Whether you are a developer or a corporation who has engaged a contractor for a building project, the ideal scenario would be for the builder to complete all the works as per plans and specifications within the time-frame, and for you the owner, to pay all amounts due as per the schedule of payment. Sadly, the ideal situation does not materialise all the time as things happen along the project journey that cause relationships to breakdown. When this occurs, it may become necessary to consider terminating the building contract.

Before making any final decision about terminating a building contract, below are 7 key considerations for you to make:

  1. Why do you want to terminate?

Termination can be complicated; it will damage your relationship with the faulting party and affect the future completion of your project. Hence, it must be considered only as a last resort after exploring other options for resolving the situation.

Clearly understand your grounds for wanting the termination. Are they contractual grounds that have been specifically drafted into the contract? In many cases the contract will specify what grounds suffice as a basis for termination. You do not have the right to terminate simply because the other party is in breach. Many contracts require that the other party be in ‘substantial breach’ before the termination provisions can be invoked.

If the reason for termination is beyond the control of either party, it may mean that the contract has been frustrated. If a frustrating event occurs the contract automatically ends and the parties are excused from their future obligations, although any accrued liabilities will remain.

  1. Have you considered costs and other implications?

Terminating a building contract has serious implications on the completion of your project. You will need to consider whether you will be able to find someone else to finish the work, additional expenses and how further delayed your project will be.

You will also need to know how the amount due upon termination will be calculated. Are there any limits of the types of losses that you will be able to recover? If termination is contractual, the contract may specify the categories of loss that can be recovered and, possibly, the limits on recovery. The remedies for common law termination are wider, and aim to put the innocent party in the position it would have been in had the contract been properly completed. With a common law termination, all accrued rights continue to be enforceable and any sums that have become payable prior to termination remain due.

An equally important consideration is the impact on any ongoing long-term relationship that could have spillover effect on other contracts or projects that you may have with the same builder.

  1. Will your decision affect innocent third parties?

In the frustration and haste of ending a failed building contract, many people omit to think of the consequences of their decision on innocent third parties. By not considering whether you have any contracted any independent contractors or suppliers, or by not considering whether you have leases that require strict adherence to deadlines may mean that you compromise legal obligations you owe to others.

  1. Are there express provisions regarding termination?

Most Australian building contracts, especially commercial ones contain express termination rights. The Australian Standards (“AS”) building contract sets out a formal process to be followed by both owner and contractor with respect to termination. The standard form contract helps remove doubt as to whether the termination process utilised by a party is valid. Therefore a party that has realistically interpreted and followed the procedure outlined in will minimise their exposure to any claims of wrongful termination. Some AS contracts contain the procedure whereby a ‘substantial breach’ by the contractor grants the owner the right to issue a written notice to ‘show cause’. Our specialist building lawyers are experienced in helping you with such “show cause” claims.

  1. Is there a need to invoke the ‘common law’ for termination?

It has been held that the formal process of termination in an AS contract is not exclusive and does not extinguish any common law rights. What this means is that there is the potential for a party to a standard form construction contract to successfully terminate at common law despite not having followed the termination process expressly contained in the contract. The common law right to terminate (or repudiation) requires there to have been a ‘material’ or ‘substantial’ breach of the contract, so serious that it would be unreasonable for the innocent party to continue with the contract. Examples include:

  • refusal to carry out work;
  • abandonment of the site by the contractor; and
  • employing other contractors to carry out the same work.

Some other breaches may not be clear-cut. Thus, if you are planning to invoke a termination through the common law, consult your lawyers and consider carefully whether you will be able to establish that the breach is sufficiently serious.

  1. Do you need to follow a process?

Check the wording in your building contract to see if there is a prescribed process set out in the termination clauses that must be followed. If there is a process, follow it strictly or else you may inadvertently be accused of repudiatory breach as a result of incorrectly terminating the contract.

Many building contracts in Australia recommend termination only after undergoing an alternative dispute resolution (“ADR”) process first. Usually the ADR process will be triggered by one party giving the other notice that it is invoking the action of the relevant contractual provision. In some cases there will be several mandatory stages of ADR before a contract can be terminated. For example the parties may have to meet to discuss the matter within 14 days. If there is no resolution the parties may then have to attend mediation before one can exercise a termination right.

  1. Do you need to serve notices?

If yes, ensure notices are served on time, in the correct format, containing all required information, are served at the correct address and to the correct person. In most instances, you will be required to give the party in breach a chance to respond or rectify the breach within a specified period. If the breach continues beyond the specified period, a second notice can be served terminating the contract.

Conclusion

Termination of a building contract is fraught with difficulty and risks. Once you have weighed the key considerations listed above, ensure that you do not risk affirming the contract further by conducting yourself in a manner which could explicitly or implicitly be inconsistent with termination. If in doubt at any stage, seek legal assistance to ensure that your interest is protected at all times.

At Owen Hodge Lawyers, we represent clients involved in the commercial development of property. We have significant experience in identifying situations which lead to the termination of a building contract and are best positioned to advise you on the solutions available, on your remedies and to help you negotiate a proper closure while protecting your interests. Contact our Property Development Lawyers at 1800 770 780 or via email at ohl@owenhodge.com.au for a consultation, so that we can help you evaluation you options.