Terminating a building contract

By Andrew Whitelaw

When it comes to building a house or renovating an existing one, mounting frustrations and blown out budgets can lead to the termination of building contract, writes Andrew Whitelaw

Building a home or adding an extension can be frustrating for owners and builders alike. Delivery schedules fall back; plans and specifications change throughout the process. While in most cases a compromise can be reached, some may require contract termination from either the owner or the builder if work is not carried out in accordance with the established contact.  However, it is important to consider whether the contract should be terminated and the consequences of doing so.

All standard form contracts for residential building works contain clauses which allow the owner (and the builder) to terminate the building contract for a breach by the other. Termination is a major step and should only be utilised in certain circumstances and upon legal advice. The consequences of getting it wrong can be costly.

To terminate a building contract certain procedures must be strictly complied with. Most contracts require the owner to send the builder a “Notice of Default” setting out that the builder is in breach, stating with clarity what the breaches are and then allowing the builder a specific period of time in which to remedy the breaches. If the builder fails to do so, the owner may have the right to then terminate the building contract under a second Notice.  A failure to follow these steps may leave the owner in a precarious position of having terminated the contract illegally and in doing so, repudiated the contract allowing the builder to terminate instead.  

The recent VCAT decision of Cube Building Pty Ltd v Fois (Domestic Building) [2011] VCAT 311, is a stark reminder of what can occur if a party gets it wrong. This time it was the owners.

The builder alleged it was hindered in proceeding with the works by the owners due to their failure to make decisions for certain aspects of works, provide information, and supply prime cost items. The builder reached a point where it was unable to proceed and suspended the contract. The owners then purported to terminate the contract and refused to pay the builder almost $95,000.

The Tribunal found that the owners’ Notice of intention to terminate the contract was invalid as the owners were in breach of the contract at the time the Notice was served on the builder. The builder was not in breach of the Contract as it was unable to proceed with the works due to the owners’ failure to provide information regarding the works.

The Tribunal stated it was “apparent that the owners, as lay people, have little understanding of matters to do with building” and that the owners “fundamentally misunderstood their role as owners, which is to allow the builder to get on with the job”. As the owners were in breach of the contract it was not open to them to terminate. Their conduct in interfering continually with the works, by taking possession of the site and excluding the Builder, meant the owners had repudiated the contract.

The builder was awarded damages of $95,879.00

Termination of a building contract is not a simple exercise; Notices of Intention to Terminate and of Termination must be carefully prepared. A breach of the contract must be able to be clearly established before a termination will be valid. It is crucial that, in terminating a contract, the procedures laid down in the contract are followed.
Andrew Whitelaw is a building and construction lawyer at TressCox Lawyers

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