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Cooler heads will prevail – Tribunal finds that direct notice of termination of a home building contract is not required

It is not uncommon in home building projects for disputes to occur at the end of the project in relation to the quality of the work carried out by the Builder and a claim for outstanding money by the Builder.  Inevitably, this can lead to the contract coming to end by way of abandonment, termination or repudiation.

If the matter proceeds to a Court or Tribunal, the first issue to be determined is:

  • whether the contract is still on foot;
  • whether the contract has been terminated; and
  • if the contract has been terminated, whether that termination was valid.

The answers to these questions will dictate the parties’ entitlement to claim damages (and the types of damages) and ultimately, the outcome of any legal proceedings.

In an ideal world, the terminating party would issue a notice of breach or default under the contract, which would result in a termination of the contract if the breaches are not remedied.

Building cases are never this clear cut and more often than not, the Courts and Tribunals have to delve into the conduct of the parties and what their intentions were in ascertaining whether the contract is still on foot, or whether it has been terminated validly or otherwise.

In the case of Rudas and Andrassy v Eid [2021] NSWCATAP 4 the Tribunal dealt with this very issue of termination of a home building contract by the Owners in the absence of any direct notice to the Builder and what circumstances or conduct would give rise to a finding that the contract was no longer on foot.

The first Tribunal determination

  1. The Owners entered into a home building contract with the Builder to carry out renovations at their property in Frenchs Forest (Site).
  2. In the first instance, the Tribunal found that the Builder abandoned the Site before completing the building works and thereby repudiated the building contract as the Builder ceased carrying out the building works at the Site and removed all of his tools and any materials that he felt he could use elsewhere.
  3. The Owners made a claim against the Builder under the Home Building Act 1989 (NSW) (HBA Act) for costs to complete the building works by another builder consequent upon their acceptance of the Builder’s repudiation of the building contract and its termination by them.
  4. The Tribunal held that even though the Builder had repudiated the contract, the contract still remained on-foot because the Tribunal was not satisfied that the Owners had terminated the contract by accepting the repudiation of the Builder. The Tribunal found that there was no evidence relied upon by the Owners that they accepted the Builder’s repudiation by their conduct of engaging another builder and further, there was no evidence that the Builder knew of this conduct.

The Appeal

5. The Owners appealed the determination principally on the basis that the Tribunal erred in failing to find that the contract had been terminated.

6. The appeal panel upheld the Owners’ appeal and determined that the Tribunal did determine this issue incorrectly for the following reasons:

(i)  there is no real issue as to the legal principles applicable to determine whether an innocent party to a contract has accepted the other party’s repudiation and thereby terminated the contract.  In other words, any communication or conduct which clearly conveys to the repudiating party that the aggrieved party is treating the contract as at an end is sufficient; and

(ii)  where the innocent party has by conduct elected to treat the contract as at an end, it is sufficient that the fact of election comes to the repudiating party’s attention.

Examples of conduct that would demonstrate that the contract has been terminated in the absence of any direct notice to the other party

In this case, the Tribunal said:

(i)   the commencement of the proceedings and/or the service of an appropriate pleading, claiming relief on the basis of termination for breach or otherwise clearly conveying in such pleading that the aggrieved party is treating the contract as at an end can be regarded as communication of the innocent party’s acceptance of repudiation and subsequent termination; and

(ii)    the commencement of the proceedings by the Owners claiming damages based upon the cost to complete the works will act as the communication of the prior election to treat the building contract as terminated, if this had not previously occurred. Indeed, the Owners in this case could have simply claimed damages on the basis of the contract coming to an end without more.

The Tribunal determination also contained a table of examples of cases where a termination has been held to have taken place, despite the absence of any direct notice to the relevant party, see below:

Case Paragraph
“The actual commencement of the hearing of lengthy and expensive litigation, directed to a final resolution of the parties’ rights, was conducted by both parties manifesting an intent ion wholly inconsistent with any continuing obligation of performance on either side Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2005) NSWCA248 75
A maintenance provider was held to have accepted the  other party’s repudiation  by executing an agreement transferring  its  assets and employees to a third party although the transfer agreement did not purport to exercise any right to terminate WallaceSmith v Thiess Infraco (Swanston) Pty Ltd

