Terminating or Suspending Building Contracts (Vic)

Whether you are a builder, contractor, subcontractor or owner, you should always seek legal advice before terminating or suspending a building contract or refusing to perform further work. The failure to properly suspend or terminate a building contract or work correctly may result in an adverse finding should a matter proceed to a court or tribunal. This article deals with terminating or suspending building contracts and work in Victoria.

Terminating or Suspending Building Contracts because of defective workmanship

If a party wishes to terminate or suspend a building contract because of defective workmanship, questions will arise as to whether the defects are substantial, and whether the conduct of a party is such that suspension or termination can be justified.

Whether a building contract can be suspended or terminated in this situation can be affected by the following factors:

• The conduct of the parties, for example, the owner’s interference with work;
• Whether the work is in fact defective, for example, by reference to the relevant standard;
• Causation;
• The extent to which the work can be rectified or remediated;
• The cost of rectification and remediation;
• Actual loss and damage;
• The failure to pay sums due pursuant to the contract;
• Whether the opportunity has been provided to the defaulting party to rectify or remedy any alleged breach.

Defective work may be attributed to many things – defective soil analysis, improper design and engineering, incorrect work by the subcontractor, incorrect instruction or confusion caused by variations.

Check the provisions of the building contract

Whether it is a domestic building contract or the construction of a commercial building, reference must be had to the provisions of the contract. It is important to check the following provisions:

1. The process for suspending works;
2. The proper process of termination, for example, whether you are required to send a “Notice of Intention to Terminate”;
3. Any payments due and the power to withhold monies due;
4. Any warranties contained in the contract;
5. The obligations of each party under the contract.

A party to a building contract must ensure that they do not engage in any conduct which may be deemed a repudiation of the contract. A repudiation consists of any conduct which evinces an intention to no longer be bound by the contract. An example of this is the owner stating, “I’m not paying you for the final stage at all”.

The test for whether a repudiation has occurred is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.

A mere breach of a standard may not be sufficient to terminate the contract or withhold monies due. Taking possession without making the final payment could amount to a repudiation of a contract or wrongful termination. However, a party that is also in breach – for example, having failed to pay progress payments under the contract, may not be in a position to lawfully terminate the contract on the basis of such a repudiation.

Building contracts: Lexecon Construction Group Pty Ltd v MacRae

In the 2020 VCAT decision of Lexecon Construction Group Pty Ltd v MacRae (Building and Property), there is an example of a company failing to properly terminate a building contract.

Lexecon claimed in its pleading that it had terminated the contract by Notice of Termination claiming the owner had failed to provide the required planning approval and amended architectural plans and designs so that the building works to the relevant units could be completed.

The Tribunal did not agree and made a declaration that the purported termination by Lexecon of the contract dated 9 September 2015 in respect of the units was unlawful and was itself a repudiation of the contract. This was accepted by the owner.

Quantum meruit claims after building contract disputes

Before terminating or suspending a building contract or work, a party should be aware that the builder/contractor may be entitled to a quantum meruit claim for the work and labour performed. If there are defects, deductions can be made from a quantum meruit claim on account of the cost of rectifying the work to accord with the contract.

There is an entitlement to deduct liquidated damages from a quantum meruit amount if the work failed to reach practical completion unconditionally before the contract was terminated. It is typical in building cases for the parties to engage in claim and counterclaim sometimes trying to offset monies owed against the cost of rectifying or remedying defects.

Before terminating a building contract or taking action of any kind, whether you are the builder or owner, you should obtain legal advice in the first instance. You should also obtain expert advice by engaging a building consultant or expert engineer to determine the extent of the defect and whether rectification or remediation is possible. In the case of loss and damage, you should obtain a quantity surveyor to determine the actual cost of the remediation or rectification.

Building and construction cases can become complex resulting in many parties being joined in the dispute. A building dispute may involve the soil classifier, engineer, architect, builder and subcontractor each contesting liability, causation and costs and apportioning blame to the other. This can result in the litigation becoming protracted and expensive.

If you require legal advice or representation in relation to building contracts or in any legal matter, please contact Armstrong Legal.