What does contract ‘repudiation’ and ‘breach’ mean for builders?

What does contract ‘repudiation’ and ‘breach’ mean for builders?

16 Mar 2020

By Justin Cotton, Director, Lovegrove & Cotton – Construction and Planning Lawyers

Like it or not, and no matter how well you build, there will be a small minority of owner customers for whom no level of quality management will necessarily avoid a contract dispute. Of course, many owners are reasonable, and having worked in dispute resolution for many years one gets to see that there is plenty of good and bad on both sides of the contractual divide.

This article will examine what happens when the parties’ relationship appears to break down irretrievably, so much so that the Owner retakes possession of their land, changes the locks or in some other way communicates to the Builder that the contract is at an end. When such action is taken, it is almost a ‘like it or lump it’ situation, and the Builder is usually left pondering how to recoup monies owed or ‘what do I do next?’

The Tricky Concept of Repudiation

The test of what is a repudiation, is whether the action or conduct amounts to “evincing an intention to no longer be bound by the contract”. This could be by way of re-taking possession, changing the locks, or even by words. For example, an owner advising the Builder to leave the site, never to return.

A perennial case for contractual repudiation in Australia was the High Court case of Carr v JA Berriman Pty Ltd (1953) 89 CLR 327. This case concerned an owner (Carr) and a builder (Berriman) who contracted to build a factory. Prior to commencement of the build, the owner failed to appropriately clear the building site, which he was obliged to do under the contract by a certain date. The contract also stated that Berriman would supply and fabricate the steel needed for the works.

Carr failed to clear the site by the appropriate time. Despite this breach of an express contractual term, it was not a sufficiently essential term under the contract to give rise to a right of termination. Berriman also encouraged continuation of the contract which was considered an ‘affirmation’ of the contract. Above that, there was evidence that the delay was exacerbated by poor weather. It followed that Berriman was unable to rely on breach of this express contractual term alone by Carr.

Carr also breached his promise to Berriman under the contract that Berriman would be responsible for supplying and fabricating steel, which would have afforded Berriman a profit. It also had the ramification of rendering Berriman unable to pay his subcontractors. However, again, this breach was not necessarily in and of itself sufficient to give rise to a right of termination, as it did not rid Berriman of the substantial benefit under the contract.

The key finding in this case was that when viewed together these two non-essential breaches meant Carr evinced an intention to no longer be bound by the contract. By repeatedly breaching the contract, albeit non-essential terms of the contract, Carr indicated that he had no intention on seriously making good his promises to Berriman. The repeated small breaches had aggregated to a repudiation. It followed that Berriman had a right to rescind the contract on the ground of repudiation.

Breaches of Essential and Innominate Terms

In other cases, often contracts are brought to an end due to a substantial breach of an essential or innominate term that causes substantial loss to the wronged party (for instance, ridding that party of their substantial benefit under the contract).

The general test for breach of an essential term according to Jordan CJ referred to in Tramways Advertising Pty Ltd v Luna Park (1938) 61 CLR 286 at the lower New South Wales Court of Appeal (the case went to the High Court, where Jordan CJ’s passage was approved), is: “whether it appears from the general nature of the contract, or from some particular terms, that the promise is of such importance that the party would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise.” [Emphasis added]

Meanwhile, innominate terms (or ‘intermediate’ terms) do not follow the same test. Whether breach of an innominate term gives rise to a right to terminate is dependent on whether the breach may cause substantial loss. This is despite the fact that the term may not have, at the time of formation of the contract, been understood (actually or hypothetically) to be essential. One example that comes to mind is from the case Hongkong FIR Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, where the relevant clause stated essentially that a ship would be “maintained in good repair”. In the case of a ship, breach of such a term could either be fleeting and have a minuscule consequences (such as broken floorboard) or be a substantial breach with disastrous consequences (such as a gaping hole in the hull). Due to the variability in consequence of breach, the term is an innominate term.

In either the case of breach of an essential or innominate term, or contractual repudiation, knowing whether you have a right to issue a notice of default or notice of termination requires substantial legal skill and analysis of the circumstances. It is important to get this right, as if mistakes are made, one might be taken to have repudiated the contract themselves.

Notice of Default / Notice of Intention & Notice of Termination

There is a wrong way and a right way to end a contract and the correct method will be those situations where the other party is in substantial default under the contract in some way, and an initial notice of default (ideally, prepared by a lawyer) is served under the contract.

That preliminary notice sets out the contract breach or breaches and requires the other party to rectify their default within the set time allowed by the contract. It will also advise that if the default is not remedied within that time then the non-defaulting party reserves the right to serve a second notice (being a notice of termination). Only with delivery of the notice of termination is the contract regarded as being at an end.

