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Terminate or Ending a Building or Construction Contract
You’ve come to a dead end. Your building project has stalled; your relationship has soured. The other party keeps playing games, refuses to answer your telephone calls and you’re ready to be done with it all. So, time to terminate the contract?
Before you commit to termination, you need to be sure that you’re in the right position to terminate the contract.
Failing to terminate a construction contract properly can affect your entitlements and your legal position, and can actually leave you vulnerable to a claim by the other party.
The normal process of terminating contracts
Later we will look at terminating the contract using the internal contract mechanism. While that is an important part of the process, you still have common law rights of termination and it’s important to know what they are.
Unless the contract specifically and expressly excludes your common law termination rights, you may be able to terminate the contract without following the process laid out in the contract.
The basic common law rights of termination are:
- There must be a breach of a fundamental term of the contract;
- You must clearly terminate the contract following that breach.
Despite this sounding straight forward, many people choose to use the contractual process as it can be often clearer when to terminate than relying on common law rights. Under the contract process, you do not need to argue over whether something is or is not a fundamental term of the contract, given that it’s all laid out for you.
Despite a lot of the building industry using standard form contracts, clearly understanding your specific contracts and the terms within it is an integral part of considering when and how you can terminate.
Termination under a standard form building contract
A large number of builders now use standard form contracts for the domestic building works. Most of these contain a formal process for either party to use to terminate the contract.
These processes are not identical for either party and they many contain different triggers to exercise the termination rights, but they are a useful process designed to minimise disputes over whether the party had the right to terminate. Of course, disputes will still arise.
Most of these contracts have a procedure where the party, in the event of a major breach, send a notice to the offending party, notifying them of the breach and allowing a certain amount of time to rectify the breach. In some contracts, these are called ‘show cause’ notices. Failure to remedy the breach would then allow a right to terminate.
The contract, usually, has definitions of what constitutes a major breach.
Having received a breach notification, the party needs to respond to it to the issuing parties’ reasonable satisfaction. Depending on the breach, that might involve a plan for rectification, a further schedule for works or payments, or details about how the breach may be resolved.
What if you terminate improperly?
What happens if you get it wrong?
Perhaps you don’t issue a valid breach notification, or perhaps the breach is not actually a substantial breach? And then you proceed to issue the termination notice?
The main advantages to terminating a contract when the other party is at fault are:
- Getting someone else to do the work properly (or getting out of a contract that has become unprofitable);
- Being able to claim damages against the other party.
A failure to terminate properly can affect these benefits. If you attempt to terminate, but do it incorrectly, it’s generally regarded as a “repudiation”. Repudiation is where you indicate that you don’t intend to be bound by the contract. Therefore, the other party can accept the repudiation and terminate themselves, or affirm the contract and keep you bound by the contract.
If they elect to terminate, it’s then the other party that has the right to claim damages and not you.
Making the wrong decision can leave you not only unable to claim your losses back, but vulnerable to claims being made against you; Building and Construction Law is a focus of Cogent Legal and we can help.
What happens after repudiation?
You tried to terminate and didn’t get it right, then the other party accepted your repudiation and terminated the contract themselves.
What is their claim against you?
An owner may be able to claim the costs of getting a new contractor on the job (including tendering costs), the additional costs of that contractor coming up to speed, and potentially losses resulting from the project delay (for example, interest on finance).
A contractor might be able to claim not only for work done, but also for profits that they will no longer achieve on the job having been wrongly terminated.
In each case, all parties have a duty to take reasonable steps to mitigate their losses.
It’s also important to check whether your contract has provisions that affect your ability to claim for certain types of loss. Some contracts limit the claim to a percentage of the total works or the total profit that would have arisen from the contract, depending upon the progress made at that time the contract was termination.
Often for Domestic Building Contracts litigation occurs in VCAT. If you are going to VCAT, contact us.
Key Takeaways
- Read your contract – what is your ability to terminate; what is your entitlement to damages or exposure to loss; what is the process to be followed should termination be the best course of action?
- Are there grounds to terminate under the contract? Are there common law grounds to terminate? Are there both?
- What is your risk if you incorrectly terminate and are claimed to have repudiated the contract?
- Is termination the best course of action to resolve your issue or is there an alternative course of action that may achieve the same ends?
COVID-19 Update:
Is your builder claiming that a Force Majeure clause has come in to effect due to COVID-19?
To make a decision on Construction Contract termination, you will need legal advice. Contact us to have a no cost initial consultation on this.