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Owners that utilise clauses in their Domestic Building Contracts that refer to s41 of the Domestic Building Contracts Act 1995 (Vic) (‘DBCA’) [IE, s21.1 of the HIA HC-7 Contract] as a ground for termination of their contract must realise that this clause may be seen as a ‘no-fault’ provision. That the member of VCAT that will decide the allocation of damages if the Builder of the Owner seek damages or quantum meruit in a Domestic Building Contract dispute at VCAT will closely scrutinise the use of this section in the DBCA.
This is seen clearly in the ruling of Senior Member M Farrelly, in the matter of Modscape Residential Pty Ltd v Adams (Building and Property) [2023] VCAT 653 (‘Modscape’). In Modscape, we see a dispute over a domestic building contract valued at $1,960,135 for a new home, the owners found themselves in a legal battle with their builder. The heart of the conflict in Modscape arose when the owners took over the home before the contracted work was fully completed, and they did not pay the builder’s final bill of $203,242.44. This led the builder to file a claim for the unpaid final sum along with damages.
The situation further escalated in Modscape as the owners counterclaimed, demanding substantial damages for what they alleged were incomplete and defective construction works, plus liquidated damages due to delays. In the end, this is what saved the owners.
However, the legal findings in Modscape favoured the builder to some extent. It was determined that the builder had not breached the contract substantially, and the actions of the owners were seen as a repudiation of the contract—an act which the builder legally accepted, ending the contractual relationship.
The resolution involved assessing the builder’s final claim and setting off costs that the builder would have incurred to finish the incomplete or defective parts of the work. This amount was then adjusted by the undisputed $24,000 liquidated damages for delays. After calculations, the balance turned out to be $39,081.60 in favour of the owners. This case highlights the complexities of construction disputes and the importance of clear contracts and thorough documentation in the building industry.
In Modscape, one of the twists was consideration of whether or not the owners use of s41 of the DBCA was valid as a ground for termination by an owner as within the Domestic Building Contract. At paragraph 55, Senior Member M Farrelly stated:
‘ “Section 41 of the Act relevantly provides:
Ending a contract if completion time or cost blows out for unforeseeable reasons
(1) A building owner may end a major domestic building contract if—
(a) either—
(i) the contract price rises by 15% or more after the contract was entered into; or
(ii) the contract has not been completed within 1½ times the period it was to have been completed by; and
(b) the reason for the increased time or cost was something that could not have been reasonably foreseen by the builder on the date the contract was made.
(2) For the purposes of subsection (1), any increased time or cost that arises as a result of a prime cost item or a provisional sum or that is caused by a variation made under section 38 is to be ignored in calculating any price rise or increase in time.
(3) To end the contract, the building owner must give the builder a signed notice stating that the building owner is ending the contract under this section and giving details of why the contract is being ended.
(4) The Director may specify that the notice is to be given in a form approved by him or her. If the Director does this, the building owner must give the notice in that form.
(5) If a contract is ended under this section, the builder is entitled to a reasonable price for the work carried out under the contract to the date the contract is ended.
(6) However, a builder may not recover under subsection (5) more than the builder would have been entitled to recover under the contract.
(7) Section 39 does not apply to this section.”
56. In my view, the section is not applicable. Section 41 provides relief to an owner when the increased time has been caused by a matter not foreseeable on the part of the builder, and if the contract is terminated in reliance on the section, the builder is entitled to a reasonable price for the work carried out. It is, in a sense, an avenue of no-fault termination. This is manifestly not the case put by the owners in this case. The owners assert substantial breach on the part of the builder and claim damages arising from the alleged breach. There is no suggestion that the delay is the result of something not foreseeable by the builder at the time the contract was entered.’
[bolded for emphasis]
Thus, the use of section 41 of the DBCA by the owner was misguided as it did not provide a unilateral mechanism for termination for gross breach of contract of the Builder as they sought in the main of their case.
If you are seeking to terminate a Building Contract, contact Cogent Legal for assistance and legal advice. The decision to terminate must be made in the context of the Building Contract, the DBCA, the Building Act 1993 (Vic), the relevant regulations and most importantly the common law of this area both in VCAT and in the Courts of Appeal.