework of Australian laws (Hainz, Weill and Godlewski 2013). These have precedential value and thus have a binding effect on legal disputes in the Australian commonwealth. In the case of Heilbut, Symons & Co v Buckleton [1912] UKHL 2 it was held that a collateral contract is one where a person enters into a contract by virtue of the existence of another promise form the other party (Llewellyn 2016). Thus, the collateral contract is one which is separate from the original contract but is related to and supplementary to the original contract. Thus the collateral contract acts as consideration to enter into the original contract. Thus in such a case the promise would not be a term of the contract but a separate contract. However, the separate contract was the basis for entering into the original contract and a breach of this would entitle the innocent party to damages for the same.

Elements of Collateral Contract

The following elements must be present to successfully establish the presence of a collateral contract (McKendrick 2014):

  • There is a promissory statement and the same is followed by a promise.
  • The collateral contract is consistent with the original contract.
  • Collateral contract must have all the elements of a contract.

It has also been held in the case of De Lassalle v Guildford [1901] 2 KB 215 that an assurance which solicits the acceptance of another contract may be construed to be a collateral contract (Hughes, Champion and Murdoch 2015).

When entering into the agreement Rafia ensured that the purpose for the performance was made clear to Kalpana. Kalpana subsequently assured Rafia that the show would be a cultural and traditional dance and hence the purpose (which was getting the contract for the exchange program from the Indian university) would be fulfilled. On the basis of this assurance Rafia entered into the contract.

Thus there was a promissory statement made when Rafia asked for the assurance from Kalpana. There was a subsequent promise as Kalpana assured her that the performance would adhere to standard stated by her (Knapp, Crystal and Prince 2016). This contract was consistent with the contract formed regarding the performance. Finally, there was an offer and acceptance and a valid consideration for both parties thus the collateral contract had all the elements of the original contract. Thus it can be inferred that transaction had all the elements of a collateral contract (Kötz 2017).

Thus form the judgment in Heilbut, Symons & Co v Buckleton [1912] UKHL 2 we can infer that this was a collateral contract because there was an assurance which solicited the acceptance of another contract (Stone and Devenney 2017). From the judgment in De Lassalle v Guildford [1901] 2 KB 215 it can be inferred that an assurance on the bases of which a contract is entered into is a collateral contract and thus the promise would be a collateral contract (Turner 2014).

Conclusion

The oral assurance given by Kalpana would not be included or inferred as a term of the original contract. However it would be construed to be a promise on the basis of which a contract was entered into and resultantly it would be deemed a collateral contract.

In the same set of circumstances as above it must be determined that if the oral assurance given by Kalpana is considered to be a term of the contract then if it would be construed as a condition or a warranty by the court.

As stated above Australian law is subject to  and thus the same would have a binding effect on legal disputes within the Australian commonwealth.

Oral Assurance as a Collateral Contract

As per common law a condition is an important part of the contract. A condition would be construed as a material performance obligation without which the basis of the contract would cease to exist. Thus in case of conditions they are terms that dictate the purpose of the contract. This position has also been reiterated in Poussard v Spiers and Pond [1876] 1 QBD 410. In case of a breach of a condition the innocent party has the option of repudiating the contract. Conditions are ideally explicitly added as a term of the contract (Adriaanse 2016).

A warranty on the other hand is a supplementary term which does form the crux of the agreement and a breach of it would not lead to a loss so substantial that the purpose of the agreement would be defeated. In case of a breach of warranty the innocent party foes not have the right to rescind the contract and can only claim damages for the breach. This position has been reiterated in Bettini v Gye (1876) 1 QBD 183 (Honigsberg, Katz and Sadka 2014). This would also ideally mean that the warranty is not such a clause that would carry the essence of the contract (Pagallo 2013). Thus for such a case the right to rescind the contract does not arise and thus it is only appropriate to award damages for the same.

Thus we see here that if the oral assurance given by Kalpana is interpreted as a term of the contract the extent of the implication of the term would have to be considered when determining if it is a condition or a warranty. By virtue of the fact that Rafia entered into the contract purely because the assurance given by Kalpana this could be looked at as a condition as the basis of the subsequent contract was this very assurance. This assurance thus formed the crux of the transaction. Thus, following the judgment in Poussard v Spiers and Pond [1876] 1 QBD 410 it maybe so determined that the oral assurance was a condition and thus a breach of such a condition would entitle the innocent party (Rafia) to rescind the contract (Brudner 2013). This however would only be the case if the court determined the oral assurance to be a term of the contract and not a collateral contract as a whole. Thus in case of a collateral contract the right to rescind the contract does not arise.

Condition vs Warranty

Conclusion

To conclude, if the court construes Kalpana’s oral assurance as a term of the contract it would be regarded as a condition. The breach of such a condition would entitle the innocent party to a right to rescind the contract.

The issue that has been identified in this given scenario is what remedies are available to the USC in relation to the given facts of the case.

