Termination of Building Contract – Extreme Caution Required

17/06/2020

Watson & Watson have acted for the Builder and in other cases, for the Owner in relation to issues, rights and the effect of a termination of a Building Contract.  There is also a separate issue as to the whether the Builder can suspend the works.  The issue usually arises when works are significantly progressed but not completed and the relationship breaks down between the parties to the Building Contract.  If the Builder suspends the works, the Owner is in a very difficult situation as the works have stopped and the Owner is not able to bring the works to completion without bringing the works out of suspension.

Can the Owner terminate the Contract?  The difficulty is that most standard Contracts do not give any simple resolution to the Owner.  If the Owner is to terminate the Contract with the Builder most standard form Contracts require:

1. The Owner to give a Notice of Intention to Terminate to the Builder to rectify the default.  The Owner can then terminate the Contract only if the Builder does not rectify the default within the time required in the Notice of Intention (which should be in accordance with the Contract).
2. The Contract usually has no clear objective default which gives the Owner a clear right to give the Notice of Intention to Terminate and then on the Builder’s default, a right to terminate.

Accordingly there is going to be a significant risk if the Owner firstly gives the Notice of Intention to Terminate and then terminates the Contract at the expiration of the period of the Notice of Intention to Terminate the Contract.

The law is clear if either party for example, the Owner acts in a way in which the Owner is objectively telling the other party (the Builder) that the Owner does not and will not be bound to the terms of Contract, that is a “repudiation” of the Contract by the Owner when/where the termination is invalid.

Such circumstances will give a right to the other party (the Builder) to accept the repudiation and bring the Contract to an end or to sue for specific performance of the Contract.  Commercially if the Owner attempts to terminate the Contract and if it is invalid, it is a repudiation of the Contract and the Builder usually will elect to bring the Contract to an end.  This would allow the Builder to finalise the matter.

In a recent case in which we acted for the Builder decided by New South Wales Civil and Administrative Tribunal (NCAT), the issue of the validity of the Termination by the Owner arose after a breakdown between the Builder and the Owner. 

The facts briefly were:

1. In August 2017 the Owner and Builder entered into a Building Contract in one of the standard form Contracts for the construction of a new residential building.  The Contract Sum was $700,000.
2. Four Progress Claims (1 - 4) were made and paid by the Owner to the Builder.  The Builder received payment of $315,000 for Stages 1, 2, 3 and 4.
3. The Owner and Builder entered into a Variation Agreement requiring significant extra works to be undertaken for the sum of $90,000 inclusive of GST.  $37,000 of this Variation had not been billed in the Progress Claims 1 – 4.
4. There was an additional dispute in relation to a Provisional Sum adjustment for steel fabrication.  The Contract provided for a provisional sum of $120,000.  The Builder made a further claim of $33,000 as an adjustment in relation to the Provisional Sum. 
5. The Builder provided the Owner an invoice in the sum of $140,000 (Progress Claim 5) for:
   • Stage 5                                    $70,000
   • Unpaid variation                      $37,000
   • Provisional sum adjustment    $33,000
6. The Owner did not pay Claim 5 in the sum of $140,000 and the Owner made assertions that the Builder was not entitled to these claims and should continue working.
7. Thereafter a dispute arose as the Builder had not been paid and the Owner made assertions that the Builder was not entitled to these claims and should continue working. 
8. The Owner engaged a Lawyer who thereafter assisted the Owner and sent correspondence to the Builder.  The Owner claimed the Builder was not entitled to payment of Claim 5 and had been overpaid in relation to Progress Claim 4.
9. The Owner terminated the Contract.
10. On behalf of the Builder and based on the facts as we believed they would be determined, the Builder accepted the Notice of Termination from the Owner, as invalid and as a repudiation of the Contract and accordingly the Contract was at an end. 

With our assistance, the Builder filed a claim in NCAT seeking that the Owner pay the Builder:

(a)       The outstanding Progress Claim 5 and other minor adjustments;

(b)       Interest on the outstanding sum referred to in (a); and

(c)       Loss of profit for the balance of the Contract Works.

In response, the Owner made a claim for in excess of $400,000 which we note is more than the Owner paid for all the works that had been undertaken.  The claim was based on numerous matters and alleged Builder’s breaches which the Owner claimed the sum of approximately $400,000. 

Matters were raised by representatives of the Owner which were not relevant to issues to be decided by NCAT.  However each of these matters were considered by

us and appropriate responses given.  The Owner could have elected to limit his claims to matters that were clearly relevant and left some of the other matters out of the Owner’s claim. 

Such considerations and decisions by the Owner required very careful consideration of the facts, the consequences of making the claim and having regard to facts and matters and advice. 

When considering your case, we provide advice to enable you to make an informed decision as to which matters to pursue and which matters not to pursue.  This is one of the difficult issues that arise when the relationship between the Builder and the Owner has broken down.  There are many matters and consequences to consider; not all of them can be decided in a Court case.  We consider those and provide advice as to possible collateral damage. 

The matter was heard by a Senior Member of NSW Civil and Administrative Tribunal (NCAT) over 3 days in 2019 and 2020 and recently the Senior Member has provided his Decision in the proceedings.  The Decision is a long and considered Decision dealing with the matters relevant to the matter. 

The Senior Member:

(a)       Held and found that the Owner had not properly terminated the Contract and noted that the Owner had repudiated the Contract and that the Builder had accepted that repudiation to bring the Contract to an end.

(b)            Accepted the Builder’s claim for the unpaid invoice of $140,000.

(c)             Agreed that interest was payable on the unpaid invoice from the date of the invoice.

(d)            Allowed and awarded the Builder loss of profit relating to the balance of the Contract works.

(e)            Dismissed the Owner’s claims which included a claim for compensation, for damages and for defects. 

This is another example of the great difficulty that the Owner (and the Builder) face when the relationship breaks down.  To separate from the relationship so as to go their separate ways, the best resolution is to attempt settlement however this is not always the case (as in this particular case despite attempts being made at that stage).

If you wish to seek advice from experienced building and construction lawyers who deal with these types of cases, strata matters and associated matters on a regular basis, please contact Richard Watson or his Personal Assistant Shereen Da Gloria to discuss your matter and seek appropriate timely advice.

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