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Effective determination of building contracts

Feature Articles

Cite as: (2002) 76(11) LIJ, p.54

Disputes about determination of building contracts are common. There are several issues to be considered when advising or acting in relation to the determination of a building contract.

By Graeme Hellyer

A building contract can be discharged by agreement, by frustration, or by determination by one of the parties. Determination of a building contract involves bringing the contract to an end before performance has been completed. There must usually be good reason for a party to end the contract before completion.

Most building contracts contain provisions in relation to the determination of the contract including the grounds for determination and the procedure to be followed.

At common law, a contract can be determined by acceptance of a repudiation. Generally, contractual provisions relating to determination do not exclude common law determination and are construed as providing an alternative or additional means by which a party can determine a contract.[1]

Often the same facts can give rise to a right of determination under the contract and at common law. It is common for the contract to specify grounds for determination which would not at common law give rise to a right to determine a contract. For example, a failure to pay a progress claim within the required time generally would not constitute a sufficient ground for determination at common law, whereas many of the standard form building contracts specify a failure to pay a progress claim when due as a ground for determination.

Provisions for determination of a contract are as much about providing a means of securing performance of the contract by having the other party remedy a default, as they are about ending the contract.

DETERMINATION PURSUANT TO THE CONTRACT

Most building contracts set out the grounds for giving notice of default (the defaults).

Clause 42.0 of the Housing Industry Association (HIA) Plain English building contract provides that the builder may bring this contract to an end by giving written notice by certified mail to the owner if the owner:

  • fails to provide the builder with the essential information as set out in clause 13 (proof of title, capacity to pay); or
  • fails to make a progress claim on time; or
  • takes possession of the building works before making the final payment; or
  • is in breach of this contract.

Clause 43.0 of the HIA building contract provides that the owner may bring this contract to an end by giving written notice by certified mail to the builder, if the builder:

  • fails to proceed with the building works competently and diligently; or
  • suspends the building works unreasonably; or
  • refuses or persistently neglects to comply with the requirements of local or other authorities; or
  • refuses or persistently neglects to fix or replace faulty work or materials; or
  • is unable or unwilling to complete the building works or abandons this contract; or
  • is in breach of this contract.

It is imperative that the party is able to establish that the ground or grounds relied on exist. The wording of the contract, particularly where the contract makes provision for grounds for determination which would not be considered serious enough to justify determination at common law, is construed strictly.

The notice of default must specify the default or defaults clearly.[2] The amount of detail required depends on the nature of the default being alleged. Sufficient detail must be provided so that the recipient can know what is being alleged and to enable them to take appropriate steps to remedy the default or defaults.[3]

A failure to proceed with reasonable diligence involves a general failure to proceed with that degree of promptness and efficiency one would expect of a reasonable builder.[4]

A failure to proceed with the works competently involves a failure to maintain those standards of building and building organisation which a builder can be expected to have, having taken on the responsibility for the task.[5]

It may be sufficient for the notice of default simply to make the statements that the builder has failed to proceed with the works competently and/or with due diligence and/or that the builder has suspended the works unreasonably without providing greater particularity.[6]

Where the owner’s complaint involves deficient work, it would be appropriate to specify the defects as clearly as possible.

The ground, “where the builder is in breach of this contract” is very broad and is not to be limited by the specific grounds set out in the contract.

The requirement that the notice of default not be given unreasonably would suggest that it would not be open for a party to rely on a trivial breach of contract.

The notice of default should state in the alternative that the defaults are relied on as constituting a repudiation, which if not remedied within the relevant time period specified, will be accepted.

MODE OF SERVICE

Often the building contract will specify a required mode of service of the notice of default such as by registered or certified post. Obviously, the contract should be followed in all respects. In addition to the mode or modes specified, it is sensible to forward the notice by facsimile transmission because this is instantaneous and provides a conclusive record of service. Generally, where for some reason the specified mode of service has not been adopted but it is beyond doubt that the recipient received the notice, the notice will be considered given notwithstanding objection being taken to the fact that the terms of the contract were not complied with strictly. The purpose of these provisions is considered to be facultative, not obligatory (rather than placing an absurd premium on a particular mode of service that could be of no benefit to anybody).[7]

It is a requirement that notice of default should not be given unreasonably or while the party giving the notice is in breach of the contract. These matters provide ample scope for dispute.

