Technically, this means ‘standing alongside’ – something which follows from the main contract and is, effectively, part and parcel of that agreement and tied to it. A collateral agreement is one which could not be fulfilled independently of the main contract.
The easiest example to cite is a contract for the sale of stock which is dependent upon the sale of a shop as a going concern.
There is a secondary meaning to the term collateral – it sometimes means the security for a loan. Normally a lender takes a mortgage charge to secure the loan of funds required to finance the original purchase. Where the value of the property is well in excess of the loan there are no problems and the charge against the title recorded at the Land Registry will be adequate security.
However, if the
loan is close to the full market value of the property, the bank or building society
may ask for additional collateral before approving the mortgage. This may be a
second charge against another property or some other valuable consideration –
for example, an insurance policy charged to the lender, an undertaking from a
family trust or a lien (q.v.) over shares in family-owned
business. This secondary security stands alongside the main registered charge
as additional collateral.