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Wrongful termination of contract 

As a construction lawyer, the writer has witnessed many instances where builders and owners find themselves involved in unavoidable litigation due to wrongful termination of contract. 

Usually, a well-crafted contract will have a procedure by which the contract can be brought to an end in the event the relationship between the parties breaks down irretrievably due to one party’s breach against the other, however terminating a contract is not always a “get out of jail free card”, as it were. One must be very careful and seek legal advice when considering terminating a contract.

Most contracts provide default provisions to allow parties to resolve their dispute without the need to take the matter to court. This may be issuing a ‘notice of dispute’ to enable parties to engage in dispute resolution discussions and resolve their dispute. 

If the matter is not resolved within the dispute resolution period stipulated in the contract (if applicable), then the next step may be issuing a ‘notice of default’. An example of a party’s contractual

default may be carrying out defective building work or poor-quality workmanship by a builder, or failure to pay a progress payment by an owner.   The reference to “default” means there must be a default or a substantial breach of the contract that one party is seeking to be remedied by the other party.

It should however be noted that one party’s default does not necessary give the other an automatic right to immediately terminate the contract. In other words, serving a notice of default, does not necessarily entitle a party to terminate the contract, if the default is capable of being remedied and the party in default is willing to remedy the default. 

For instance, if a builder fails to rectify an alleged defect within the stipulated time in the notice of default and/or the contract, the owner is still not necessarily entitled to terminate the contract, unless the factual grounds that underpin a right to terminate exist. 

Purporting to terminate a contract in circumstances where an innocent party does not give the defaulting party the opportunity to remedy the default described in the default notice, would be regarded as a ‘repudiation’ or unwillingness by the failing party to no longer be bound by the contract or to perform the Contract.

Most contracts also contain a provision that a party seeking to terminate a contract based on a notice of default, should not themselves be in breach of the contract.  So the party seeking to terminate due to the fault of the other should have “clean hands”.

Repudiation of contract

Repudiation of contract occurs when a party “evinces an intention to no longer be bound by the contract”, either expressly or by conduct. For instance, a builder may allege that an owner failed to pay a progress payment in circumstances where the relevant building stage has not been completed. If the owner then refuses to pay the alleged progress payment and the builder refuses to continue with the building works, this may be regarded as a repudiation or unwillingness to perform contractual obligations by the builder. 

In Heyman v Darwins Ltd 1942, it was held that:

“… a party by words or conduct evinces an intention to no longer to be bound (by the contract) and the other party accepts… and rescinds the contract.”

As mentioned above, every case is different on its merits and one must seek legal assistance prior to terminating a contract, because even if one believes he/she is the wronged party, one can still be liable for wrongfully terminating a contract if due process is not followed pursuant to the contract.

Does repudiation mean the contract is at end?

Repudiation by one party does not automatically end the contract, unless accepted by the other party. Whether to accept a repudiation or insist on specific performance is best answered on a case-by-case basis as each case is different on its facts. 

Ending a building contract pursuant to section 41 of the Domestic Building Contracts Act 1995 (Vic) (“DBCA”) 

An owner may terminate a major domestic building contract for completion time or cost blows out for unforeseeable reasons if:

(i)   The contract price rises by 15% or more after the contract was entered into; or

(ii)   The contract has not been completed within 1½ times the period it was to have been completed by.

Furthermore, for the owner to terminate the contract the reason for the increased time or cost was something that could not have been reasonably foreseen by the builder on the date the contract was made.

Any increased time or cost that arises as a result of a prime cost item or a provisional sum or that is caused by a variation are not included in calculating any price rise or increase in time.

To end the contract, the owner must give the builder a signed notice stating that the owner is ending the contract under section 41 of the DBCA and giving details of why the contract is being ended.

If a contract is ended under this section, the builder is entitled to a reasonable price for the work carried out under the contract to the date the contract is ended however the builder cannot recover more than the builder would have been entitled to recover under the contract if it was not ended prematurely.

Lovegrove & Cotton strongly caution owners, builders and contractors to ensure that they do not adopt a layman’s approach to contractual termination.  

When faced with the challenges of terminating a building contract, it would be prudent to consult with expert construction lawyers, and have them draft any necessary documents.

Article written by Tsigerda Lovegrove Construction and Planning Lawyer and firm manager Lovegrove & Cotton.

Disclaimer

This article is not legal advice rather a discussion of the topic in only general terms. Should you be in
need of legal advice, please contact a construction law firm. Lovegrove & Cotton Lawyers and
our experienced team will assist you based on the facts and circumstances of your case.