Collateral Promise: Everything You Need To Know
A collateral promise is one that is established by statute. A promise established aside from the legal statute is referred to as original.3 min read
A collateral promise is one that is established by statute. A promise established aside from the legal statute is referred to as original. These terms have been introduced by case law to ease contract interpretation. The original promise creates debt because it establishes a quid pro quo relationship. On the other hand, a collateral promise can be a binding contract but does not create debt.
Distinguishing Original and Collateral Promises
Although these terms are not clearly defined in legal terms, they were initially adopted to indicate which cases fall outside or inside a statute as intended by Parliament. Remembering this distinction can help you discern that an original promise does not necessarily constitute priority and a collateral promise is not necessarily conditional.
Let's look at some case law examples provided by Chest of Books.
- D'Wolf vs. Rabaud: "The terms original and collateral promise, though not used in the statute, are convenient enough to distinguish between the cases where the direct and leading object of the promise is to become the surety or guarantor of another's debt, and these where although the effect of the promise is to pay the debt of another, yet the leading object of the undertaker is to subserve or promote some interest or purpose of his own."
- Roser v. Roser: "Admitting there were a promise; yet it being collateral it did not make a debt, but should have been brought as an action upon the case."
- Ambrose v. Rowe: "Rolle's argument in that case of Sands c. Trevilian not promises as distinguished from debts are always promises to be answerable only on default of a principal debtor, there seems no reason to doubt that an absolute promise of a surety to pay the debt of one who received the quid pro quo and who also was absolutely liable, is a collateral promise, with reference both to the action of debt and to the Statute of Frauds."
Michigan Statute of Fraud Law
As indicated by statute 566.132(1) of Michigan Compiled Laws (MCL), “an agreement, contract, or promise is void unless that agreement, contract, or promise, or a note or memorandum of the agreement, contract, or promise is in writing and signed with an authorized signature by the party to be charged.”
This means that a promissory note for a debt cannot be legally enforced unless it is signed. This Statute of Frauds defense is legally powerful but does carry some exceptions. Certain oral contracts can be enforced under the doctrine of promissory estoppel. However, this requires the plaintiff to prove that:
- A promise exists.
- The person who made the promise reasonably expected it would result in action on the part of the other party.
- The promise created forbearance or reliance such that it must be enforced for justice to be served.
Promissory estoppel sometimes interacts and contradicts with the statute of frauds, so it's important to have a thorough understanding of both laws to avoid potentially expensive consequences. For example, let's say you want to grow your business and a friend of yours promises to pay all business expenses that exceed your expansion budget. However, he refuses to pay, creating substantial debt and resulting in failure of the company.
Because the promise was not made in writing, you attempt to sue under promissory estoppel and the defendant denies that a promise was made. The defendant argues that the promise falls under the statute of frauds and is thus unenforceable without a written agreement. This is where Michigan law distinguishes between collateral and original promises. An original promise is a promise to pay for services or goods that will be proffered at a later date. A collateral promise is a promise to pay for goods and services that have already been provided.
Based on this distinction, original promises are not covered by the statute of frauds and thus do not need to be made in writing. This is not the case for a collateral promise, which is how the business expenses in the above example would be categorized. Thus, you would lose the case without a signed promise, unless you can prove all required promissory estoppel elements.
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