Collateral

contracts

- What are they?
• A subsidiary contract which induces a party to enter into a main contract or
which depends upon the main contract for its existence.

Subsidiary contract
• may be made between the original parties or between a third party and
the original party before, before or at the time the first or main contract is
made.
• Usually is a unilateral contract i.e. only one party to it makes the promise.
• Offer and acceptance of the agreement is the original intention of the first
contract.
• The consideration is the promise to enter into the original agreement –
Kah Seng Contruction Sdn Bhd v Selsin Development Sdn Bhd.

Induces
• Must be distinguished from mere puffs and representations
• Mere puffs are usually statements of intention or opinions which carry no
legal consequence
• Representations are statements of fact which are intended to induce a
party to enter into a contract.
• Representations are deferent from collateral contracts in that
representations made under a collateral contract have the effect of a
promise or warranty. See: Shanklin Pier v Detel – where the
representation made by the defendants that their paint had a life span of
7 years was held to be a collateral promise when the paint only lasted 3
months.

Depends upon the main contact for its existence
• They cannot have the effect of destroying the main contract.

- Why are collateral contracts entered into:

• It's terms are incompatible with those of the main contact
• The rules of evidence preclude its incorporation in the main contract
• The main contract is defective
• The contracting parties are different (a third party is involved)
• May also be entered to avoid violating the privity of the main contract

- Collateral contracts and the patrol evidence rule

o Written contracts represent the terms of agreement between the parties.
o Any oral representations made between the parties before that which do not
find their way into the written document are considered representations – and
are less important.
 o Written contracts are signed and it is difficult to argue that it does not
represent the intention of the parties – see: L’Estrange v F’Graucob Ltd –
bound by signature rule.
o The parol evidence rule supports the bound by signature rule – in that any
extrinsic evidence cannot be brought into court. The aim of the rule is to
protect the original content of ten written contract between the parties. This
ensures certainty and stability particularly in business dealings.
o In Malaysia the parol evidence rule is provided for in Sections 91 & 92 of the
Evidence Act 1950.

- Sections 91 & 92 Evidence Act 1950

• Section 91 states that where the terms of a contact … have been reduced into
a document … no evidence shall be given in proof of the terms of the contract,
… except the document itself, or secondary evidence of its contents ... is
admissible…

• This is known as the best evidence rule; see: Bhai Hira Devi v The Official
Assignee Bombay; Datuk Tan Leng Teck v Sarjana Sdn Bhd – oral evidence of
the terms is therefore unnecessary.

• Section 92 in turn provides that where the terms have been proved as per
Section 91, any oral agreement or statement shall not be adduced which adds,
subtracts, varies or contradicts the written agreement.

• Section 92 however provides for a number of exceptions, in particular Section
92(b) which concerns collateral contracts, a device that has been used to admit
pre-contractual statements which had not been incorporated into the written
agreements.

• There are two general situations where the courts would acknowledge the
existence of a collateral contract:-

§ Where a party is able to show that he would have refused to enter into
the written agreement if he had not received assurance on a particular
point; and

§ Where there was a promise not to enforce a particular term in the main
contract.

• In JJ Savage & sons Pte Ltd v Blakney it was held that for there to be a collateral
agreement,
§ The statement must have been intended to be relied upon
§ Reliance must be by the party alleging the collateral contract
§ The maker of the statement must have intended to guarantee its truth.

 • This was endorsed in Kluang Wood Products Sdn Bhd v Hong Leong Finance
Berhad.

• Collateral contracts do not offend the parol evidence rule because the oral
promise is not imported into the main contract. It is a separate contract,
collateral to the main contract.

• It must be noted however that the basis of the collateral contract is the written
contract itself, therefore it cannot destroy the main contract. See: Tan Swee
Hoe Co Ltd v Ali Hussain Bros; Industrial Distribution Sdn Bhd v Golden Sands
Construction Sdn Bhd.

• Collateral contracts are allowed to be enforced where the contract is made
partly in writing and partly oral, see: Walker Property Investment (Brighton)
Ltd v Walker; Tindok Besar Estate Sdn Bhd v Tinjar Co; or where the written
contract is silent on the subject matter of the collateral contract.

• In Tan Chong Motors Co Sdn Bhd v Alan McKnight, the courts allowed for the
collateral promise to be admissible to avoid mischief in the law and to ensure
business efficacy.