It is common for contracts to contain deeming provisions as to the date when notice will be given where service occurs by post or by registered post, for example, two clear business days after the date of posting.

The default must continue for the required period (often 10 or 14 days) from the date or deemed date of service of the notice of default.

It is necessary that the party continue to be in default during the relevant period. This could involve a failure to remedy the defaults sufficiently or at all, no response or no satisfactory or reasonable response to the notice of default.

It is not necessary that each and every element raised by the notice of default should be cured within the relevant time period. Probably it is sufficient that the party shows a willingness to act bona fide and to remedy the breaches, that is, “in a substantial and commercial sense, and not in a nominal or colourable way”.[8]

In calculating the relevant period between the date of service of the notice of default and the earliest date when notice of determination can be given, it is necessary to consider whether the contract requires the default to continue for a specified number of “calendar” or “working” days.

It is essential to get the counting of the days right. If the days are miscounted and the notice of determination is given prematurely there cannot be an effective determination under the contract and probably a notice of determination which has been given prematurely cannot be relied on in the alternative as a notice of determination at common law.[9]

Although it is not unusual for it to be alleged that an ineffective attempt to determine a contract constitutes a repudiation, the better view would appear to be that the result is an ineffective attempt to determine the contract but not an act of repudiation.[10]

Interesting issues arise when the owner ejects or excludes the builder from the site on the basis of a mistaken belief that they have effectively determined the contract; whether such conduct amounts to a repudiation on the part of the owner.

It is imperative that the party giving the notice of default be careful that by its conduct or by discussions or correspondence with the other party, it does not leave itself open to an allegation that it has waived the default or is otherwise estopped from relying on the notice of default.

The notice of determination should follow the requirements set out in the contract as to mode of service. Also it is appropriate for the notice to contain a statement that in the alternative it is a notice of determination at common law.

DETERMINATION AT COMMON LAW

Determination of a building contract at common law involves the acceptance of the other party’s repudiation of the contract. Repudiation involves a breach or series of breaches[11] of the contract of sufficient gravity to convey to the other party an inability or unwillingness to perform the contract or an intention not to perform it or to fulfil it only in a manner substantially inconsistent with its obligations.[12]

The adoption of an erroneous but bona fide view as to the construction of a contract may not constitute a repudiation.[13]

Acceptance may be by words or conduct.[14] The clearer the acceptance the better.

A failure to complete the works by the date for completion specified or otherwise arrived at pursuant to the contract may not of itself constitute a repudiation, particularly where the contract makes provision for liquidated damages for delay. Although the extent to which the time taken is beyond the construction period stipulated in the contract will be relevant.[15]

Also it would be prudent to give notice of a date by which the works are required to be completed for the purpose of establishing repudiation based on delay in completion. It is open to argument that unless expressly provided, time is not of the essence in a building contract.[16]

There is a general requirement in relation to determination at common law that the party determining the contract must act reasonably[17] and should be ready and willing to perform its obligations under the contract at the time of determination.

Generally, a party may justify the determination at common law by reference to any ground which was available at the time of determination although that matter may not have been notified to the other party at that time.[18]

THE CONSEQUENCES OF DETERMINATION

Some contracts contain provisions as to the parties’ rights and obligations on determination.

At common law an owner who has effectively determined the contract would be entitled to the cost overrun, (i.e. amount paid in respect of contract works plus amount payable to complete less contract price) together with the cost of rectification works, liquidated damages for delay up to the date of determination and delay costs subsequent to determination.

At common law a builder who has effectively determined the contract can elect to make its claim on either of the following bases:

(a) any amounts payable pursuant to the contract (progress claims, variations, delay costs) plus loss of profits in respect to the unpaid balance of the contract sum, or

(b) balance of money on the basis of a quantum meruit.

