Best Tips and Tricks for Drawing Up a Killer Collateral Agreement!

Standardized Legal Documents Best Tips and Tricks for Drawing Up a Killer Collateral Agreement!

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. 

DoNotPay can answer all your questions about collateral agreements, show you how to write any contract, and explain how legal documents work.

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:

Collateral Contract

Brief Explanation

UnilateralOne party makes a promissory note in exchange for funds
BipartiteBoth parties in the original contract enter the collateral contract
TripartiteA 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:

  1. It must not contradict the original agreement
  2. The contract should be promissory
  3. A statement should follow the promise
  4. It has to contain all legal elements of a contract
  5. 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. 

Create Your Legal Documents With DoNotPay

Ideally, you should consult a lawyer when drafting contracts, but what if you don’t have the budget to hire an attorney? Creating legal documents yourself can be quite a hassle if you don’t understand legal and business jargon. 

Don’t let this bring you down because DoNotPay has got your back! For an affordable monthly fee, we can draw up numerous contracts and agreements for you!

All you have to do is follow these steps:

  1. Register for DoNotPay
  2. Type the name of the document you need
  3. Add details to help us customize your contract

DoNotPay will send you a personalized document within minutes! All you need to do is download, print, and sign it.

Here’s a list of the documents we can create:

Real EstateBusinessOther

Can’t find what you’re looking for? DoNotPay is working around the clock to add more documents, so stick around to find out more!

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