Dangers of Terminating Building Contracts before Contractual Stages are Completed

Dangers of Terminating Building Contracts before Contractual Stages are Completed

20 May 2019

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

“Everyone else is doing it so why can’t I?” – Common industry practice is one thing, but often building law and its interpretation adopts a stricter approach to industry best practice.

The Supreme Court of Victoria has formed a narrow and tight definition of ‘Lock Up stage’ in the building process, to the effect that the garage should be considered as part of that stage. The upshot is that the garage must be fully finished, including installation of the garage door, before Lock Up can be said to have been achieved.

Further the court decision highlighted that builders needed to be totally correct on the facts before serving a notice of suspension to suspend the works, or they can be said to have repudiated the contract by refusing to continue building.

As a consequence of this case it is even more critical that builders in the residential industry ensure that their contract administration is tight and correct in such matters as:

  • the timing and sequencing of progress payment claims; and
  • how they utilise contract mechanisms such as notices of suspension and notices of default.

You do not necessarily need to see a lawyer to get the simple things right, such as properly documenting variation approvals and extension of time requests. Good, organised paperwork is very important not only for commercial but also domestic building works.

However, it is a wise course to seek advice from a lawyer before taking protective action such as a notice of suspension or a notice of default (or intention to terminate) and you should certainly seek professional assistance in drafting these significant documents.

Cardona v Brown, a decision of the Victorian Supreme Court of Appeal, concerned the above matters. It overturned previous decisions at VCAT and the Supreme Court that could be described as more ‘builder friendly’, regarding the same project.

Many industry standard building contracts allow for progress payments to be made pursuant to either Method 1 (i.e. at the completion of the main defined stages) or Method 2. The Court of Appeal found that builders claiming progressively under Method 1 can only make consecutive claims incrementally at the completion of each stage (in accordance with the legal definition of completion of each stage).

This means that the builder can only make the progress claim for each stage payment once the previous stages (and the current stage) have been completed. Further, the claims must be in sequence.

Given that in the past it has been widespread in the industry for some builders to claim Method 1 payments when prior stages had not been fully completed (eg claiming for Fixing stage, even though Lock Up had not been claimed due to some missing brickwork), this decision has now effectively forbidden this practice.

But that is not the only discrepancy with industry practice found in the decision. In the past garages have not always been considered to be part of ‘the home’ as it is a class 10a non habitable area – further, builders often delay the installation of the garage door as it can be damaged during construction.

As noted above, this decision has found that the garage is indeed part of the home and falls within the scope of the Lock Up stage, if the garage is part of the agreed scope of works in the contract. The Court was emboldened in this approach by the wide definition of ‘home’ in the Domestic Building Contracts Act (DBCA).

Section 40 of the DBCA defines Lock Up stage to be when:

“the home’s external wall cladding and roof covering is fixed, the flooring is laid and external doors and external windows are fixed, (even if those doors or windows are only temporary).”

The Court of Appeal found that the VCAT at first instance had made a mistake in not considering whether the garage itself was part of the home. Because it was held that the garage was part of the contract scope and part of the home, the non installation of the garage front door meant the home could not be secure.

Perhaps the most resonant part of this decision for builders is the strict approach taken by the Court of Appeal to the timing of notices of suspension.

Some contracts have contractual provisions that allow the builder to suspend works by notice where the owner fails to pay a progress claim within 7 days after it becomes due or is otherwise in breach of the contract. Here the builder suspended works due to failure to pay for the Lock Up claim, but the suspension started two days too early.

Consequently, the Court decided the builder was not entitled to suspend when it did and so this was a substantial breach of the contract by the builder. Ordinarily this would entitle the owner to then serve the builder with a notice of substantial breach requiring an end to the wrongful suspension.

In the Cardona case, only a letter had been sent on behalf of the owner, arguing that (amongst other matters) the suspension was wrongful, and the Court seemed mindful that even the owner had not strictly complied with the contract by serving the appropriate default notice. However, that did not stop the Court from taking a strict approach to the effect that the wrongful suspension then the failure to return to work when asked constituted a repudiation of the contract by the builder, that the owner was entitled to accept and then sue for damages.

Some people could mount a reasonable argument that the ‘wrongful suspension’, even if it was technically unlawful, should not necessarily amount to a repudiation in and of itself, until such time as the owner followed the correct contract procedure of a notice of default/intention to terminate and then the later notice of termination if the breach remains un-remedied.

Nevertheless this case is a salutary reminder that when tensions on a project mount to the point where such contractual notices are considered or manifested, urgent legal advice from lawyers with construction expertise needs to be sought.

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. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, 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 Council, for HIA Victorian Chapter. 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.