• The terms of a collateral contract must be strictly proven, see: Sama World
Asia Sdn Bhd v RHB Bank Bhd – where it was held that the law views with
suspicion collateral contracts, the sole effects of which is to vary or add to the
terms of the main contract.

• It was also held in Sama World’s case that in construing whether there is a
collateral contact, the courts shall have regard to the degree of formality of
the document, the more formal the written agreement is, the more suspicious
the court must be to the existence of a collateral contract. See also: Bank
Pertanian Malaysia Berhad v Fiskal Fantasi Sdn Bhd & Anor; Jamin Trading
Sdn Bhd & Anor v Shell Malaysia Trading Sdn Bhd

• Not all oral evidence may be brought in and is regarded as collateral contract.
Courts will examine and determine critically whether the oral evidence may
constitute a collateral contract. The burden of proving a collateral contract is
on the party alleging its existence. Industrial & Agricultural Distribution Sdn
Bhd v Golden Sands Construction Sdn Bhd.

- The position of collateral agreement which are inconsistent with the main contract

• Section 92(b) of the Evidence Act 1950 states ‘the existence of any separate
oral agreement, as to any matter on which a document is silent and which is
not inconsistent with its terms, may be proved, and in considering whether or
not this proviso applies, the court shall have regard to the degree of formality
of the document’.

 • The wordings of the section are therefore clear, a collateral agreement cannot
be admissible where:

§ It concerns a matter on which the written agreement is silent; and
§ Where it is not inconsistent with the terms of the written agreement;
and
§ Where the agreement between the parties can be said to be partly oral
and partly written. The more formal the document, the less likely it will
be construed as such.

• The Federal Court however in the case of Tan Swee Hoe Co Ltd v Ali Hussain
Bros held, that an oral promise made at the time the contract was entered into
which induces a party to enter into an agreement, overrides any inconsistent
written agreement.

‘In our view there is a growing body of authority which supports the
proposition that a collateral agreement can exist side by side with the
main agreement which it contradicts’ per Raja Azlan Shah CJ

• In Bank Pertanian Malaysia Bhd v Fiskal Fantasi Sdn Bhd (2010) the High Court
in holding that an oral collateral agreement was only admissible where it was
not inconsistent with the terms of the written agreement; held that the
approach in the case of Tan Swee Hoe Co. Ltd has not been accepted by the
courts in Singapore (where a similar provision to Section 92(b) exist), see:
Latham v Credit Swiss First Boston (2000) 2 SLR 693

• In Latham’s case it was held that Section 94(b) of the Singapore Evidence Act
(equivalent to our Section 92(b)) only allows the admission of evidence of a
collateral contract on matters which are not inconsistent with the written
agreement. Where the collateral agreement is inconsistent with the written
agreement, the evidence is inadmissible.

• The case of Tan Swee Hoe Co Ltd relied heavily on English authorities given
that it was one of the first cases to deliberate the issue. However, despite there
being support at common law for the proposition in Tan Swee Hoe, the High
Court in Bank Pertanian Malaysia Bhd held that the position in Malaysia is
clear, collateral agreements pertaining to a matter on which the document is
silent, evidence as to its nature, factual background or surrounding
circumstances may be given when such oral agreement is not inconsistent not
contradict the terms of the document.

• The courts in Bank Pertanian quoted with approval the Court of Appeal’s
decision in Seven Seas Industries Sdn Bhd v Philips Electronics Supplies (M)
Sdn Bhd & Anor (2008) where the Court of Appeal held:

‘… The doctrine of collateral contract or agreement is recognised in
this country by virtue of proviso (b) to s.92 of the Evidence Act 1950
 which allowed to be admitted into evidence any separate oral
agreement as to any matter on which a document is silent and
which is not inconsistent which its terms. Unless the additional
evidence sought to be introduced falls within the scope of any of the
provisos, it should not be allowed to be introduced as it would be to
contradict, vary, add or subtract from the terms of the agreement
(per Chang Min Tat FJ in Tindok Besar Estate Sdn Bhd … such
collateral contacts must be viewed strictly (see: Heilbut Symons & Co
v Buckleton [1913] AC 30). No agreement would be safe from being
re-written by one party in the contract if parol evidence which do not
fall within the proviso of S92 of the Evidence Act is admitted in
evidence (see: Tindok Besar Estate Sdn Bhd, supra. [Emphasis
added]

• The High Court in Alliance Investment Bank v Good Quantum Sdn Bhd & 3
other (2009) expressed similar views however the Court of Appeal in Good
Quantum Sdn Bhd & 3 others v Alliance Investment Bank Berhad (2015) 2 MLJ
746 choose to endorse the position in Tan Swee Hoe.

