Collateral contract: Definition, Example and Related Terms
What is a Collateral contract ?
A collateral contract is like a side agreement that two parties make, either while they're making their main contract or promise to make in the future. It's kind of like if you and your friend agreed to trade your baseball cards, and then also agreed that whoever got the better deal would buy the other ice cream. The ice cream agreement is like the collateral contract - it's related to the main deal, but it's a separate promise.
An interesting thing about collateral contracts is that they can sometimes be used to correct mistakes or fill in gaps in the main contract. For example, if you and your friend realized later that you forgot to say when the ice cream had to be bought by, you could make a collateral contract to clear that up.
Example(s)
Scenario Description Sponsorship Deal A company agrees to sponsor a sports team, and they also make a collateral contract that the company will provide extra funding if the team makes it to the championships. Software Purchase A business buys software from a supplier, and they make a collateral contract that the supplier will provide extra technical support for the first six months. Music Festival A band agrees to play at a music festival, and they make a collateral contract that the festival will provide extra security for the band's equipment.