BuildingContract

Opting out – In what situations can you cancel a building contract?

Commerical lawyer, Geoff Hardy

There are plenty of situations where a builder might want to cancel a building contract.

 

You might have suffered a personal tragedy or a serious health setback, or you might have unexpectedly lost one or more senior staff members. You might have overcommitted yourself and taken on more projects than you can handle.

Alternatively, you might have discovered that your clients are impossible to work with, either because they are distrusting micro-managers who are constantly interfering and finding fault with your work, or because they are determined to fleece you by always delaying payment or short-paying your invoices, and manufacturing excuses to justify it. Finally, you might have simply got a better offer, and regretted your earlier decision.

In any of those situations, can you just bailout? The short answer is, no.

Under a building contract you are not only entitled to see the project through  to the end, you are obliged to see the project through to the end. So just as the owners can’t have second thoughts, neither can you.

What would happen if you just do it anyway? The starting point is that if you pull out of a building contract before completion, you will have breached your obligation to see it through to the end. The owners could then sue your company for their losses, or get an order forcing you to continue, and you would be on very weak ground in trying to defend yourself.

Nevertheless, you might have no choice but to do it regardless. What would be your exposure then? The losses the owners would suffer are only the additional cost they would incur as a result of having to change builders.

In charge-up contracts, that might only be the cost of the delay — assuming the building materials and subcontractors haven’t gone up in price, and the new builder’s hourly rates are the same as yours. So sometimes paying damages and legal fees is the lesser of two evils. And if you genuinely believe that you are in the right, you might even gamble that they won’t bother suing you in the first place.

However, that is not a decision you ought to take lightly. It is far safer to try to find some way to cancel the building contract instead.

There are circumstances where the building contract can be cancelled, and those circumstances are summarised below. However, you need to be very sure of your ground, because if you get it wrong,  you are in breach yourself, so it could backfire on you.

In all building contracts there are certain standard situations where you can cancel. For example, where the owners have gone bust. Or, where they are seriously in default. Most standard-form building contracts spell out when a party is considered to be seriously in default, but the wording of those contracts varies so you need to check it carefully.

Where the contract doesn’t spell it out, then you can always fall back on Part 2 Subpart 3 of the Contract and Commercial Law Act 2017, which allows you to cancel the contract in the following circumstances:
1.     Where the owners might make it clear they don’t intend to complete the performance of their obligations.
2.     Where you have been induced to enter into the contract by a representation the owners made to you that turned out to be false. In that case it must have been agreed (expressly or impliedly) that the truth of the representation was essential to you, or the effect of the false representation must be that the project is substantially worse for you than you expected.
3.     Where the owners have breached a term in the contract, or it is patently obvious that they will do so. In that case, performance of the term must have been agreed (expressly or impliedly) as being essential to you, or the effect of non-performance must be that the project is substantially worse for you than you expected.
4.     Under some building contracts you can also terminate if the owners have abandoned the project or they are incapable of performing (permanently and without a doubt). Or if the contract has been “frustrated” – which means impossible to perform any longer.
What happens if you terminate? There is normally a process that you have to follow to cancel, which is either set out in the contract or in the Contract and Commercial Law Act. Once that is done, then typically the builder gets paid up to date, he hands over possession, and clears the site.

Parts of the contract such as the dispute-resolution provisions, the warranties and guarantees, etc. continue in force. But the main consequence is that the builder is free to go and the owners are free to hire another builder. If the termination was caused by the owners’ default, then the builder can recover his losses from the owners if he chooses to do so.

Of course, it is not always so clear-cut. There may not be any insolvency, intention not to complete, misrepresentation, serious breach, abandonment, incapacity, or frustration.

The owners may be in default, but not seriously enough to justify you cancelling the contract. In that case, all is not lost. If the owners fail to pay promptly or interfere with progress, then you may be entitled to suspend work.

There is a process you have to follow to do this, so check the contract, and if in doubt seek legal advice. The important point is that if the suspension continues for long enough their default), you may then be justified in cancelling the contract.

If none of the above situations applies, but something is preventing you from working, you may be able to rely on the “force majeure” clause in the building contract, if it has such a clause.

Force majeure is also known as “Act of God” and it means a cause or event beyond your reasonable control that prevents you from complying with your obligations. Think earthquakes, subsidence, floods, war, riots, industrial action, states of emergency, or unforeseeable shortages of labour, materials, or transport.

If those prevent you from getting on with the project, then you’re not liable for failing to do so. It’s not a permanent leave-pass, however — you must try to resume work as soon as possible. But if, despite your efforts, the force majeure continues for long enough, then once again you may be justified in cancelling the contract.

If all else fails, you may be able to persuade the owners to let you go. If you have had a personal crisis, overcommitted yourself, or lost valuable staff, they may sympathise with you or at least recognise that it’s not in their interests to persevere with you.

Alternatively, if your relationship with the owners has completely deteriorated then they may be just as happy to be rid of you as you would be of being rid of them.

You will have a better chance of negotiating  a mutual cancellation if you write off some of the money owing to you, and/or  line up another suitable builder to take over from you.

 

Geoff Hardy has 45 years’ experience as a commercial lawyer and is a partner in the Auckland firm Martelli McKegg.  He guarantees personal attention to new clients at competitive rates. His phone number is (09) 379 0700, fax (09) 309 4112, and e-mail geoff@martellimckegg.co.nzThis article is not intended to be relied upon as legal advice.

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