Everything You Need To Know About a Collateral Agreement
If you want to create a collateral agreement, you should have all the information you need beforehand.
What Is a Collateral Agreement?
A collateral agreement is an independent document between parties in the original contract regulating a separate issue or deal. It can also determine the conditions under which one party can enter an agreement with an outside contractor.
For example, an individual X is renting their house to Y and promises to fix the electricity problems before Y moves in. In this case, the rent agreement is the original contract. X’s promise to repair electricity is the collateral agreement beyond the main contract. If X does not get it repaired, Y can sue X or demand financial compensation for the inconvenience caused.
Collateral contracts set out additional terms for the main agreement. If the primary contract has any error or is missing important information, the collateral agreement serves to rectify the mistake.
You can use collateral agreements alongside many contracts, such as:
Why Do You Need a Collateral Agreement?
There are many reasons for a collateral contract, and the most common ones are listed below:
- The original contract might miss an important element
- There are errors or conflicting statements in the main contract
- A mediator is required to resolve conflicts
- Both parties do not want to overstep the primary contract’s boundaries
Types of Collateral Contracts
Check out the table below for an explanation of the three main collateral agreement types:
|Unilateral||One party makes a promissory note in exchange for funds|
|Bipartite||Both parties in the original contract enter the collateral contract|
|Tripartite||A third party, not in the original contract, issues a promissory statement|
Collateral Contract Requirements
Your collateral contract must meet the following criteria to be valid:
- It must not contradict the original agreement
- The contract should be promissory
- A statement should follow the promise
- It has to contain all legal elements of a contract
- It should be made before or at the time of drafting the main contract
How To Create a Collateral Contract Yourself
If you want to create the collateral contract yourself, search for contract templates online to get a gist of how to make it. Although using a ready-made document seems easy, online templates are usually outdated and might not have the exact information you require.
When drawing up a collateral contract, make sure that you include the following information:
- Names, contact information, and addresses of all parties
- Terms and conditions of the collateral contract
- Indication of a promissory note
- Duties and responsibilities assigned to each party
- The effective date of the agreement
- Signatures confirming that all parties have read and understood the terms and conditions
Once all parties have signed the contract, you should get the document notarized to confirm that every participant is willingly signing the pact and is not being coerced into it. If you need help finding a notary, DoNotPay can guide you through the process.
Is a Collateral Agreement Legally Binding?
A collateral agreement is a separate contract and not a part or clause of the main contract. If one party fails to honor the collateral contract, the other can file for legal action, while the original contract will still be valid.
A collateral contract is only legally binding if it is in writing. Verbal agreements cannot be enforced in a court of law.
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