How to Properly Terminate a Building Contract
By Kim Lovegrove RML, FAIB, Senior Lawyer, Lovegrove & Cotton – Construction and Planning Lawyers
One of my first legal jobs was that of a legal and contracts officer at a trade association where we gave legal advice to members.
Members often asked me to look at building contract termination documentation to determine whether the contracts had been terminated correctly. Sometimes, notices of termination had been drafted by owners, other times by builders and occasionally they were drafted by lawyers unfamiliar with the construction law jurisdiction. Often, key matters of contractual import were omitted and thus the instruments were often flawed. This culminated in a large portion of notices not correctly terminating respective contracts, even though some notices had indeed been fashioned by lawyers. The fact that lawyers, albeit those whom were unfamiliar with the jurisdiction, sometimes got it wrong showed the area of contractual termination was and still continues to be a vexed area, if not a minefield.
It follows that if you are an owner and you want to terminate a building contract, it is essential to engage the services of a construction lawyer skilled in the art of drafting default notices and building contract termination instruments. If you do not, and the termination paperwork is defective, then you run the risk of repudiating the contract. A contractual repudiation occurs where a party “evinces an intention to no longer be bound by a contract.” When repudiation occurs and the other party to the building contract accepts it, the repudiator is in an invidious position at law and may well end copping a sizeable damages claim.
So what are some of the seminal tenets when one terminates a contract?
One has to read the building contract termination procedure very, very carefully; one has to be somewhat of a pedant. There will ordinarily be a default procedure and it will be spelled out in the contract. The procedure will typically state the grounds upon which one can terminate. Where grounds are stipulated, one must stick to those stated grounds. It is very risky to import other grounds or grounds that are not articulated in the contract default provisions.
The grounds for termination then have to be married up with the clear instances of contractual breach. If, for instance, the criterion is time-related – i.e. the project is way behind crucial path – then this will be the ground to terminate, assuming there is a time default clause under the contract on point. But it is critical that the delay is real and tangible and moreover that the owner can prove the delay lest the delay default criterion is challenged. Absent proof or the ability to substantiate the grounds upon which one issues a default notice, the notice can be challenged.
One must allow the clock to run
Default clauses invariably state the number of days within which the default must be remedied. The time period must run out before a notice of termination can be issued. Furthermore, the termination notice can only be issued if the default is not remedied within the number of days specified in the contract. There must be non-contentious evidence available that can be relied upon that confirms that the default was not remedied before the termination notice is issued. The owner should keep a diary and a photographic record of that which occurs or does not occur during the default rectification period. In the case of defects, the owner should get independent technical advice to confirm that a default notice for defect rectification has either been complied with or not within the given default period. Assume that the notices will be challenged and prepare for that in proactive and meticulous fashion.
Be careful with the drafting of the default and termination notices.
Novices often misjudge or “butcher” the drafting of a termination notice. As pointed out above, even non-specialist lawyers can make a game-changing error in the drafting of a default or termination notice. Resist the temptation to import default or termination criteria that are alien to the criteria specified in the contract. I cannot stress this enough: you must be a pedant, you must be meticulous and you must stick to the letter of the contract. Often, “less is more” if there is an economy of wording with respect to the actual wording of the contractual provisions.
You cannot issue a default notice if you are in default
Make sure that you do not issue a default or termination notice if you, the drafter of the instrument, are in default at the time the default notice is issued. If perchance you ignore this advice, then you will be the contractual repudiator as it is the first repudiator that is the germane repudiator at law. By way of example, if an owner were to issue a default notice on account of delays to the completion date but at the time of service of the notice, the owner owes the builder money, then the owner may be considered to have repudiated the building contract if the owner terminates the contract whilst payment is still outstanding at the time the termination notice is dispatched.
Make sure you comply with the service notices under the contract
Contracts normally have a provision that states how the giving of notice must be effected or served. If the notice states that service must be effected by registered mail, then it is essential to serve it by registered post. If it states that it must be served by hand delivery, then do that. A failure to serve the notice in accordance with the contract can mean that notice is not validly served.
Remember: building contract termination is not for the faint of heart as a great deal of legal gravitas attaches to such an act. So if you need to terminate a building contract and you have the grounds to do so, make sure you get it right. If you feel that you are out of your depth, brief a building lawyer. Yes, there will be a cost, but it is a false economy to be “penny rich and pound poor.”
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 appointment as Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, 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 firstname.lastname@example.org.