Regardless whether the owner or the builder has effectively determined the contract, the builder would remain liable to the owner for the cost of rectifying defective works. If the builder has determined the contract, the builder may be entitled to have the cost of rectification works assessed on the basis of the cost to the builder rather than the cost to the owner (i.e. market rates).

The intention is that the party be awarded damages so that they are put in the same position in which they would have been but for the determination of the contract.

The stakes for the parties to a dispute about determination are high. If the owner succeeds, the owner will be compensated to the extent that the costs of the project exceed the original contract price. It is notoriously difficult for owners to find builders who are prepared to rectify and complete another builder’s work. The relatively small number of builders who are prepared to take on this type of work command a premium. Their prices are loaded to take into account the risk and general unattractiveness of this type of work. In awarding damages in these cases, the courts and VCAT acknowledge that this is the reality of the situation and in general terms see it as a consequence of the builder’s failure to perform the contract. It follows that the difference between the amount of money left in the contract at determination and the cost of completion and rectification can be significant.

If the builder succeeds, the builder can recover the difference between the amount paid to the builder by the owner and the fair value of all the works carried out by the builder on a quantum meruit (cost plus fair margin). There is the potential for this to be considerably greater than the agreed contract price, particularly if the builder priced the works too low in the first place.

Unlike the owner, the builder stands to receive the benefit of the damages calculated on this basis. In the case of the owner, the owner pays “any premium” to the second builder.

Commonly both the builder and the owner will be asserting that they have determined the contract and that the other’s purported determination is ineffective, invalid and/or wrongful. Because the stakes are so high and because generally there can only be a finding that one party has effectively determined the contract, these determination disputes, unless settled, are hard fought.

The owner’s complaints can include delays (including delays in obtaining the building permit), deficiencies in the works, disagreement about the scope of works or variations, poor communication on the part of the builder, failure to organise statutory inspections and the like.

The builder’s complaints can include complaints about delays in the provision of proof of ownership and/or capacity to pay, information such as selections, decisions in relation to variations, signing of variations, lack of access, delays due to matters beyond the builder’s control, delays in payment of progress claims and/or variations, interference including issuing instructions to tradespersons directly, and poor communication.

The nature of these allegations and the issues raised in a determination dispute require the project to be examined in detail at the hearing. The sort of issues which are likely to be canvassed will include the scope of contract works, the date for commencement, the date of commencement, the date for completion, the date of completion, the reasons for delay and whether the delays give rise to any entitlement to extensions of time, variations, deficiencies in the works, the validity of the notices of default and of determination, the scope and cost of rectification and completion works and the amount of the builder’s entitlement to payment whether under the contract or on a quantum meruit.

All this is likely to take many days.

The parties run the risk that at the end of the campaign the other party will not have the funds to satisfy any judgment obtained against them.

The domestic building works insurance regime provides some protection to the owner but the cover provided by the domestic building works insurer does not include all of the heads of damage which the owner in principle is entitled to recover from the builder. For contracts entered into after 1 July 2002 the insurance cover has been modified further.[19]

The indications are that in determination disputes the decision-maker ends up making an assessment as to which party is the “guilty party” and which party is the “innocent party”. The difficulty is that there can be degrees of fault on both sides and in reality it becomes a matter of deciding in the face of some hotly contested evidence and in the light of some highly technical legal rules, which party is more guilty or innocent than the other.

So what does an owner who is fed up with their builder and wanting to end the contract need to know?:

(a) it can be a long, hard and uncertain road;

(b) if they lose, it will cost them significantly. If they win they are still likely to be out of pocket to some considerable extent. In addition there is the risk that the builder may go into liquidation and that the domestic building works insurer would not indemnify the owner for all their losses;

(c) the time involved in having the dispute determined could well be greater than the time it would have taken to have a recalcitrant builder complete the works; and

(d) as an alternative to determining the contract, serious consideration should be given to exploring other options, particularly if the quality of the builder’s work is reasonable.