(2005) FCAFC 49

103 and

152

Service of an appropriate pleading can be unequivocal election to terminate a contract. Janos v Chama Motors Pty Ltd (2011)NSWCA
na
23
The commencement of an action claiming relief on the basis of termination for breach normally amounts to an election to terminate the contract if such an election has not already been made. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
A seller of land who on expiry of a notice to complete proceeded to advertise and sell the land was held to have manifested an election to t rea t the contract as terminated. Holland v Wiltshire

(1954)

HCA 42 ; (1954)

416 and

424

90 CLR409
The closing down of a business and vacating a premises
was held to be sufficient communication of the
termination of the lease.                                                         Karacominakis v Big 155                                                                                                       Country
Developments Pty Ltd
(2000)
NSWCA 313.

Quantum of damages

The Tribunal then went onto assess the quantum of damages.

To be consistent with the guiding principle of ensuring the just, quick and cheap resolution of the real issues in the proceedings, the Tribunal determined the question of damages, rather than remit the matter for further hearing.

The Tribunal then assessed the damages owing by the Builder to the Owner in the amount of $187,280.24 plus costs on the ordinary basis.

What does this mean for residential builders?

  • contracts need to be terminated carefully as the Court and Tribunal will consider the conduct of the parties if there is any argument that the contract was repudiated.
  • if the contract is not validly terminated it can affect the builder’s entitlements to damages.
  • if the homeowner terminates the contract, the builder would need to prove that the termination was wrongful in order to claim any loss of profits, demobilisation costs and loss of wages etc.
  • obtain legal advice before you terminate.

Nominal liquidated damages may not keep general damages away

A Building Contract usually contains a provision for a cap on liquidated damages. In some contracts, particularly Master Builders and HIA contracts, the amount for liquidated damages is usually a default position (unless otherwise stated) at $1 a day for each day of delay from the date the builder was meant to reach completion under the Building Contract until the builder actually completes the works.

The amount set for liquidated damages is meant to represent a genuine pre-estimate of loss that would be suffered by the principal should the works be delayed. If the amount of liquidated damages is excessive, it may be argued that such a clause is a penalty and thus be held to be void.

In the recent case of Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021, the Supreme Court of NSW considered whether a Building Contract which contained a provision for a nominal amount of liquidated damages in the amount of $1 per day excluded the homeowner from also claiming general damages for delay.

The contract was a HIA Costs Plus contract for works related to renovations to a dwelling. The homeowner alleged that the builder was approximately seven months late in completing the works. The Homeowner claimed that it was entitled to general damages, in addition to the claim for the amount of liquidated damages.

The general principle in law is that where parties agree on a rate for liquidated damages, it is taken to exclude claims for general damages.

Justice Ball stated [at paragraph 27]:

“Accepting that principle, the question remains whether by inserting a nominal amount as the amount payable by way of liquidated damages the parties intended, in effect, to exclude the operation of the liquidated damages clause or whether they intended to exclude a right to claim damages for delay altogether. The answer to that question does not depend on the application of any general principle but on the proper construction of the contract in question.” (Emphasis added)

It was also noted that Section 18B(1)(d) of the Home Building Act 1989 (NSW) implies into a residential Building Contract a warranty that the builder will complete the works within the time stipulated in the Building Contract. If the Building Contract seeks to limit a party from claiming damages in the form of nominal liquidated damages it has the effect of restricting that party’s rights in respect of the warranty and would be held to be void under Section 18G of the Home Building Act 1989 (NSW).

Justice Ball held that he preferred the interpretation that if only a nominal amount of liquidated damages is provided for under a Building Contract, it should not be interpreted as preventing a claim for general damages. Accordingly, the parties intend that general damages can be claimed rather than limiting it to the amount of the nominal amount of liquidated damages.

However, Justice Ball ultimately upheld in this case that the Home Owner was only entitled to nominal damages as the majority of the delays were due to the Homeowner’s requested variations to the works and did not appear to have suffered any additional loss.

In light of the above, it is important for liquidated damages to represent a genuine pre-estimate of loss, otherwise:

  1. it will either be held to be a penalty if it is too high and thus void; or
  2. if the amount of liquidated damages is only nominal, then it can be also be held to be either void or may not exclude general damages.

If you or someone you may know is in need of assistance or clarification regarding the above, please email us at info@bradburylegal.com.au or call (02) 9248 3450.