It is not compulsory to serve the second notice just because the first has been served, but it gives the Builder (or indeed the Owner in the reverse scenario) the option to do so if the default is not remedied, and is a good way to apply pressure on the other party first and foremost.

Once the second notice (termination) is sent, more often than not the parties will end up in Court or in VCAT if significant monies are owed on either side. If the Builder serves the termination notice, or if the Owner has otherwise repudiated the contract, the Builder will be entitled to claim damages under the contract against the Owner.

Wrongful Termination

So generally speaking if the ‘bad news’ owner on the opposing side of your dispute decides to simply re-take possession of the works without following the above procedure, this could well amount to a wrongful termination or ‘repudiation’ of the contract.

Even if the correct double step notice of termination procedure under the contract is used, that in itself only means that due process was followed. A termination could still be found to be unlawful in the long run if the notice of termination was served by a party who is themselves in breach (for example, for not paying a valid progress claim), or if the grounds for the default notice are found to be unmeritorious.

Further to that, if the way the notice of default or notice of termination are prepared is somehow defective or lacking in form, that has in the past led to VCAT striking down the notices and instead finding that this amounts to a repudiation by the party serving the notices. When you think about it, this is not a mere technicality, because if a contract notice is misleading about what is wrong under the contract or what the consequences will be if the warning is not heeded, this can lead to misapprehension about future contract actions. And hence the importance of having these notices prepared by a lawyer or at least checked by one before they are served.

If you are a Builder with an errant owner, there are notices (including those above) under the contract that can assist. The most common contractual breach by an owner is failure to pay a progress claim on time, usually but not always the final progress claim. In these circumstances a notice of suspension should be considered, as this will help avoid the problem getting worse by doing more work that you may not get paid for, and granting you an automatic extension of time while the Owner’s breach continues. Suspension notices become less effective the closer you are to completion.

I once acted for a Builder of horse stables where the Owner had re-taken possession following the service of notices. While the Builder was loath to allow the Owner to re-take possession, they really had no choice but to do so. The old adage goes: “A man’s home is his castle”. Likewise, it is the Owner who has proprietorship of the land and they can ultimately re-take possession if they so wish. The upshot for the Builder though is that if there is a repudiation or wrongful termination of a contract, then the Builder is placed in a strong position legally.

Non-Contractual Claims that May Assist

The damages claimed by the Builder can be on a “quantum meruit”. This means that rather than just claiming strictly what was owed under the stage or progress claims set out in the contract schedule, the Builder is entitled to count up value of work with trades and suppliers for which they have not been paid by the Owner. This was recently thought to allow claims of quantum meruit that were sometimes higher than the contract schedule price or what was actually billed in the invoice to the Owner.

However, pursuant to a recent High Court decision Mann v Paterson Constructions Pty Ltd [2019] HCA 32, there has been a clarification of the quantum meruit doctrine, where the contract agreed price acts as a cap on what can be claimed; and furthermore, any variation claims in Domestic Building contracts must follow the process set out in Section 38 of the Domestic Building Contracts Act 1995. For more information on point, read a relevant article here.

The Importance of a Good Paper Trail

I cannot emphasise enough how important it is for Builders to retain good paperwork and to ensure that all relevant invoices and receipts are included in a court or VCAT claim and given to your legal representative. That means invoices and receipts from subcontractors and suppliers, it is not enough just to rely on the invoices served on the Owner and a summary spreadsheet.

The costs and the margins will need to be able to be broken down, whether we are referring to original contract works or variations. Too often we find that it is like “pulling teeth” when asking that all relevant invoices and receipts are provided for VCAT disputes, but the importance of these documents is not to be under-estimated.

In addition, when calculating damages the Builder can also include the lost profit margin on the works yet to be completed under the Contract. For example, if the Owner wrongfully terminates at the end of Lock Up stage and the Builder has not done works on Fixing and Completion stages, the Builder can claim for the loss of profit on the remaining contract price after Lock Up.

On the other side of the coin, if the Builder repudiates the contract or is validly terminated from it, then the Owner can claim damages on a different basis. If the Owner engages a second contractor to finish the works, it is likely to cost more than the balance left in the contract price due to the second contractor charging for the risk of taking over someone else’s project. That cost over-run can be charged back to the first Builder as damages. Seldom will a Builder agree to hand this over, so once again this will become a court or VCAT saga.

This is a brief summary of what it means when a contract is ended before completion, some common ways this can manifest, and what a Builder can or should do when faced with this dilemma. It need not be the end of the world by any means, but you should seek legal advice to know your rights.

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Justin Cotton is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Likewise, Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.