Contractual obligation to provide a guarantee from a parent company: Can these be enforced and against who?
When contracting parties agree that guarantees will also be provided, but the guarantor is not a party to the contract, is there an enforceable obligation to provide the guarantee?
This article reports on the decision of the Supreme Court of Victoria of Boroondara City Council v ADCO Group Pty Ltd [2025] VSC 774 which had to consider this issue.
Justice Matthews found that:
ADCO Group had breached its contract with Boroondara City Council (Council) by failing to provide a parent company guarantee required under the terms of the contract;
damages were inadequate and therefore granted a mandatory injunction compelling ADCO Group to do all things within its power to procure the guarantee from its parent company;
determined that there was no ability to force the parent company to provide the guarantee under the terms of the contract.
Background
The Council undertook a public tender process in early 2020 for the construction of Kew Recreation Centre (Project).
ADCO Group Pty Ltd (ADCO Group) was the tenderer. ADCO Constructions Pty Ltd (ADCO Constructions) was the parent company of ADCO Group.
Council and ADCO Group entered into a contract for the construction of the Project (Construction Contract). Clause 5.6 of the Construction Contract stipulated that ADCO Group was required to provide Council with a deed of guarantee and indemnity from ADCO Constructions in the form of a Parent Company Guarantee (Guarantee).
The Guarantee was never provided to the Council. The Council was not aware of that the Guarantee had not been provided.
ADCO Group commenced construction and received regular payments from the Council in relation to their work on the Project.
The Council became aware that the Guarantee had not been provided three years later, and commenced proceedings alleging that:
ADCO Group has breached and was in breach of the Construction Contract for its failure to provide the Guarantee; and
ADCO Constructions has breached and was in breach of a separate alleged contract with Council to provide the Guarantee.
The Council sought mandatory injunctions against ADCO Group and ADCO Constructions to compel provision of the Guarantee.
Issues between the Council and ADCO Group and determination
The issues to be determined between the Council and ADCO Group were:
What was the proper construction of clause 5.6 of the Construction Contract?
Had Council waived its right vis-à-vis ADCO Group to be provided the executed Guarantee?
Was it appropriate to grant the relief sought by Council against ADCO Group?
The Court granted a mandatory injunction against ADCO Group to do all the things within its power to provide the Council with a Guarantee executed by ADCO Constructions.
His Honour held that the proper construction of clause 5.6 imposed a standalone obligation on ADCO Group to provide a Guarantee. It was not conditional on it being provided within five business days of the Notice to Proceed being issued, nor a condition precedent to other contractual rights such as site access or payment.
Justice Matthews found that Council had not waived its right against ADCO Group to be provided with the Guarantee. Council’s conduct in granting access to the site and making payments did not constitute waiver, as Council was not aware that the Guarantee had not been provided. The elapsed time of three years due to Council overlooking the Guarantee was not material to this case, as Council was at no point during the three years aware that it had not received the executed Guarantee. Guarantee
Therefore, ADCO Group’s failure to provide the Guarantee constituted a continuing breach of the Construction Contract.
Issues between the Council and ADCO Constructions and determination
The issues to be determined between the Council and ADCO Constructions were:
Had ADCO Constructions made a binding contractual promise to deliver the executed Guarantee to Council or to ADCO Group for provision to Council?
Had Council waived its right vis-à-vis ADCO Constructions to be provided an executed Guarantee?
Was it appropriate to grant the relief sought by Council against ADCO Constructions?
Justice Matthews held that ADCO Constructions did not enter into a contract or a collateral contract with Council to provide an executed Guarantee.
Amongst other things, ADCO Group did not have ostensible authority to enter into a contact with Council on behalf of ADCO Constructions and there had been no intention between Council and ADCO Constructions to create legal relations.
Key Takeaways Issues between the Council and ADCO Group and determination
Security provisions such as guarantees from parent companies are enforceable as standalone contractual obligations against the contracting party BUT NOT against the guarantor if it is not a party to the contract.
If a contracting party is unaware that the guarantee has not been provided, allowing the contract to proceed does not constitute waiver. Delay and oversight are not sufficient.
Security instruments (such as guarantees) allocate contractual risk between parties and are not sufficiently compensated by damages alone. Mandatory injunctions can be granted by a court to compel a party to do all things in their power to procure the executed security (guarantee) in accordance with their contractual obligation.
Parent companies are not automatically bound even when a contract expressly requires a parent company guarantee. They will only be legally bound upon executing the guarantee, or if there is actual or ostensible authority of the party contracting to bind a parent company.
Please contact Alicia Hill or Jake Cole if you have any queries about this article or the enforcement of contractual obligations.
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E:ahill@sladen.com.au
Jake Cole
Senior Associate
T: +61 3 9611 0112 | M: + 61 413 557 157
E: jcole@sladen.com.au
This article was prepared with the assistance of Penny Qin, Law Clerk.
