Collateral agreements also have broader implications for contract law and theory, Cohen argued. Parallel agreements upset the complete contract paradigm that exists in contract theory, Cohen said, because parallel agreements are a deliberate attempt to render the main contract incomplete. “There are many ways in which contract theory can benefit from thinking about parallel agreements and the idea of contract as property.” He concluded by thinking, “Sometimes we have to look to the side to see what`s right in front of us.” Cohen gave the example of a chicken company in Arkansas that needed a larger freezer where supplies could be stored. The company entered into an agreement with a builder to sell the land on which the freezer was to be built and lease it for six years to use for the freezer, with the option of buying back the land and freezer at fair market value. Rather, an ancillary agreement made the purchase price for the purchase of the property the difference between rent payments and construction costs plus interest. Essentially, the chicken company claimed to have a lease, but it actually had a loan because of the side agreement. The chicken company “had several entities that it had to deceive.” The company was concerned about the violation of usury laws, so it hid the parallel agreement from its lawyer; he hid the parallel agreement from his accountants and the IRS because the main agreement allowed the company to pay less tax (a full deduction for lease payments); and the company hid the ancillary agreement from its own bank, which had forced it to maintain a certain asset-to-liability ratio. “Too much debt was incurred by the chicken company” under the side agreement, and the bank would have blocked the deal if it had known, he said. Cohen, who is an expert in the Enron case, pointed to the company`s defunct deal with Merrill Lynch to sell barges operated as floating power plants in Nigeria. No one wanted to buy the barges, but Enron used its ties to the investment giant to reach a deal in which Merrill Lynch bought the barges so that Enron could report the sale as income and profit. The ancillary agreement, which was not submitted to the auditors, provided that Enron would later buy back the barges at a sale price plus interest.

The parol rule of evidence of contract law renders ancillary agreements inapplicable in many circumstances, but focuses doctrinally on whether the main agreement is sufficiently complete or whether the ancillary agreement contradicts the main agreement. Under an exception to the parol proof rule, collateral evidence may be considered if a party presents evidence that the main agreement was deception. “The focus [of teaching] is on the wrong thing. In many of these cases, the evidence of the parallel agreement is very credible because it is the real deal, but the problem is that it is fraud, and should the law sanction the fraud [by allowing the application of the parallel agreement]? Cohen said. “What is most worrying, at least in my opinion, is that the courts are almost completely unaware of the impact of enforcement or non-performance on the interests of third parties.” Parallel agreements tend to appear when the main agreement is used as a type of property, for example. B secured for a loan, Cohen said. “Sub-agreements are private transactions on information, and it is the information that affects the value of the contract as property or the ownership characteristics of the contract that delimit the property, and this second contract. is hidden from interested third parties who otherwise try to understand what the value of the property is or what are the characteristics of the ownership of the main agreement,” he said. Collateral deals are inherently bad if there is no good reason to keep this information secret from third parties, which is also known as fraud. Another innocent explanation sometimes put forward for parallel arrangements is that they may signal a desire for non-legal application.

“How confident we are. that parallel chords really serve as a signal? Cohen asked. Cohen argued that if the parties really want any part of their agreement to be legally unenforceable, they could spell that out in the main agreement. Laws that regulate side agreements — agreements entered into outside of publicly known contracts — should focus on protecting the legitimate interests of third parties such as investors, law professor George Cohen said at a Nov. 7 conference that marked his appointment as Brokaw Professor of Corporate Law. After seeking plausible innocent reasons for ancillary agreements, courts should consider whether third parties are aware of the main agreement, but not of the ancillary agreement. Third parties may be investors, creditors, persons acquiring contractual rights, custodians such as lawyers and accountants, clients, the government and ignorant or new personnel among the parties` businesses. The range of topics covered by the page letters is wide. In some cases, ancillary agreements have determined national labour law policy. .