Monday, 6 February 2017

What is "Security" in a Contract?

Photo: Hire Production Equipment Being Used in Qatar
In many contracts, one party uses something - such as a hired car, or hired equipment - for a fee, and is expected to return that equipment to the other party at the end of the agreement.

In this type of contract, the owner of the equipment usually wants to prevent the hirer from damaging or selling the equipment. But what happens if the equipment is damaged while being used, or is sold or maybe stolen by someone else?

In that type of situation, the contract needs to include some kind of security. Security means a facility for the owner to recover its loss from the hirer or even someone else, like a guarantor for the hirer. Common forms of security can include the following things:
  • Bond money.
  • A chattel mortgage of some type, which prevents any third party being able to legally become the owner property without the consent of the first owner.
  • A guarantee given by the hirer as a bank guarantee.
  • A guarantee given by a third party, e.g. a personal guarantee from another person.
If the equipment that is being hired is valuable, it makes sense for the owner to take precautions to protect the value of the property.  Asking for security is an important option available for this purpose.

Note that in common law countries, "fair wear and tear" experienced by the property during normal use is not something that the owner can seek compensation for.  Also, some countries have set up registries for the registration of security over personal (i.e. non-real estate property) alongside the older systems for registering land ownership and ship ownership.

[The author of this blog post, James Irving, is a business lawyer who practises in Perth, Australia. Please visit the Irving Law website for further information. This post is not intended as legal advice for any particular person, and reflects the law of Australia at the time of writing. Photo credit: Hire Production Equipment Rental Agency Qatar 04, by Resolution Hire, a public domain photograph published by Wikimedia Commons and used here under a CC BY-SA 4.0 licence.]

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