Terminating a Building Contract - Care Required

27/01/2021

When the relationship breaks down between the Builder and the Owner often the Owner wishes to terminate the Building Contract. 

There are legitimate reasons why an Owner would want to end the relationship with the Builder when the work is not being properly undertaken in accordance with the terms of the Contract. 

This of itself does not give the Owner a right to terminate the Contract.  The Contract sets out terms upon which the Contract can be terminated and most often it requires giving a preliminary Notice of Intention to Terminate giving the Builder a right to rectify the Builder’s default.

If one party attempts to terminate the Contract

In the proceedings there is likely to be an argument as to whether the Contract is terminated and who caused the Contract to be terminated.  The consequences of who is successful on this issue will have a significant impact on the outcome of the proceedings. 

There are other issues that arise for example, whether an Owner can claim the cost of completing work or rectifying the claimed defective work if the Contract has not come to an end.  This is a further complicating factor. 

This adds significant stress to the parties and additional costs as to litigation.

If the Building Contract is not properly terminated for example by the Owner, the assertion that it is terminated and action by the Owner on the assumption that it has been terminated amounts to repudiation of the Contract.  This gives the Builder a right to elect to either accept the repudiation and terminate the Contract or seek to affirm and enforce the Contract.  Rarely would the Builder seek to enforce the Contract.  If the Builder accepts the repudiation and terminates the Contract and the Court or Tribunal holds that the Owner wrongfully terminated the Contract, then the Owner is likely to be liable for damages suffered by the Builder.  These can include loss of profits on the balance of the Contract. 

A recent case of Rudas & Andrassy v Eid decided 8 January 2021 indicates the difficulties that might arise.  In this case the Owners sought $408,202.42 to complete incomplete works which was in addition to the claim for the costs of rectifying defective work; and repayment of moneys paid for variations.  In Rudas case at first instance at NSW Civil and Administrative Tribunal (NCAT) Senior Member (a Queens Counsel) made a decision and said:

“As the Owners have not established that they terminated the Building Contract, this issue (damages for incomplete building works) must necessarily be determined on the basis that the Building Contract remains on foot.

The Tribunal concluded that as the Owners had not established the onus of establishing that the Builder breached the Building Contract by reasons of incomplete building works it concluded that the Owners had not suffered any loss.

In the result the Tribunal ordered that the Builder pay the Owners $34,954.80 made up of $11,882.80 for overpayment of variations and $23,070 inclusive of GST for defective building works.”

The Owners appealed the decision to the NCAT Appeal Panel.  The Appeal Panel allowed the Appeal and ordered amongst other things that the Builder is to pay $187,280.24 to the Applicant. 

One can see the very significant difference having regard to the legal arguments as to the validity of the termination of the Contract and the general onus of proof on the parties to the litigation.  The Appeal Panel said:

“There is no real issue as to the legal principles applicable to determine whether an innocent party to a Contract has accepted the other party’s repudiation and thereby terminated the Contract.

First, any communication or conduct which clearly and unequivocally conveys to the repudiating party that the aggrieved party is treating the Contract as at an end is sufficient: see Vitol SA v Norelf Limited [1996] AC 800; 3 All ER 193 at 200 per Lord Steyn, and cited with approval in Cooper v Kinsella [2011] NSWCA 45 at [70].

Secondly, where the innocent party has by conduct elected to treat the Contract as at an end, it is sufficient that the fact of election comes to the repudiating party’s attention.

Thirdly, the commencement of proceedings and/or the service of an appropriate pleading, claiming relief on the basis of termination for breach or otherwise clearly conveying in such pleading that the aggrieved party is treating the Contract as at an end can be regarded as communication of the innocent party’s acceptance of repudiation and subsequent termination: Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2005] NSWCA 248 at [73]; Janos v Chama Motors Pty Ltd [2011] NSWCA 238 at [23]; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537.

The commencement of proceedings and/or the service of an appropriate pleading can act as either the election to treat the Contract as at an end, or the communication that the innocent party has by previous conduct elected to treat the Contract as at an end.”

Many parties particularly Owners who are frustrated about the slowness of the works by the Builder (and the Builder’s failure to complete the works within a timely manner as set out in accordance with the Contract) fundamentally often want to terminate the Contract to enable the Owner to engage a new Builder and finish the project.  Before taking the drastic step to terminate the Contract appropriate advice should be sought.  This needs to be undertaken prior to taking steps such as terminating the Contract or attempting to terminate a Contract which may cause irreversible harm.

There are of course some circumstances where the parties do not have the luxury of time for example, if there was a limitation period approaching.

If you are having difficulties and need advice please contact our experienced Building and Construction Lawyers at Watson & Watson.  Please contact Richard Watson Accredited Specialist, Building and Construction or his Personal Assistant Shereen DaGloria to discuss your matter and seek 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.