Termination of a building contract

Construction projects don’t always go to plan.

Building materials can be delayed, plans can change, and budgets can be blown out.

While these issues can cause frustration, when it comes to terminating a building contract, there are limited circumstances in which this can happen.

Estimated reading time: 5 minutes

Generally, a party may terminate a building contract if:

  • the contract contains a clause that allows termination in the circumstances; or
  • termination in the circumstances is allowed under common law or legislation.

Terminating a building contract can be difficult, risky and expensive, so it should be considered carefully.

Terminating under a contract

Termination under a contract process is usually clearer and less combative than under common law or legislation.

Automatic termination

Automatic termination usually relates to pre-conditions that must be satisfied within a certain time period, such as finance.

Specified event

Most construction contracts provide specific events which give rise to termination.

These include a building contractor being unable to complete the work because, for example, they have died, become insolvent, or failed to gain necessary building approval by a specified date.

Default

Generally, a default (breach) will not automatically terminate a contract, unless the default is serious. The defaulting party will need to be notified of the default and asked to rectify it within a certain period.

If the defaulting party fails to respond, or respond adequately, the right to termination by the other party may arise.

AS 4000

Under the AS 4000, formally known as the Australian Standard AS 4000-1997 General Conditions of Contract (a widely used contract for construction projects in Australia), the breach must be a “substantial breach” to warrant termination of the contract.

Substantial breaches by a building contractor include:

failing to:

  • provide security;
    • provide evidence of insurance;
    • rectify defective work as directed; or
    • use materials or standards of work required by the contract;
  • wrongful suspension of work;
  • substantial departure from a construction program without reasonable cause or approval;
  • where there is no construction program, failing to proceed with due expedition and without delay; and
  • knowingly providing documentary evidence containing an untrue statement.

Substantial breaches by an owner include:

  • failing to:
    • provide security;
    • provide evidence of insurance;
    • rectify inadequate possession of the site as required; or

The party in breach of contract must be given a “show cause” notice as to why the contract should not be terminated and be given at least seven days to respond.

If the breach is not remedied, or adequately dealt with, within a specified period, the party in breach may give written notice of termination of the contract.

Terminating under common law

There are several ways a contract may be terminated under common law.

By agreement

Parties may agree to terminate the contract either expressly or by implication.

Breach

A breach must be of an “essential term” for there to be right to terminate, so it is critical to determine whether the breach involves an essential or non-essential term.

Essential terms in construction contracts usually relate to work timelines or payments.

Repudiation

Repudiation occurs when one party evidences an intention that they are unwilling or unable to perform their contractual obligations.

This can be express or implied. For repudiation to be a valid ground for termination, the non-repudiating party must be able to show they were willing and able to perform their obligations were it not for the repudiation.

Examples of repudiation by a building contractor include refusing to carry out the work, abandoning the site, and employing other building contractors to carry out the work.

Factors to consider before terminating a building contract

Valid ground

The party seeking termination should ensure they have a valid ground for termination. If the reason for termination is beyond the control of either party, the contract may be frustrated (such as by a force majeure event) which means the contract ends automatically.

Failing to follow the termination process properly can have serious implications and may leave a party unable to claim losses. It may also be regarded as “wrongful repudiation”, and the other party may respond by affirming the contract, then terminating it themselves.

Comply with process

The party seeking termination should ensure they comply with the process for termination under contract or legislation, otherwise the termination will be invalid and the contract will remain on foot.

Notices may need to be served in a specific format, on a specific person at a specific time, and contain specific information. Further, the party in breach will usually need to be given an opportunity to respond or rectify the breach within a certain time period.

Costs

Termination may bring costs and expenses due to consequences such as the need to find another building contractor to compete the work, interest on finance, and the impact on any other projects the owner or building contractor might be involved in.

Third party impacts

Termination may have unfortunate impacts on innocent third parties such as suppliers and subcontractors.

Queensland Home Warranty Scheme

This scheme involves claiming on home warranty insurance, which must be taken out by a building contractor for residential work valued at more than $3300 in Queensland. It offers several protections for the building contractor and the owner, including for when the building contractor fails to complete work or rectify defective work.

Assistance under the scheme is available only if the contract has been lawfully terminated. The contract does not have to be terminated when a building contractor has died, been deregistered, had their licence cancelled, or become bankrupt.

The contract must be terminated within two years of the date it was entered (if no work was done), or within two years of the day work began.

The owner must then make a claim under this scheme within three months of the termination.

How Gibbs Wright Litigation Lawyers can help

If you’re currently involved in a building dispute or need to seek legal advice regarding a building contract matter, you can do so with our construction lawyers here at Gibbs Wright Litigation Lawyers. Discuss your options in a no-obligation, confidential consultation.