Considering Terminating a Building Contract? Read This First

My builder is late, my builder is increasing costs (or all of the above)

Do you find yourself typing any of these into Google? If so, you are one of many Victorians (if not Australians) suffering from the consequences of the COVID-19 pandemic on the construction industry.

Unsurprisingly, the global trade route shutdowns have meant scarcer construction materials and labour. With a lack of supply, domestic builders face increased pressure to complete their existing projects within timeframes and on budget (particularly where they entered into these contracts before to the COVID-19 pandemic).

Like many others, you may be considering your options, which may include:

• Terminating your current contract.

• Engaging a new builder.

• Commencing proceedings against your previous builder to recover the difference on contract sums.

In this article, we will unpack your options for proceeding against builders. 

Step One – Terminating the Contract

Terminating a contract of any kind is not a common solution. And the ramifications of terminating a contract may not be as simple as you think. Therefore, you should carefully consider your options (and seek legal advice) prior to doing so.

What are the grounds to terminate a building contract?

In most construction contracts, the builder’s obligations are typically summarised as:

• To complete construction of the dwelling by the Completion Date (including meeting the milestone dates for relevant stages such as frame or lock-up stage); and

• To complete the construction in compliance with the relevant standards, legislations and regulations.

In essence, your entitlement to terminate will only arise once your builder breaches either of the above two essential conditions.

When can you terminate a building contract?

That means the earliest date you can typically terminate the contract is after the completion date – the date when the builder is meant to hand over the dwelling to you.

In some instances, you may terminate earlier if your builder has shown a clear intention to breach the two conditions. This is known as an anticipatory breach. However, anticipatory breach is a highly technical area of law. So before going down that path, you should seek legal advice accordingly.

What are the pre-requisites for terminating a building contract?

Terminating a contract is a last resort. Therefore, you should only consider termination after reasonable attempts to hold your builder to the contract.

To that end, there may be other formal contractual procedures prior to you exercising your right to terminate, such as notices of breach and offering the builder an opportunity to rectify that breach. A failure to follow these procedures may result in your attempt to terminate being deemed invalid or an act of repudiation (which has further risks for you).

Once you have satisfied the pre-conditions necessary, you will need to formally terminate the contract in writing or in the form prescribed by the contract.

Step Two – Completing the Works and Damages

Once you terminate the construction contract, you regain possession of your property and responsibility for any construction work.

If your dwelling is only partially constructed, naturally, your first priority will be to complete the construction. For that, you will need to engage the services of a new builder.

However, you will most likely find out that the costs for the new builder to complete the works will be greater than those you would have had to pay your previous builder under your original contract.

Can you claim for any additional cost of completing works after terminating a building contract?

Yes, you can claim any additional costs from the amount specified in the original contract from the original builder.

At this point, you will have two options on when to claim:

1. Obtain quotations from builders or an expert quantity assessment report identifying the costs to complete. Then, you are entitled to make a demand to the original builder for payment of the difference. Once you have received this payment, you engage the new builder to commence works; or

• Alternatively, you engage the new builder to conduct the completion works and concurrently or subsequently demand the difference in costs from your original builder.

Both options have their own unique risks and considerations. For example, whilst the first option may not require you to front-run the cost differences on your own, you will be without a dwelling until such time the original builder pays your demand (or you go to court) and for that entire period your incomplete dwelling will be exposed to the elements.

What if the builder refuses to pay additional costs?

Should the builder refuse to comply with your demand, your only alternative to escalate the matter is to issue court proceedings.

Step Three – DBDRV and VCAT

Prior to issuing court proceedings, you must first refer the dispute to Domestic Building Disputes Resolutions Victoria (DBDRV). This is a free government-run service aimed at providing conciliation and mediation services to help parties to a building dispute resolve their matter by agreement.

How long does a DBDRV matter take to resolve?

From the date of application to the DBDRV, it may take between 60 -100 days for your matter to be allocated to a DBDRV member for a conference.

Is a DBDRV Decision binding?

DBDRV does not produce a binding outcome by way of judgement or decisions, and is entirely dependent on the parties reaching a mutual agreement.

Should the parties not reach an agreement at DBDRV, then you will receive a certificate from DBDRV that enables you to proceed to issuing VCAT proceedings.

How long does VCAT take to resolve a building contract claim?

Depending on the size and complexity of the building dispute, the entire litigation process in VCAT may take between 12 – 18 months. However, at the end of a VCAT proceeding you will obtain a binding order and judgement.

Secret Steps Four, Five and Six – Statutory Demands, Winding Up Applications and DBI Claims

Most people think that once you get a court order against a builder, that will be the end of the story and the builder will pay the judgement amount. In reality, there are often times where the builder may continue to disobey the court order. In such instances, you will need to consider the further steps of enforcement.

What if the builder does not comply with a court order?

You should first issue a statutory demand on the basis of the judgement debt. This is a statutory debt collection process that requires the builder to pay the judgement debt within 21 days of service of the demand. Failure to comply with these debt obligations may expose the builder to a winding up application by that creditor. 

You must draft any Statutory demands with a high degree of accuracy. Defects may cause the statutory demand to be ineffective and invalid. Accordingly, we recommend that you seek the appropriate legal advice when progressing with this step.

What if the builder does not comply with a statutory demand?

Should you issue a valid statutory demand, and the builder does not comply with the statutory demand or issues an application to have it set aside within the 21 days from service of the statutory demand, the builder is presumed to be insolvent.

As the creditor who issued the statutory demand, you are then able to issue a formal winding up application in the Supreme Court. A winding-up application will place the company into liquidation, and the court will appoint a liquidator.

Once appointed, the liquidator conducts an investigation into the company’s affairs. They will also release the assets available for distribution among their creditors. In most cases, if there is a distribution to creditors, it is cents in the dollar.

How long does the statutory demand process take?

The statutory demand process and winding up application usually takes around 8-12 weeks.

What can I claim from Domestic Building Insurance?

However, should you have Domestic Building Insurance (DBI) (which should have been obtained by the builder at the start of your building contract), you will have the option to submit an insurance claim at this stage. A pre-requisite to claiming on DBI is that the builder must be dead, disappeared or insolvent.

DBI will only cover you for the costs of:

• Completing any works the builder did not complete under the original building contract;

• Structural defects left by the builder (if they occur within six years of termination of the contract); and

• Non-structural defects left by the builder (if they occurred within two years of termination of the contract).

How much can I claim from Domestic Building Insurance?

The DBI cover will be to a maximum of $300,000.00 in total. Any claims for completing incomplete works are limited to 20% of the contract price.

How long do Domestic Building Insurance claims take?

Depending on the build’s size and complexity, this process could take between 2 – 6 months to finalise with the insurers.

Take Action to Terminate a Building Contract

There are many steps along the way to a final and certain resolution should you wish to terminate your building contract. There are also risks and technicalities associated with each step. Accordingly, we recommend that you obtain the right legal advice before terminating the contract.

Should you have any questions about this article or have a contract you are considering terminating, please do not hesitate to contact our infrastructure law team. Our expert lawyers will ensure you have an informed response that is in your best interest. For further assistance, get in contact with us today.

The contents of this article does not constitute legal advice and should not be relied upon as such. If this article pertains to any matters you or your organisation may have, it is essential that you seek legal and relevant professional advice.