What does the builder who is fed up with the owner and wanting to end the contract need to know?:

(a) It can be a long, hard and uncertain road;

(b) If the builder loses, the builder loses any entitlement it otherwise would have had to payment of any balance due under the contract (which could effectively represent the builder’s working capital) and be liable for the cost overrun, inflated to the extent of the premium charged by builders to complete and rectify another builder’s work; and

(c) If the builder wins, the builder could be entitled to payment on a quantum meruit basis but the delay and costs involved could affect adversely the builder’s business and the builder would be liable to pay the cost of rectification of defects in any event. These cost may be calculated on the basis of the cost to the builder or on market rates.

RESPONDING TO A NOTICE OF DEFAULT

The most common response seems to be to go on the attack, to criticise the notice, allege repudiation, and to endeavour to get the upper hand. There is a place for this strategy. At the same time consideration should be given to the making of a bona fide attempt to address legitimate concerns whether in an open letter or without prejudice. The appropriate action depends on the strengths and weaknesses of the party’s position at the time of the receipt of the notice of default.

If the party is in default as alleged, probably the appropriate course is to provide a reasoned response including an explanation for the defaults and to give appropriate and realistic assurances that the party remains ready and willing to perform its obligations under the contract. This could include providing a revised schedule for the completion of the works. If this is done, it would be significantly more difficult for the person advising the party giving the notice of default to advise that they could confidently proceed to determine the contract in those circumstances.

The advantage of continuing with the contract is that the parties maintain some reasonable degree of control over their destinies whereas if one or other or both of the parties purport to determine the contract they embark on what can be a bitter all or nothing fight to the end.

ANNEXURES

Draft notices of default and of determination (a framework for discussion) based on the provisions of the Housing Industry Association Plain English building contract are annexed. These notices must be prepared carefully and in accordance with the requirements of the contract and the relevant circumstances.

NOTES

GRAEME HELLYER is a member of the Victorian Bar. He works in commercial litigation, including building and engineering disputes, and is an accredited mediator.

Notice 1
DRAFT NOTICE OF DEFAULT, BUILDER TO OWNER – A FRAMEWORK FOR CONSIDERATION
By registered post

To: The owner
[Address for service as stated in the contract]

We act for the builder.

By HIA form of agreement dated (insert date) between you and our client our client agreed to carry out the construction of a house for you at (insert address).
We hereby give you notice pursuant to clause (insert clause) of the contract that you are in breach/default of the contract in that:
(a) you have failed to provide our client with the following essential information as set out in clause (insert clause) of the contract:
(i) satisfactory evidence of your title to the land;
(ii) full details of any easements, restrictions or covenants which affect the land;
(iii) satisfactory evidence of your capacity to pay the sum of the contract price including satisfactory written evidence that any loan has been approved by the lending body and that the mortgage documents have been signed;
(iv) details of any inspections required by the lending body;
(v) a copy of any town planning approval and proof of payment of the relevant fees;
(b) you have failed to make payment of our client’s progress claim dated (insert date) in the sum of $(insert amount) which was due and payable on (insert date);
(c) you have taken possession of the works prior to making payment of our client’s final claim dated (insert date) which was due for payment on (insert date);
(d) you are in breach of this contract in that:
(i) you have failed to provide access;
(ii) you have denied our client access to the works for the carrying out of the works;
(iii) you have failed and/or neglected to provide instructions as to selections;
(iv) you have failed and/or neglected to execute necessary variation documents.

Take notice that if you remain in breach as referred to above for the period of 10 days after the date of service of this notice on you our client intends to bring this contract to an end.
Further, or alternatively, the breaches and other matters set out above constitute a repudiation of the contract by you. If within the said 10-day period you do not take appropriate steps to remedy the breaches and other matters our client reserves the right to accept your repudiation of the contract and to determine the contract at common law.
[Note: probably only the defaults in sub-paras (c), (d)(i) and (ii) (and perhaps (iii)) could constitute a repudiation].

Yours faithfully,


Notice 2
DRAFT NOTICE OF DEFAULT, OWNER TO BUILDER – A FRAMEWORK FOR CONSIDERATION
By registered post

To: The builder
[Address for service as stated in contract]

We act on behalf of the owner.

