Key Takeaway Points
- Understanding the purpose of deeds vs agreements. Deeds and agreements can be utilised to serve different legal functions. Deeds bypass the need for consideration, offering enforceability for significant one-sided obligations, while agreements must entail consideration in exchange for a promise or the grant of a right. Selecting the correct instrument ensures smoother transactions.
- Key legal differences between deeds and agreements. Deeds often feature longer limitation periods than agreements and require stricter formalities, such as signing and delivery. They are binding upon execution, even without consideration, making them ideal for transactions involving unique or high-risk obligations.
- When deeds are essential in construction law. Deeds are critical in construction law for securing collateral warranties, step-in rights, and guarantees. These ensure legal clarity and enforceability, especially in complex projects with multiple stakeholders and scenarios where agreements may fall short.
- Specialised deeds for construction projects. Tools like collateral warranties, deeds of consent, and financier step-in deeds address specific construction challenges. They ensure obligations are met, rights are protected, and projects progress smoothly despite defaults or insolvencies.
If you enter contracts on a regular basis, it is of importance to be aware of the nuanced distinctions between agreements and deeds. In this article, the first in our Building Fundamentals series, we set out the key differences between deeds and agreements and their use in the field of construction law.
Deeds and agreements are both legal documents, but they differ in their formalities and enforceability. Having an understanding of the differences between these legal instruments helps you to use them appropriately and progress transactions with certainty. In this article, we further explore common deeds used in conjunction with construction contracts, for establishing collateral warranties, step-in rights and guarantees and indemnities from third parties.
What is a deed?
A deed is a formal document that conveys or confirms an interest, right, or obligation and does not require consideration to be binding. It is usually executed with greater formalities, such as being signed, witnessed, sealed, and delivered, to signify the intention of the parties to be legally bound.
A one-sided deed, known as a deed poll, is a promise undertaken by one party, the promisor, to do a particular thing, for the benefit of another party. The deed purports to create obligations of that first party. It will usually be expressed as being “in favour of” the other party.
A deed can also be used where there are obligations flowing both ways, to affirm a mutual agreement reached by both parties.
As deeds do not require consideration by the promisee, they allow parties to bypass difficulties arising from the need to provide consideration for agreements to be effective. Therefore, if a business arrangement does not confer valuable consideration, a deed must be the used instrument. By signing a deed, the promisor commits to perform the specified duties and obligations and the commitment is legally enforceable notwithstanding that there may be no consideration paid in exchange.
What is an agreement?
In contrast to a deed, an agreement is a mutual arrangement between parties which includes consideration to create a binding contract.
Key difference between a deed and an agreement
A deed typically provides longer limitation periods than an agreement. The limitation period for a breach of contract is 6 years in all States and Territories excluding the Northern Territory where it is 3 years.
Below are the summarised State-by-State positions for limitation periods on deeds:
- Queensland: 12 years (s 10(3) Limitation of Actions Act 1974) – soon to be 6 years on commencement of Property Law Act 2023 on 1 August 2025.
- New South Wales: 12 years (s 16 Limitation Act 1969).
- ACT: 12 years (s 13 Limitation Act 1985).
- South Australia: 15 years (s 34 Limitations of Actions Act 1936).
- Victoria: 15 years (s 5(3) Limitation of Actions Act 1958).
- Western Australia: 12 years (s 18 Limitation Act 2005).
- Tasmania: 12 years (s 4(3) Limitation Act 1974).
- Northern Territory: 12 years (s 14(1) Limitation Act 1981).
In most jurisdictions, a deed must be written, sealed, and delivered (Queensland has dispensed with the need for it to be sealed – see section 46C(2)(c) of the Property Law Act 1974). On the other hand, agreements can be written or oral or partially written and oral.
Deeds are binding on both parties on delivery (Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609) if all other requirements are met.
Similarities between a deed and an agreement
There is little difference between agreements and deeds when it comes to remedies for breach. Remedies are usually damages, recission, rectification, restitution, and specific performance.
When would a deed be used or desirable in construction law?
In the construction law setting, a deed is often used alongside a construction contract for critical aspects with project participants, where a high level of assurance or enforceability is needed, such as warranties, guarantees, and commitments involving significant obligations, and where the consideration necessary to form an agreement may not be present.
Utilising side-deeds to provide such legal benefits as warranties, indemnities, step-in rights and guarantees can be particularly important in construction projects with multiple stakeholders such as financiers, contractors, subcontractors and ultimate end-users who may not be the principal. They can help keep a project running if one of the involved parties becomes insolvent. A deed can also be used to enable a party to recover damages for loss caused by another party with whom they would not otherwise have a direct contractual relationship.
Deeds are also often used when a specific aspect of a transaction is better addressed in a separate instrument, rather than within the construction contract itself.
Let’s proceed by delving into how certain types of deeds can be useful in construction.
Deed of collateral warranty
A deed of collateral warranty can be an important and useful tool. It operates by creating a direct legal relationship between parties who would not otherwise have one.
Collateral warranty regarding workmanship
A principal that has engaged a head contractor may use a deed of collateral warranty to obtain a guarantee of the quality of the work performed by a third party subcontractor or supplier for a certain period, ensuring legal enforceability even if there is no contract (and no consideration exchanged) directly between the principal and the subcontractor or supplier. This type of collateral warranty therefore proves useful where the principal cannot obtain satisfactory warranties from the head contractor or where significant parts of the works are to be performed by sub-contractors. Collateral warranties can therefore provide “certainty of obligations” in a circumstance where the only other avenue may be a claim based in negligence, with all of the challenges entailed in that (namely making out the elements of duty of care: breach of duty, damage or injury and causation).
Collateral warranty confirming ownership of unfixed goods and materials
In the event of insolvency of a head contractor, there are often disputes about the ownership of unfixed goods and materials. In such events, collateral warranties can also be employed to clearly state the rights to unfixed goods and materials and set out specificities about when in time ownership is passed.
Collateral warranty to benefit end-user
When the principal of a project will not be the end user of the completed project, the principal can obtain collateral warranties from the head contractor for the benefit of the end-user. This may be particularly relevant for government bodies where Build-Own-Transfer models are employed for projects.
Deed of consent to assignment
In instances where the head contractor defaults, a deed of consent may provide that the sub-contractor pre-emptively consents to the assignment of the sub-contract to the principal or to a third-party contractor. The project can then be completed by the principal with minimised cost escalation and delay.
Financier’s step-in deed
In instances where a financier takes a mortgage over a principal’s interest in a construction contract, the financier will often require a separate collateral deed between it and the head contractor. In case of the principal defaulting under the construction contract, the head contractor promises not to terminate and instead will first give the financier the opportunity to rectify the default and take over the project, effectively allowing the project to be completed rather than stalling or collapsing. Equally, the head contractor will likely still be paid if the principal defaults. In these instances, the financiers may also seek collateral commitments from subcontractors and consultants.
Deed of guarantee and indemnity from a parent company
In a circumstance where one party to a construction contract, whether it be the principal or the contractor, is an asset-poor subsidiary owned by an asset-rich head company, it would be prudent for the other party to insist upon the head company guaranteeing the performance of the subsidiary and indemnifying the other party for any loss incurred in a default. This can be achieved by way of a side-deed executed by the parent company.
Outcome
Collateral rights, guarantees and obligations established by deeds of the kind discussed above provide additional security and clarity, allowing construction projects to proceed smoothly even in the face of unexpected challenges.
If you want to learn more about how to best secure your interests, please do not hesitate to reach out to our Commercialisation, Supply and Projects experts.
Stay tuned for the next Building Fundamentals insight, in which we will be looking at electronic execution.
