Gossip Girls

Collateral Contract

Gossip GirlsMy attempt at question 3 on terms and representations. This is a tough nut to crack. According to the question, S and T were in negotiations but certain terms were not included by T in the written contract. T claims that the Evidence Act would not allow oral terms to be included if a written contract is in place. The question is whether these statements are still legally binding nonetheless.

My gut instinct tells me that they have to be, but let’s look at the Law.

Oral Terms
Establish the 4-tests.

Parol’s Rule
The parol evidence rule prohibits a person from adducing oral evidence where the terms of the contract have been put into writing. This means that where a written document exists to record the agreement, the court will not allow the introduction of oral evidence to contradict the terms of the agreement.

The reason for this is established in Tindok Besar Estate S/B v Tinjar Co where it was decided that introduction of extra evidence that modify the terms of the agreement would open the floodgates to all manners of dispute and no agreement would be safe from being re-written in court.

Therefore, T is preliminarily right in telling S that those negotiated terms that are not included in the written contract cannot be introduced in court, if S were to bring the case to court – except that there are exceptions to the parol evidence rule that have reduced the effectiveness of S.92 of the Evidence Act.

However, in Tan Chong and Sons Motor Co v Alan McKnight it was decided that the rule only applied when all the terms negotiated had been reduced to writing. If some terms agreed to orally were left out, those terms could still be introduced as evidence.

Collateral Contracts
In addition, S.92(b) of the Act allows the admission of parol evidence on the existence of any separate oral agreement on matters where the document is silent and that are not inconsistent to it. This device is a collateral contract and is particularly useful where an oral statement is made which induced the party to enter into contract.

The oral contract is considered a separate contract but exists side-by-side with the main contract. Therefore, it does not violate the parol rule but is a work-around for the limited situation where the oral terms induced the party to enter into contract.

It was held in Kluang Wood Products S/B v Hong Leong Finance Bhd that the requirements for this are that there exists a representation that was intended to be relied upon and used to induce the party into signing the contract. Therefore, the representation itself must amount to a warranty, collateral to the main contract.

Therefore, the issue now is whether the representations made during the negotiations between S and T were relied upon and induced the other party into signing the contract and therefore exists as a collateral contract, side-stepping the parol evidence rule.

From this, it is quite possible that the representations made by T during the course of negotiations form a collateral contract and are legally binding. The rule to determine this depends on whether they were intended to be relied upon and used to induce S into signing the contract.

The question itself is not clear on this but this can be inferred from the insistence by S that T include those representations in the written contract. Those terms must have been important to S. Therefore, I would argue that the representations are legally binding in the sense that they exist as a collateral contract.

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Shawn Tan

Chip Doctor, Chartered/Professional Engineer, Entrepreneur, Law Graduate.

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