What Types of Damages can Flow from a Breach of a Building Contract?
By Jarrod Gutsa, Lovegrove & Cotton.
When a party breaches a contract the innocent party will be entitled to damages due to the breach by the other party. The types of damages recoverable and the sum of the said damages will be contingent upon the type of breach committed. It is beyond the breadth of this article to consider all the types of breaches of a contract that can be possibly committed, however, it will focus on substantial breaches and breaches that amount to a repudiation (the incorrect termination) of the contract.
Substantial breaches of a building contract are normally breaches that are so severe in nature that they will give rise to the right of the innocent party to terminate the contract, if the breach is not remedied in a set period of time.
Typical types of substantial breaches from a builder’s point of view are:
- the owner/principal refuses to pay a progress claim under the contract;
- the owner/principal takes possession of the works;
- the owner fails to provide evidence of capacity to pay the contract sum; or
- the owner interferes with the builders trades.
From the Owners Point of View
Typical types of substantial breaches from an Owner/Principal’s point of view are:
- the builder suspends the works without cause; or
- the builder refuses to perform works that are required by the contract.
In these circumstances the types of damages that a party may seek to claim are damages that ‘flow as a natural consequence’ from the breach of contract (Hadley v Baxendale (1854) 9 Exch 341). These damages may include such items as:
- extra interest payments on any loans due to a delay in construction;
- interest on the sum of a withheld progress payment; and
- holding payments to third party suppliers whilst the works are suspended.
Where a party repudiates a contract (terminates a contract incorrectly) the innocent party will argue that they are entitled to damages to place them in the same place they would have been if the contract was performed, and to compensate them for any losses they have suffered due to the repudiation of the contract.
From a Builder’s Point of View
If an owner repudiates a contract the builder may seek damages for such costs as:
- work performed under the contract (even if it has not reached the relevant progress payment stage);
- the loss of profit the builder would have been entitled to if the builder had completed the contract; and
- payments owing to third party suppliers for materials or cancellations of orders that relate to the contract works.
From an Owner’s Point of View
If a builder repudiates a contract the Owner/Principal may seek damages for such costs as:
- the difference in cost of obtaining a new builder to complete the works and the original contract sum;
- costs associated with obtaining a new building permit;
- costs associated with obtaining different insurance for the works;
- extra interest payments on loans due to the works being delayed; and
- if the builder was made aware that works when complete were due to be leased or sold, in some circumstances the owner may seek to claim in additional costs they incur in relation to the sale or
lease of the building being delayed.
The above article is a brief synopsis on the types of damages that may be claimed if a party breaches or repudiates a contract. Each contract is different and many building contracts have clauses that may cover some of the loss that may be incurred by a party, such as liquidated damages and delay damages clauses. A party will not be entitled to recover twice for the same loss, so one must bear this in mind when deciding on what type of damages to claim for a breach of contract.
A construction lawyer should always be consulted at first instance when a party considers that the other party is in breach of the contract. Assessing whether a breach of building contract has in fact occurred is never as straight forward as it initially seems and one would be wise to get expert advice rather than to start down the road to a possible repudiation of the contract.
Please click here to read an article by Kim Lovegrove RML, F.A.I.B that provides a more in depth analysis on the dangers of repudiating a building contract.