collateral contract

Written or oral associated, second, or side (but independent and separate) contract made between the original parties, or between a third party and an original party, before or at the same time the first or main contract is made. A collateral contract is entered into commonly because (1) its terms are incompatible with those of the main contract, (2) rules of evidence preclude its incorporation in the main contract, (3) the main contract is defective, or (4) the contracting parties are different (involve a third party). It may also be entered into to avoid violating the privity of the main contract. A collateral contract runs parallel to the main contract and may override or supplant one or more of the main contract's provisions. For example if 'A' enters into a construction contract with 'B' on the basis of which 'B' enters into a contract with 'C' for a material used in the construction, 'A' may have the right to sue 'C' for compensation if the material turns out to be defective. A collateral contract between three or more parties requires the contracting parties to fulfill their individual obligations to each party. Called also collateral warranty.