Legal Definitions - accessory contract

An accessory contract is a secondary agreement that exists to support, secure, or guarantee the performance of a primary, main contract. Its validity and enforceability are directly linked to the existence and validity of that primary agreement. If the main contract is invalid, fulfilled, or terminated, the accessory contract typically loses its purpose or becomes unenforceable as well.

Here are some examples to illustrate this concept:

• Example 1: Loan Guarantee

  Imagine a small business, "InnovateTech," wants to secure a loan from a bank to expand its operations. The bank agrees to lend the money (this is the primary contract). However, to mitigate risk, the bank requires the owner of InnovateTech, Sarah, to personally guarantee the loan. Sarah signs a separate agreement stating that if InnovateTech defaults on the loan, she will be personally responsible for repayment (this is the accessory contract).

  How it illustrates the term: Sarah's personal guarantee only exists because the primary loan agreement exists. If InnovateTech successfully repays the loan, Sarah's guarantee automatically terminates. If, for some reason, the original loan agreement between InnovateTech and the bank was found to be invalid from the start (e.g., due to a legal technicality), then Sarah's accessory guarantee would also be invalid because there would be no primary obligation for her to guarantee.

• Example 2: Mortgage on a Home

  When someone buys a house, they typically take out a loan from a bank to pay for it (this is the primary contract – the promissory note to repay the debt). To secure this loan, the buyer grants the bank a mortgage on the property (this is the accessory contract). The mortgage gives the bank the right to take possession of the house if the buyer fails to make loan payments.

  How it illustrates the term: The mortgage exists solely to secure the repayment of the primary loan. Once the homeowner fully repays the loan, the mortgage is released, and the bank no longer has a claim on the property. If the original loan agreement were somehow deemed invalid (e.g., if the bank never actually disbursed the funds), the mortgage securing that non-existent debt would also be unenforceable.

• Example 3: Performance Bond for Construction

  A city hires "BuildRight Construction" to build a new public library (this is the primary contract). To ensure the project is completed on time and according to specifications, the city requires BuildRight Construction to obtain a performance bond from an insurance company (this is the accessory contract). This bond promises that if BuildRight Construction fails to fulfill its obligations under the primary contract, the insurance company will step in to ensure the project's completion or compensate the city for damages.

  How it illustrates the term: The performance bond's existence and purpose are entirely dependent on the construction contract. If the construction contract is successfully completed, the bond expires. If the construction contract were to be legally cancelled before work began, the performance bond would no longer have a primary obligation to secure and would become void.