Terminating a building contract enables parties to discontinue their contractual obligations. The terms for termination are dependent on the terms of the contract and the circumstances involved. Therefore it is important that the contract is reviewed by a solicitor prior to enforcement and/or termination. If there has been a substantial breach or repudiation of the contract, termination can be made by express or implied agreement.
There are significant consequences for owners who invalidly terminate a building contract. This article will examine a recent case where the owners claimed the builder had breached their due diligence and thus the owners repudiated the contract. However they failed to establish the builder’s breach of due diligence, thus emphasising the importance for owners to fulfil all of their obligations when considering termination.
A recent case study: Patel v Redmyre Group Limited
The builder (Redmyre Group) carried out building works to renovate and restore a 4 storey residential terrace in Dawes Point, Sydney, for the owners (Nandini Patel, Harsh Jain and Jainco Services Pty Ltd). The building contract required building completion within 32 calendar weeks from the date of commencement. At the end of 32 weeks, the building was not complete. The owners took the following actions:
- 20 February 2019: the owners issued a ‘show cause’ notice demanding a schedule of works and estimated time for completion.
- 7 March 2019: the owners issued a notice of termination with immediate effect due to the builder’s alleged breach of the contract and statutory warranties contained in section 18B of the Home Building Act 1989 (NSW).
- 4 April 2019: the builder responded noting their intention to rectify the defects and seeking access to the site. The owners did not provide this requested access.
At first instance, the owners alleged that the builder failed to progress the works and exercise due diligence. The owners claimed $215,683 in damages for incomplete works and an additional $130,000 for delay. The builder alleged that the delay was beyond their control for factors including the owners’ direct interference and variations from the initial works.
The NSW Civil and Administrative Tribunal held that the owners did not establish that the builder had breached their due diligence obligation and instead issued a notice which was not in accordance with that required by the building contract. It was found that the owners repudiated the contract in their letter dated 7 March 2019, but the builder had not terminated the contract given their request to return to the site. Repudiation occurs when one party to the contract expressly or implicitly demonstrates that they are either unwilling or unable to perform their contractual obligations (see DCT Projects Pty Limited v Champions Homes Sales Pty Limited).
No damages for delay or incomplete works were awarded as the owners had failed to mitigate the loss and provide the builder with reasonable access to rectify the defects as required by the Home Building Act 1989 (NSW) section 18BA(3). This was upheld by the Appeal panel in the NSW Civil and Administrative Tribunal (Consumer and Commercial Division). The owners’ appeal was dismissed and they were ordered to pay the builder’s costs.
Valid termination for breach of due diligence
Valid termination can occur in circumstances where the owners can prove, on the balance of probabilities, that the builder has not proceeded with due diligence and within the time stipulated in the contract, as this would breach the statutory warranties which are considered to be implied terms of all building contracts. This requirement of due diligence is breached when a “failure to proceed with that degree of promptness and efficiency that one would expect of a reasonable builder who is undertaking a building project in accordance with the terms of the contract in question” occurs (see Re Stewardson Stubbs & Collett Pty Ltd v Bankstown Municipal Council). The length of time considered reasonable must be taken into account if construction is delayed for circumstances outside the builders’ control, such as an exclusion from the site by the owners as in the above mentioned case.
Obligations on the owner
The onus is on the owner to establish this breach of due diligence, but also to take reasonable efforts to mitigate their own loss and allow reasonable access to the site for builders seeking to rectify any defects according to section 18BA of the Home Building Act 1989 (NSW). In the Patel v Redmyre case, the owners merely proved that the builder had not achieved practical completion by the date specified in the building contract, and failed to take into account the rate of progress of the works on site. They then deliberately, and unreasonably, excluded the builder from accessing the site, thereby failing to meet these obligations.
In the event that a builder defaults on an obligation within the building contract, such as not completing the building works in a reasonable time, the building contract will typically include a notice clause. Under this, the owner is obligated to give appropriate notice of termination of the contract, in accordance with the specified terms of the building contract.
In the case study, the owners were found not to be entitled to claim damages for defective or incomplete work, or delay, as a result of their invalid termination. The Tribunal held that the owners’ letter dated 20 February 2019 was not sufficient notice and the builder was not given sufficient capacity to rectify the breach within a reasonable time frame. Failing to strictly follow the requirements of the notice clause within the building contract may result in repudiation by the owner.
How Etheringtons Solicitors can help
A solicitor at Etheringtons Solicitors can provide clarification of the relevant law and its relation to your individual circumstances. Etheringtons Solicitors can assist with if you need further advice or assistance with construction or contractual law matters, please contact one of our experienced solicitors on (02) 9963 9800 or via our contact form.