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Down-payments and deposits: what happens if they don't deliver?

By Telise Kelly - 31 Jan 2019

Payments in advance (down-payments or deposits) are common in the construction industry. When you place a custom order or hire a builder to commence work on your property, the initial credit risk to the supplier is significant - if you don't pay, they've already shelled out for raw materials and spent time which is irrecoverable. Hence, particularly with expensive designer joinery, appliances or finishes, payment in advance is the norm. But what happens if you don't get what you paid for?

In the most extreme cases, the builder or fabricator can take your deposit money and run, or go bust, before you have anything to show for your money. More commonly, extraneous circumstances can arise which result in the job not being completed, or not completed to the standard required. Illness, death and divorce of the supplier or tradesperson you have relied on, commonly get in the way of finishing the product you've ordered. This can happen with a new supplier, or even one that you've been dealing with for years.

You would expect they would refund your money in that instance, but it is surprising how often that doesn't happen - particularly when a supplier has gone into liquidation or been bankrupted.

If the supplier is simply mucking you around, then you can go to court to either force them to honour the contract (you will eventually get the product you ordered) or sue them for damages (they owe you money instead). But either way, that involves expensive and protracted litigation with no guarantee of success, against a supplier who might well be insolvent by the end.

If the supplier has already gone bust, then court may not be a viable option. Often, you simply have to hope that you get something back after the secured and preferential creditors have had their fill. In more cases than not, full recovery is hopeless. You would be better off terminating the contract, grabbing what you can off them and finding someone else to finish the job. To be able to do this, you might be able to establish that ownership of the partially made product has already passed to you, under our sale of goods laws, but it is far simpler and more expedient to detail this in the contract from the outset. Similarly, you can agree to have a security interest registered in respect of your goods during manufacture so that if the supplier becomes insolvent, you can trump other creditors and extract your partially completed goods from the liquidator's hands.

Ultimately, securing your money or the product you have paid for is best achieved before you sign the contract, rather than after. There are many mechanisms that can be built into a contract to protect you before it is signed. It is much better to understand your risks and minimise them at the beginning, rather than scramble over the pieces when things come to an unexpected end.

If you are concerned about paying a deposit to a supplier or you are already having difficulty with them, you can contact Telise Kelly or any of our construction team to discuss your options.


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