By HIA form of agreement dated (insert date) (the contract) between you and our client you agreed to carry out the construction of a house for our client at (insert address).
Pursuant to clause (insert clause) of the contract we hereby give you notice that you are in default/breach of the contract in that:
(a) you have failed to proceed with the works competently and diligently.
We note, inter alia, that:
(i) there are numerous and various defects in the works carried out by you as detailed in the report dated (insert date) which is attached/the list of defective works attached:
(ii) pursuant to the agreement the date for completion was (insert date). As at the date hereof the works have not reached the e.g. frame, lock up, fixing stage or the works are incomplete;
(b) you have suspended the works unreasonably. We note, inter alia, that no work whatsoever has been carried out in respect of the following periods:
(c) you have refused or persistently neglected to comply with the following regulations of the XYZ Council as contained in the following notices:
Date of Notice Requirements
(d) you have refused or persistently neglected to fix or replace faulty work and/or materials as notified to you in the letters/reports dated (insert date);
(e) you are unable or unwilling to complete the works and/or you have abandoned the contract. We note that no work, alternatively no material work has been carried out by you since (insert date);
(f) you are in breach of contract in that you have demanded payment of progress claim dated (insert date) when the claim was not due and payable (and/or by reason of the matters set out above).

Take notice that if you remain in breach as referred to above for the period of 10 days after the date of service of this notice our client intends to bring the contract to an end.
Further, or alternatively, the breaches and other matters set out above constitute a repudiation of the contract by you. If within the said 10-day period you do not take appropriate steps to remedy these breaches and other matters our client reserves the right to accept your repudiation and to determine the contract at common law.

Yours faithfully,


Notice 3
DRAFT NOTICE OF DETERMINATION – A FRAMEWORK FOR CONSIDERATION
By registered post

To: The owner or the builder
[Address for service set out in the contract]

We refer to our letter dated (insert date) wherein we gave you notice of default pursuant to clause (insert clause) of the building contract. You remain in breach/default as referred to in the said notice of default and accordingly on behalf of our client we hereby give notice of determination of the contract pursuant to clause (insert clause).
Further, or in the alternative, our client hereby accepts your repudiation of the contract and determines the contract at common law.

Yours faithfully,


[1] Kennedy v Collings Constructions Co Pty Ltd (1989) 7 BCL 25, 39.

[2] Yendex Pty Ltd v Prince Constructions Pty Ltd (1989) 5 BCL 74.

[3] Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] 1 Ch 233; Re Arbitration between Stewardson Stubbs & Collett Pty Ltd & Bankstown Municipal Council [1965] NSWR 1671.

[4] Stewardson, note 3 above.

[5] Brenmar Building Co Pty Ltd v University of Newcastle (1999) 15 BCL 467, 469.

[6] Stewardson, note 3 above; note 5 above.

[7] Note 1 above, 37.

[8] Stewardson, George Bevan Enterprises Pty Ltd v Robert Patrick Pty Ltd (1988) 7 ACLR 34.

[9] Wilson v Kirk Contractors Pty Ltd (1990) 7 BCL 284.

[10] Note 9 above.

[11] Hudson Crushed Metals Pty Ltd v Henry (1985) 1 Qd R 202, 1 BCL 68.

[12] Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, 634.

[13] Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699, Green v Somerville (1979) 141 CLR 594.

[14] Vitol SA v Norelf Ltd [1994] 4 All ER 109; (QBD); [1996] AC 800, 810/11 (H of L).

[15] Nibaldi v Downes (unreported, Supreme Court of Victoria, Byrne J, 26 November 1993).

[16] Carr v JA Berriman Pty Ltd (1953) 89 CLR 327, 348 cf Gold Coast Oil Co Pty Ltd v Lee Properties Pty Ltd (1984) 1 BCL 63.

[17] Renard Constructions Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.

[18] JW Carter, Breach of Contract, 2nd edn, Lawbook Co, para 1006.

[19] Ministerial order dated 20 May 2002 pursuant to s137B of the Building Act 1993.

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