One Door Slammed and Another Opens. What does Contract Repudiation mean for Builders?
By Justin Cotton, Partner and head of practitioner advocacy, Lovegrove Smith & Cotton
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, not all owners will be striving to “take the Builder for a ride”, 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 contract 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?’
There are many ways this can come about. Suffice to say 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.
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. 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, advising the Builder to leave the site, never to return.
Even if the correct two notice 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 notices were 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 notices 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 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.
There is also the two step procedure of a notice of default (sometimes referred to as a “notice of intention to terminate”) that sets out the breach and demands rectification within a set time and followed by a notice of termination if required. 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.
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 loathe 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.
The damages claimed by the Builder can be on a “quantum meruit”. This means that rather than just claiming what is owed under the stage or progress claims set out in the contract schedule, the Builder is entitled to count up all costs incurred with trades and suppliers for which they have not been paid by the Owner, and add a margin for profit. This will sometimes be higher than what is in the contract schedule or what was actually billed in the invoice to the Owner.
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.
By Justin Cotton, Partner, Lovegrove Smith & Cotton
The Lovegrove Smith & Cotton E-Library is a free online resource of articles, which puts a wealth of information at your finger tips. The articles in the E- Library have been written by lawyers and a number of them have been published in the Australian, The Age and the Herald Sun. Some of the articles date back to the 1990’s. To access click here.
© Lovegrove Smith & Cotton 2014