What Is a Collateral Contract Used for

As businesses enter into agreements with suppliers, customers, and other stakeholders, they often need to ensure that the terms of the agreement are clear and enforceable. One tool that businesses may use in this effort is a collateral contract. In this article, we’ll explore what collateral contracts are and how they are used in business agreements.

What is a Collateral Contract?

A collateral contract is a separate agreement that is made between the parties to a primary contract. The purpose of a collateral contract is to provide additional terms or assurances that are not included in the primary contract. These additional terms or assurances may relate to the performance of one of the parties, the quality of goods or services provided, or other matters that are important to the parties.

Collateral contracts may be verbal or written, although written agreements are easier to enforce in court. A collateral contract must meet several requirements to be valid and enforceable. These include:

– It must be supported by consideration. In other words, each party to the collateral contract must receive something of value in exchange for agreeing to the additional terms.

– It must be independent of the primary contract. The collateral contract cannot be merely a restatement or clarification of the terms of the primary contract.

– It must be made for the purpose of inducing the other party to enter into the primary contract.

– It must be intended to be a legally binding agreement.

Collateral Contracts in Business Agreements

Collateral contracts are often used in business agreements to provide additional assurances to one or both parties. For example, a supplier may make a collateral contract with a customer to guarantee that the goods supplied will be of a certain quality or that they will be delivered within a specified timeframe. Alternatively, a customer may make a collateral contract with a supplier to ensure that the supplier will not provide similar goods to a competitor during the term of the agreement.

Collateral contracts can also be used to provide additional protection to one or both parties in the event of a breach of the primary contract. For example, a party may make a collateral contract with a third party to provide a guaranty or surety bond that will ensure that the other party is compensated in the event of a breach of the primary contract.


Collateral contracts are an important tool for businesses that want to ensure that their agreements are clear and enforceable. By providing additional terms or assurances, collateral contracts can help to build trust and confidence between parties. If you are involved in a business agreement, you may want to consider whether a collateral contract could help to provide the additional protections or assurances that you require. Consider consulting with an experienced attorney to ensure that any collateral contract you enter into is valid and enforceable.

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