“Trigger Happy Terminations: Overly Stringent Default Notices in Building Contracts”
By Justin Cotton, Partner, Construction and Practitioner Advocacy, Lovegrove Smith & Cotton, Construction and Commercial Lawyers
A recent VCAT decision in a domestic building dispute highlights the stark reality that a contract notice of default should not require the Builder to perform the impossible within a tight timeframe. If it does, then the second notice terminating the building contract could be called unreasonable, even if there is evidence of a genuine breach by the Builder (such as defective works).
In the 2014 VCAT decision, there were competing claims between Builder and Owner as to who had wrongfully terminated (or repudiated) the contract. Whilst the Owner had alleged defective brickwork and other problems, the Builder formally requested an opportunity to have its own building consultant inspect the site to respond to the items noted by the Owner’s building consultant.
Following the service of the second notice (a notice of termination) by the Owner, the Builder alleged that the notice was without merit, had not allowed the Builder sufficient time to investigate and if necessary rectify alleged defects, and was therefore a repudiation of the Contract.
Conversely, the Owner countered that the first notice was based on a genuine contractual breach and given it had not been rectified within the stipulated 14 days, the Owner was entitled to serve a notice of termination. This meant, according to the Owner, that it was in fact the Builder who was legally regarded as having repudiated the Contract.
The consultant experts for both the Builder and the Owner agreed in evidence at the hearing that it would take some 6-8 weeks (approximately) to remedy all the defects in the default notice, ie significantly longer than the 14 day period specified in the notice.
For its part the Builder in response to the default notice did not admit all the defects, but it did not deny their existence and committed itself to obtaining its own expert evidence (from a building consultant) to investigate the matters in the Owner’s expert report (enclosed with the default notice).
The two step notice procedure to lawfully terminate the Contract was found in clause 20 of the written agreement, however the Tribunal found that clause 20.1 “did not give the Owners an unfettered right to terminate if the defects were not rectified within 14 days after service of the notice.”
Additionally, it was open to the Owners to delay the service of the second notice terminating the Contract in order to allow the Builder more opportunity, and in fact they had delayed for around 1 week after the default notice had expired.
Senior Member Riegler also found in the Decision:
- Although in this case there were defects in the Works, it did not automatically mean there was a right to terminate the Contract based on that fact, given that the Works were only at around Lock
Up and were still under construction;
- The parties had already discussed rectification of some items of construction and the Builder was considering other items raised pending receipt of its own expert report, so the Works were not
being ‘handed up’ as completed;
- Even though it may have been that the Builder had prematurely invoiced for the Lock Up stage progress claim, this did not necessarily change the fact it was premature for the Owner to terminate
- Given the evidence from the building consultants about the time required to rectify the primary defect, this raised the question of how the notice of default could be said to be reasonable, if it
is was impossible to comply with because of the 14 day limit;
- While it does not necessarily follow that the unlawful exercise of a contractual right to terminate equals a repudiation, it could be a repudiation depending on the facts;
- This was not a genuine albeit misguided attempt to exercise a contractual right to terminate, instead the factual grounds that underpin a right to terminate did not exist.
Repudiation in a contract is usually defined in legal circles as being where a party ‘evinces an intention’ not to be bound any longer by the terms of the contract.
In conclusion, Senior Member Riegler concluded on this point at paragraph 66 of the Decision:
“In my opinion, the Owners’ conduct, in purporting to terminate the Contract in circumstances where they gave the Builder no real opportunity to remedy the defects described in the Default Notice, coupled with the fact that they were warned by the Builder in correspondence dated 27 April 2012 that terminating the Contract in reliance on the Default Notice would be regarded as a repudiation, demonstrates an unwillingness on their part to perform the Contract.”
The consequence of this finding was that the Builder was given a justifiable ‘leg up’ and was entitled to damages for works not yet paid for on a quantum meruit, meaning a fair value for the works performed based on its consultant’s valuation. Though there was a reconciliation back to the Owner for the estimated cost of defect rectification as adjudged by the Tribunal.
This case highlights the need for Builders and Owners alike to not be ‘trigger happy’ when considering the service of default notices and even more particularly, termination notices under standard building contracts.
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