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Building contracts – key terms to protect yourself against bad debt …
Good terms of trade (building contracts) can help prevent bad debts and get your money into your bank account where it belongs.
From 1 January 2015 it is mandatory to have written terms of trade for projects worth $30,000 or more. We recommend having written terms of trade for all building work.
You should make sure that, in addition to the minimum requirements of the Building Act, your building contract protects you from bad debt as much as possible.
- Requiring a deposit is one of the best ways that you can prevent against bad debt. It means that your money is already in the bank account and you can rest easy knowing that you will not need to chase it. If you do use deposits, you should get top-ups as further work is required.
- You should include an interest clause in your terms of trade setting out that interest will accrue on any amount once it becomes overdue. If you don’t include such a clause, your ability to claim interest is very limited and only arises where you file proceedings to recover the debt. Even then, the amount of interest you can claim and the period you can claim it for is limited. The interest rate specified must be reasonable for it to be enforced.
- A default clause allowing you to recover against the debtor any amount you have spent in trying to recover the debt is also vital. It means you can have confidence initiating debt recovery proceedings knowing that you are likely to get your investment back.
- Where you have identified that you are contracting with an owner that is not an individual (e.g. a company, trust, or body corporate), you may want to obtain a personal guarantee from the directors or trustees. A valid personal guarantee will enable you (in the event the company or trust defaults on its obligations under the building contract or becomes insolvent) to claim against the individuals who guaranteed the debt. If you are contracting with a domestic couple, you should get both to sign the contract so that you can pursue both in the event of a default. There are particular requirements for a guarantee to be valid, including that the guarantee’s signature must be independently witnessed. It pays to take advice on how to properly get a guarantee to ensure that it is enforceable.
Once your terms of trade are in place, you need to ensure that you keep good records of what has been agreed, and comply with all of your obligations.