Guarantees and contracts

HIA’s QC1, QC2 and QC3 contracts include a form of guarantee to be used where someone is to guarantee your client’s obligations under the contract. It is not used to guarantee your obligations under the contract.

What rights does a guarantee give you?

The guarantee is not a guarantee that the contract price will be paid. What a guarantee does is create a right to enforce a contract against another person who is not a party to the contract (the guarantor) in the event that your client defaults under the contract. This is usually the recovery of money that your client fails to pay.

When should you use the guarantee?

You should use the guarantee in situations where you have doubts that your client has sufficient funds to pay the contract price. This may be where the owner is a young person being financed by a relative.

If your client is a partnership, proprietary limited company or trust, then it is good business practice to always obtain a guarantee from a natural person with sufficient assets to cover the guarantee. It is normal practice for the directors or shareholders to guarantee a company's obligations.

When is the guarantee not normally required?

If your client has sufficient funds then you should usually require your client to pay these funds into a security account without the need for your client to provide a guarantee. If your client has approved finance from a lending authority then it is not usual to also require your client to provide a guarantee.

How are guarantees enforced?

A guarantee is enforced by legal action against the guarantor(s), that is all the persons named who have signed the guarantee. Under the guarantee each guarantor is personally liable for the full amount guaranteed.

You do not need to have taken any legal action to recover against your client. The guarantor is liable to pay any amount that has not been paid by your client. It is good practice before proceeding to enforce a guarantee to make a claim on your client in the form of a “letter of demand”. Nevertheless, before commencing any legal action, we recommend that you seek legal advice.

How do I go about obtaining a guarantee?

HIA’s contracts contain a deed of guarantee. Item 7 in the contract schedule provides for the name of the “owner’s guarantors” to be inserted and then the named persons must sign the deed of guarantee and indemnity in Annexure 1. The guarantee should be sought at the time you enter into the contract.

If your client objects or refuses to provide a guarantee, then it is a matter of commercial risk for you to decide whether or not to proceed to contract. There are also other mechanisms, such as a caveat over the land (where the owner is not a resident-owner), a bank guarantee or a security account, which may be used to provide some security. If your client causes delays in providing you with a signed deed of guarantee and indemnity, you do not have to start work. You can also give your client a written request to provide the deed of guarantee and indemnity within a reasonable time. If your client fails to give the signed deed then your client is in breach of the contract.

Why is there no guarantee of the builder’s obligation?

Your clients may often ask you to provide a guarantee if they are to provide a guarantee. The contract does not contain a form of guarantee for the builder. Your clients, under Queensland law, already enjoy a high level of protection in the form of:

• QBCC statutory insurance that protects them should you fail to complete the contract or if your work is defective (which is the equivalent of a guarantee for the consumer); and
• The work is carried out on your client's land (and therefore your client owns the work) before paying for it. Your client should not be paying you for work in advance.

In circumstances where a guarantee is suitable, the guarantee can serve as an additional form of protection for builders and act as a deterrent against defaulting clients. However, a guarantee should not be a substitute for carrying out the necessary financial checks on your client in accordance with clause 2.1 of the contract prior to commencing work. HIA recommends that if you have any questions about the guarantee, need to exercise your rights in relation to a breach of contract, or are intending to enforce a guarantee, then you should contact a HIA Workplace Adviser, or your solicitor for further advice.