Is it appropriate for the Owner to Terminate the Building Contract?

23/08/2022

Watson & Watson Lawyers have acted on behalf of Owners and Builders in relation to Contracts and disputes concerning the construction or renovation of the Owner’s home or residential building works over many years.  Most often the arrangements with the Builder is in writing (as required by the Home Building Act), signed by the parties.  Most often the Contract is a standard form Contract some with Special Conditions or amendments to the standard form Contract.  As referred to in other articles on our Website, there are often some issues of concern in relation to amendments to Contracts in particular, whether the Owner should accept the terms of a Contract produced by the Builder without consideration of the terms of that Contract. 

The standard form Contracts typically have a clause providing for terminating the Contract or sometimes referred to as ending the Contract.  In this article we consider issues relating to terminating the Contract for breach of Contract in terms of the usual terms or conditions set out in the standard Contract.  The usual clause provides for a two stage process involving. 

Stage 1

Firstly one needs to look at the particular clause in the Contract between the Owner and Builder and the facts surrounding the claimed breach and whether there is a breach of the Contract which entitles for example, the Owner to terminate the Contract. 

Generally the breaches that the Owners complain of which may be breaches which are subject to the termination clause, relate to such things as:

1. The Builder fails to proceed with the works with due diligence or in a competent manner with regard to the circumstances of the Contract Works; or
2. If without cause under the Contract, the Builder wholly suspends the carrying out of the works before practical completion; or
3. If the Builder refuses or persistently neglects to remove or remedy defective work or improper material so that by the refusal or persistent neglect, the works are materially affected; or
4. If the Builder is unable or unwilling to complete the works.
5. The Builder ceases to hold the required licence.
6. The Builder abandons the works or Contract.

In the appropriate circumstances, an appropriate Notice of Default - Notice of Intention to Terminate the Contract must be prepared specifying the default(s) and that if the default(s) continue for a particular period (as stated in the Contract) then the Owner, without prejudice to other rights or remedies under the Contract, may terminate the Contract.

Care must be taken to prepare the Notice of Default - Intention to Terminate having regard to the facts. 

Care must be taken to have the Notice signed and served in accordance with the provisions of the Contract.

Care must be taken to ascertain whether in fact there is compliance with the Notice by the Builder in accordance with the Contract.

Consideration must be had as to whether the Owner wishes to and can lawfully proceed to terminate the Contract.

Stage 2

After considering the matters referred to above and the factual basis one needs to consider whether in accordance with the particular Contract and the factual matters surrounding the matter, the Owner is entitled to then serve a Notice of Termination. 

If the Owner after considering the matters wishes to terminate the Contract, then the appropriate Notice must be prepared, signed and served in accordance with the provisions of the Contract.

Following Termination

The Contract usually sets out the obligations on the Owner following service of the Notice of Termination.  Usually the Contract requires the Owner to engage another Builder to complete the works prior to proceeding against the defaulting original Builder.  In the event that the costs of completing the works are more than the balance of the sum owing under the Contract, there is usually a potential claim against the original Builder.

Care needs to be taken to ascertain the status of the works at the time of the termination.

Care needs to be taken to appropriately notify the Building Warranty Insurer. 

There are many issues that the Owner needs to consider.

In the event that the person seeking to terminate the Contract does not comply with their obligations in relation to the termination, the termination may be invalid.  Such an invalid termination will usually amount to a repudiation of the Contract by the person giving the Notice.  In the event that there is a repudiation of the Contract for example by the Owner, then the Builder can elect to accept that repudiation and bring the Contract to an end. 

In those circumstances, the Builder would be entitled to damages which often would include loss of profits on the balance of the Contract.

As can be seen, there are real risks associated with attempting to terminate the Contract.

The standard form Contracts and many tailor-made Contracts in our view, are inadequate in identifying the defaults which we believe should allow a termination of the Contract by the Owner for a default by the Builder.

In our view, it is critical that one considers the terms of the Contract before entering into the Contract firstly, as it would allow the Owner to understand his/her obligations and responsibilities under the Contract and secondly, it will allow an opportunity to negotiate appropriate amendments to the Contract. 

Over many years we have advised many Owners and Builders in relation to what would be appropriate terms for the Contract. 

As one can image, there are some critical clauses that would be required to protect the Owner and there are some critical clauses that would be required to protect the Builder.  Often the claims are conflicting in that they protect one party or the other and care needs to be taken to consider the matter and if possible, negotiate a resolution.

Since 2020 we have seen many more difficulties by the Builder in being able to complete a residential building due to difficulties having regard to the current financial circumstances to which we refer in a further article relating to currently, difficulties for Builders to comply with their obligations for construction of homes – this affects both the Builder and the Owner. 

Having regard to the obligations of the Builder to comply with the Home Building Act (HB Act) and provide the statutory warranties provided for under the HB Act, a new Builder will not usually agree to take over an existing project and complete the works for the balance of the sum payable under the Contract.  A new Builder who undertakes this type of work is often referred to as a Remedial Builder and usually requires significant additional margin (fees) to cover the extra risks associated with taking on another Builder’s incomplete building works.

This is not a new phenomenon and has been the situation for the 30 years that Watson & Watson have been advising Builders, Owners and other persons associated with building work.   The risks for the new Builder or Remedial Builder has become greater following the introduction of the Home Building Act 1989 and numerous amendments and changes to the requirements for a Builder to undertake the completion of an existing part constructed residential building, the subject of the provisions of the Home Building Act.

Care must be taken in negotiating the terms of the Contract so as to protect the Owner and also to allow the Builder to achieve its outcome.  Namely, the Owner requires the Building Works to be undertaken properly and the Builder requires payment of the agreed amount when the works are properly undertaken by the Builder.

If you find yourself involved in building or construction whether at the Contract stage or when a dispute occurs or is likely to occur or have any concerns in relation to associated building matters, our experienced Lawyers at Watson & Watson can assist you and advise you as to the best course and a way forward.  Please contact Richard Watson Accredited Specialist Building & Construction or his personal assistant Shereen Da Gloria to discuss your matter and seek appropriate and 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.