In this given scenario the principle collateral contract is relevant. A collateral contract can be defined as a form of unilateral contract in which one of the parties enters into the contract by relying on the promise given to him by the other party. In case of a collateral contract the promise made by either of the parties, is held to be the consideration of the main contract.  The definition of a collateral contract had been clearly illustrated in the De Lassalle v Guildford (Brudner 2013). In this case it had been held that the collateral contract must be consistent with the main contract that was entered upon by the parties (Smits 2017). It can be stated that the principle of collateral contract is an exception to the parole evidence rule which states that when a written contract is signed between the parties, the terms of such contract will be binding upon the parties and any attempt to the change the terms of such contract after it has been signed is not permitted.

As illustrated in the case Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd of for a collateral contract to be considered valid, it has to be promissory in nature (Gerding 2013).

Such contract must have the intention to induce as held in the case Evans & Sons Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 (Scott 2013).

A collateral contract must be consistent with the main contract as held in the case Jacobs v Batavia & General Plantations Trust Ltd [1924] 1 Ch. 287 (Poole 2014).

However, a collateral contract entitles the parties to the contract to any enforce any oral promise which is not mentioned in the written contract. It can be stated that in case of breach of a collateral contract the main contract cannot be repudiated (Pargendler 2018). However, the aggrieved party can claim damages for the loss sustained due to the breach of the collateral contract as held in the case De La Salle v Guildford.

Remedies available for breach of Collateral Contract

Thus by analyzing the facts of the case Rafia had entered into the contract by relying on the promise of Kalpana, that the dance performance would involve classical Indian dance. Kalpana had assured her that with an oral guarantee stating that her dance troupe performs the most beautiful Indian dance. Kalpana had been notified that the dance performance was very important to for the USC as it would promote student exchange programs between the two countries. Thus by the application of the decision of the case Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd  it is evident in this it can be stated that a collateral contract existed between Rafia and Kalpana, even though this oral assurance was not mentioned in the contract (Gilson, Sabel and Scott 2014). However, it can be stated that the performance resembled a Bollywood dance performance and not Indian Classical.  Therefore in this case it is evident that there was a breach of the collateral contract which was promise made by Kalpana to Rafia of delivering a classical Indian dance performance (Meyer 2013). Therefore by the application of the De Lassalle v Guildford case it can be stated that USC has the right to claim damages for the loss sustained by the same for breach o the collateral contract (Macdonald, Atkins and Atkins 2014). However, USC cannot repudiate the contract since the breach was in relation to the collateral contract and not the main contract.

Conclusion

Thus, to conclude it can be stated that USC can claim damages from Kalpana for breach of the collateral contract.

Reference List

Adriaanse, M.J., 2016. Construction contract law. Palgrave Macmillan.

Brudner, A., 2013. The unity of the common law. OUP Oxford.

Gerding, E.F., 2013. Contract as pattern language. Wash. L. Rev., 88, p.1323.

Gilson, R.J., Sabel, C.F. and Scott, R.E., 2014. Text and Context: Contract Interpretation as Contract Design. Cornell L. Rev., 100, p.23.

Hainz, C., Weill, L. and Godlewski, C.J., 2013. Bank competition and collateral: Theory and evidence. Journal of Financial Services Research, 44(2), pp.131-148.

Honigsberg, C., Katz, S. and Sadka, G., 2014. State Contract Law and Debt Contracts. The Journal of Law and Economics, 57(4), pp.1031-1061.

Hughes, W., Champion, R. and Murdoch, J., 2015. Construction contracts: law and management. Routledge.

Knapp, C.L., Crystal, N.M. and Prince, H.G., 2016. Problems in Contract Law: cases and materials. Wolters Kluwer Law & Business.

Kötz, H., 2017. European contract law. Oxford University Press.

Llewellyn, K.N., 2016. The common law tradition: Deciding appeals (Vol. 16). Quid Pro Books.

Macdonald, E., Atkins, R. and Atkins, R.D., 2014. Koffman & Macdonald's Law of Contract. Oxford University Press, USA.

McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).

Meyer, J.A., 2013. Extraterritorial Common Law: Does the Common Law Apply Abroad. Geo. LJ, 102, p.301.

Pagallo, U., 2013. The laws of robots: crimes, contracts, and torts (Vol. 10). Springer Science & Business Media.

Pargendler, M., 2018. The Role of the State in Contract Law: The Common-Civil Law Divide. Yale J. Int'l L., 43, p.143.

Poole, J., 2014. Casebook on contract law. Oxford University Press, USA.

Scott, R.E., 2013. Text versus Context: The Failure of the Unitary Law of Contract Interpretation. Francis Buckley, The American Illness: Essays on the Rule of Law, pp.325-326.

Smits, J.M. ed., 2017. Contract law: a comparative introduction. Edward Elgar Publishing.

Stone, R. and Devenney, J., 2017. The modern law of contract. Routledge.

Turner, C., 2014. Unlocking contract law. Routledge.

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