Can a builder unilaterally end a contract due to increased labour and material costs?

In a recent hearing, Nichol and Anor v Keeble (Building and Property) [2022] VCAT 1449, the Tribunal considered the situation of where a builder abandoned the works, and whether the building works were defective or incomplete, and how damages for breach of contract are assessed.

The Applicants (the Owners) were the owners of a residential apartment. The Applicants entered a major domestic building contract with the Respondent (the Builder) to renovate their apartment. There was no document- evidencing a contract between the parties, however the documents that the Tribunal found to form part of the building contract was a quotation provided by the Respondent and a spreadsheet prepared by the Applicants (the Contract). The Tribunal was not required to consider the issue of a valid contract, as there were no issues between the parties regarding the works to be undertaken or the amounts that were due to be paid.

During the course of the building works, the Applicants were concerned over the progress of the works and requested the Builder provide an update on the status as to the works via email. A few emails were exchanged between the parties, however the Applicants received no response to the last email about progress, and importantly, the Respondent did not return to site to undertake any further works after the last email.

The Applicants pursued a claim against the Respondent for incomplete and defective works. To consider the Applicants’ claim the Tribunal considered the following issues:

  • How did the Contract come to an end?

This question is critical to determine if the Applicants are entitled to loss and damage.

That is, the Tribunal was required to determine whether the Respondent’s conduct was repudiatory, evincing an intention not to be bound by the Contract.

As part of the Tribunals reasoning, the Tribunal reiterated that repudiation may be if

  • the party straight-out refused to perform the contract;
  • the party shows that they intend to fulfil the contract which is in a manner substantially inconsistent with their obligation; or
  • the party shows that they intend to fulfil the contract only if, or as and when, it suits the party.

The Tribunal found in this case that the Builder’s conduct purported to end the Contract, and therefore constituted a repudiation of the Contract.  The Tribunal acknowledged that the whilst the Builder did experience significant difficulties in performing the works, from the escalating building costs and delays as a result of the COVID-19 pandemic, such difficulties do not entitle the Builder to end the Contract.

The Tribunal found that, the risk of escalating building costs and delay or additional costs caused or levied by the Builder’s subcontractors and suppliers falls on the Builder’s shoulders.

The Tribunal also found that just because the Owners were delaying payment to question the Builder’s calculation of the progress claim, this did not in itself mean the Owners were threatening to withhold funds and not make the required payment.

It was found that the Builder had repudiated the Contract and that the Owners, by their conduct in engaging others to complete the Works after the Builder had vacated the site, constitutes the Owners’ acceptance of that repudiation and their election to terminate the Contract.  Accordingly, the Owners lawfully terminated the Contract and were entitled to damages.

  • If the Owners lawfully ended the Contract, what is the measure of their loss and damage?

The next question the Tribunal considered was, if the Owners had in fact lawfully ended the Contract, then what was the appropriate measure of their loss and damage?

The Tribunal held that the starting point in assessing damages for breach of contract is found in the judgment of Robinson v Harman, where Parke B stated ‘…where a party sustains a loss by reason of a breach of contract is, so far as money can do it, to be placed in the same position, with respect to damages, as if the contract had been performed’.

In this case, the Owners were claiming:

  • reimbursement of all monies paid under the contract (as if the contract did not exist); AND
  • damages for breach of contract, for the Builder’s failure to complete the works within the contracted construction period.

The Tribunal held that a party cannot approbate and reprobate as to the existence of a building contract, merely to fashion their claim for damages in more favourable terms. That is, once the contract is admitted and relied upon, in order to claim contractual damages, it cannot be ignored for the purpose of calculating damages.  Accordingly, the Tribunal found that the loss suffered by the Owners was the amount they spent over and above what the Owners would have paid, had the Contract been completed in accordance with its terms.

The Tribunal found that the Respondent must pay the Applicants $40,342.73.

Key takeaway points –  it is important to consider the circumstances in terminating a building contract carefully as it is a complex area of law. Repudiation does not itself end the contract immediately. There are procedural steps that must be satisfied to meet this requirement of terminating the contract. If you wrongfully form the view that the other party no longer wants to be bound by the contract and then you terminate the contract based on this, you could be held to have actually repudiated the contract.

For more information on this topic, chat with our Lawyer, Maria.

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