Ending a Building Contract – Do’s and Don’ts

Whether it is a domestic or commercial building contract, terminating a building contract is a serious matter.

An owner may wish to end a contract due to abandoned and incomplete work, due diligence not carried out and or the works being carried are dangerously substandard. Builders may seek to terminate on the ground of non-payment or refusal of access or instruction.

Grounds for termination – Breach of Contract

The majority of construction contracts make provisions that allow for the termination upon the occurrence of specified breaches of the contract.

This can include the following:

  • A party has committed a serious breach of the contract including non-payment, refusal of access, delays and defects.
  • A party has repudiated a contract or, namely, shown an intention not bound by the terms of the contract or, to insist upon the contract being carried out in a way that is inconsistent with the terms of the contract; and
  • Pursuant to a right of termination provided by the contract.

It is also essential that the party alleging default is not themselves in breach of contract. If a party breaches an essential term of the contract, there may be grounds to terminate a building contract. Exercising the right to terminate a contract for breach of contract should be seriously considered before taking action. Accordingly, it is imperative to seek legal advice before terminating any building contract.

Calling for the termination of a building contract when there is no entitlement to do so, or not taking the appropriate steps to terminate a contract, may have significant consequences as set out below.

Statutory Termination

Under section 41 of the Domestic Building Contracts Act 1995 (the Act) allows for termination on certain grounds if the project is overtime or costs have blown out. It is important that the parties understand how to terminate under these provisions as the rights of the parties significantly to a standard contract termination as set out below.

How to Terminate a Contract

Termination by Notice

Most construction contracts will require that the party alleging a breach:

  1. Issue a Notice of Default to the defaulting party – the notice must specify:
    • The grounds relied upon as a basis for the Notice;
    • State the period of time by which the other party must remedy the defaults;
    • State that a failure to comply will mean that the contract may be terminated without further notice; and
    • Notice must be served in the manner the contract dictates.
  2. Issue a notice terminating the contract if the defaults are not resolved and serve it the other party.

Repudiation – Termination by conduct

Repudiation is conduct that shows a party is unwilling or unable to considerably perform the contract. Repudiation can be categorical, for example, if a party refuses to continue building or implied. An example of an implied repudiation is where a builder walks off the site and refuses to complete the agreed building works or, the principal refuses to provide the builder clear access to the site. When a party has repudiated the contract, the other party may either continue with the contract or accept the repudiation and terminate the contract.

Consequences of Termination

Lawful Termination

The lawful termination of a contract will result in the following:

  • both parties are discharged from future obligations;
  • clauses intended to survive termination will remain binding;
  • accrued rights are preserved for damages including delay and defect claims.

A statutory termination differs significantly as rights to completion and delay damages are not claimable. This is significant and expert legal advice is essential to understand when to opt for statutory termination.

Unlawful Termination

The unlawful termination (or termination without rights) amounts to repudiation. A party could be obliged to compensate the other party damages for breaching a contract. For this reason, legal advice should be sought before considering terminating any contract.

Protect your Rights

The current construction building site restrictions in place along with delays caused by COVID-19 pandemic has resulted in an increased number of construction contracts moving to termination. Because of the significant consequences from such ­proceedings it is important that parties understand and appreciate their rights, risks and obligations prior to commencing contractual relations. Similarly, should you find yourself in a situation comparable to any described, it is important to seek legal advice to ensure your rights and entitlements are best protected.

For all building contract termination queries please call our Director, Daniel Oldham on (03) 9640 0002, or via email info@oclawyers.com.au

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