(Note: the High Court held that Section 92(c) is limited to evidence of a
condition precedent to a written contract; a condition precedent is one where
the parties have agreed that The written contract does not take effect until the
fulfillment of a certain condition precedent. See: Latham v Credit Suisse First
Boston)

• The Court of Appeal referred extensively to the judgement of Raja Azlan Shah
CJ, as he was then, in Tan Swee Hoe. The Court noted that the decision of Tan
Swee Hoe had met the approval of the Privy Council in His Royal Highness
Prince Jefri Bolkiah & others v The State of Brunei Darussalam, Brunei
Investment Agency (2007) UKPC 63, where Lord Mance held:

‘… if the courts find that all the terms of a written document have
not be reduced into a written document, of course the court is
going to let evidence in of other terms. The many well-known
clauses to prevail over inconsistent oral agreements collaterally
agreed … These provide a induced by a collateral agreement or
misrepresentation, I find it hard to believe that SS91 and 92 would
have prevented this being proved and relied upon…’

• Lord Mance relied on the Federal Court’s decision in Tan Swee Hoe and Tan
Chong & Son Motor Company (Sdn) Bhd v McKnight and went on to hold that
the ‘written agreements were in these cases executed on the faith of an
inconsistent collateral oral promise and representation, respectively, and SS91
and 92 were held to be no bar to such promise and representation being
proved and relied upon. I would not wish to disagree with these authorities.’

 • Relying on the above The Court of Appeal in Good Quantum Sdn Bhd held that
on the facts before it there was credible and sufficient evidence of
inducement, persuasion and assurance give by the plaintiff which constituted
the collateral agreement. The courts held that the defendant would not have
signed the agreement without the assurance given in the collateral contract.
The plaintiff was aware of the collateral arrangements and participated in
them earning a hefty fee.

• Hence the collateral agreement took precedence over the inconsistent written
agreement and the courts ought to take them into account.

• See also: Eushun Propreties Sdn Bhd & ors v MBF Finance Berhad (1992)
where it was held ‘… s92(b) … does not absolutely bar the defendant from
adducing evidence to vary the terms of formal agreements between the
parties.’

• Although the above appears to be the latest word on the issue, it by no means
settles the debate. There have been many other cases in support of strict
adherence to Section 92(b), see: Rira Bina Sdn Bhd v GBC Construction Sdn
Bhd (2010); Jamin Trading Sdn Bhd & Anor v Shell Malaysia Trading Sdn Bhd
(2011); Citibank Berhad v Perbangunan Cahaya Tulin Sdn Bhd & 3 others
(2012);

• In the cases of Rira Bina and Citibank Berhad it was held that where the main
contract is clear and unambiguous, the courts should not go behind its written
terms especially where the allegations of a collateral contract appears to be an
afterthought.

• Further in Citibank Berhad it was held that since the statement made in
Eushun Properties was made in the context of allowing an appeal against the
granting of a summary judgment application by the High Court; it cannot be
read as derogation and deviating from the main provision of the section as can
be seen in the caution issued in Tindok Besar Estates.

Comment

The latest Court of Appeal’s decision in Good Quantum ignores the express
wording of Section 92(b) in favour of the position taken at common law. Cases
such as Seven Seas Industries and the position in Singapore was also not brought
to the attention of the courts and hence the decision was made without
deliberating the issues raised in those cases. The courts also did not focus on the
express wordings of Section 92(b) and no explanation was forwarded for ignoring
the express wordings of the section. Instead the Court of Appeal went down the
same road the Federal Court had in Tan Swee Hoe, relying heavily on English
authorities.

What is clear is that at present there is obviously a conflict in reasoning in the
scope of Section 92(b) which warrants further judicial thought. What can be said
about the cases in which a liberal stand was taken with regards to collateral
agreements, is that in these cases the courts were concern with the
unconscionable conduct of the defendants who although aware of the collateral
arrangements and their impact on the plaintiff’s decision to enter into the
contract, were now arguing that those precise arrangements be ignored in favour
of the written contract. There appears to be support within the profession for the
view that unless the claim of a collateral contact appears suspicious, a collateral
contract ought to be admissible even if it's terms are inconsistent with that of the
written contract.

Munita Kaur
MA (Manchester) LLM (Malaya) LL.B (Hons) London CLP