Can an Owner Always Claim for Costs of Rectification or Defective or Incomplete Work?

07/03/2018

This was considered by the NSW Court of Appeal in 2005 in the case of Berwarrina Shire Council v Beckhaus Civil Pty Limited [2005] NSWCA 248 (Berwarrina case).

Since that case in 2005 NSW Civil and Administrative Tribunal (NCAT) has considered the Berwarrina case on many occasions and has considered how the Berwarrina case affects cases under the Home Building Act.

There have been different views by different Members as to whether the principles set out in the Berwarrina case are relevant to the case between an Owner and Builder involving the Home Building Act.

The issue in the Berwarrina case arises as the Court held in that case, that in a claim by an Owner against a Builder for damages for defective work, the Owner’s claim could not proceed when the Building Contract was still on foot.  This is because in effect the Builder still had access to the site and ought to be allowed to remedy any defective work.

A critical issue is whether the Contract is on foot.  The Contract may not be on foot if it is terminated or possibly if it has been completed.

One must take extreme care in consideration of whether to terminate a Building Contract.  The Contract provides circumstances, rights and obligations in relation to termination of Building Contracts.  The normal pro forma Contract (of which there are many) provide that before one can terminate a Contract the person wishing to terminate the Contract must firstly give a Notice of Intention to Terminate. 

If we assume it is the Owner who wishes to terminate the Contract, the Owner would have to give a Notice of Intention to Terminate, specify the default and allow at least the stipulated time for the Builder to rectify the alleged default.  If for example the default is something that is difficult to establish and ascertain what is required, for example delay in carrying out the works, then there would be a real factual issue that arises if the Builder returns to the site.

These are the problems that the contracting parties face at the time of the Contract.

Once the Contract has been agreed and complies with the Home Building Act then subject to various laws relating to setting aside terms, the Contract will be binding.  If the Owner attempts to terminate the Contract but the attempt is wrong at law, the Builder can accept the wrongful termination as a repudiation of the Contract.  In such circumstances the Builder would be entitled to seek damages which may include such items as loss of profit on the balance of the Contract works.

If the matter is not resolved it will take some time, most often more than a year, for a Court or Tribunal to make a determination of who is right and who is wrong.

As can be seen, it is critical that legal advice should be obtained from an experienced Solicitor with the appropriate expertise in this particular area before taking a step to terminate or not terminate the Contract.

As can be seen if the Contract is not terminated and is still on foot it may create other issues down the track.

As it happened there are various cases since Berwarrina’s case in 2005 and some suggest that the matter has not been settled.  Notwithstanding there are some cases including a case in 2017 Little v K & K Homes Pty Limited where NCAT has found that “the obstacle to a claim for damages for defective work, while the Contract remains on foot, is that as long as the Builder remains in possession of the site it cannot be said that it has failed to fulfil its contractual obligations to deliver the work free of defects”.

While the Contract remains on foot, it is open to the Builder to rectify any defect(s) at least as long as the Owner maintains that Practical Completion has not been achieved, with the consequences that an entitlement to damages (other than for example delay damages) has not accrued.

Such a state creates some additional difficulties for example as many Contracts state that if an Owner takes possession it is deemed Practical Completion.

We have been advising in relation to these very important issues before Berwarrina’s case and on many occasions following Berwarrina’s case, as to the processes that are more likely than others to be appropriate in the circumstances of your case.

Certainly if your adviser is not aware of the cases or the relevant sections of the Home Building Act and Civil and Administrative Act then we suggest that you obtain a second opinion as to the appropriate course to be adopted.

Unfortunately when it comes to the issue of termination and repudiation of Contracts often action taken by for example the Owner can turn a winning case into a losing case.

Please contact Richard Watson or his Personal Assistant Shereen Da Gloria to discuss your important matters in relation to your disputes with the Owner or Builder or if you are at the doorstep of terminating a Building Contract and are unsure of the ramifications of your actions or if you are about to enter into a Building Contract and seek advice as to your rights to terminate and the consequences thereof.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 02 9221 6011.