by Commerical lawyer, Geoff Hardy
Occasionally building projects go off the rails. The relationship between the owner and the building company breaks down, the invoices don’t get paid, and the building work grinds to a halt.
The building company usually has to initiate some action to recover the money it believes it is owed, and the owner responds with a counter-claim.
That counter-claim typically relies on three types of allegations – the building work was defective, there were unjustifiable delays, and there was overcharging of some sort — whether it be inflated hours, building materials charged for that weren’t used in the project, or claims for variations that were in fact part of the original scope of work.
In a commercial project, often the parties will simply accept this as being a fact of life, and persevere with the acrimonious relationship simply because it is more economic than parting company.
However, in residential projects where emotions run high, it is very common for the owner not to want the builder around anymore. Whatever work remains to be done, the owner would rather have done by a substitute builder.
And that option becomes even more attractive when the owner is holding onto money that is claimed by the builder but the owner would rather use to cover the additional costs involved in getting someone else in to finish the job. And so the owner either serves a trespass notice on the builder, or advises him that the building contract is terminated on account of the defects, the delays, and the overcharging.
The problem for any owner or property owner is that you can’t terminate a building contract just because you feel like it. The contract is a commitment that lasts for the entire duration of the project.
Just as the building company is obliged to see the project through to the end, so is the owner. After all, the building company has hired staff, ordered materials, engaged subcontractors and purchased or leased equipment in reliance on the project going the distance.
If it is a large company, they are counting on the project to cover their overheads and provide a satisfactory return to their shareholders. If it is a self-employed builder, he is counting on the project to pay his mortgage and feed his family. So even though every building contract can be brought to an end by mutual agreement, the circumstances in which you can do so on your own are quite rare.
When can the owner terminate?
The owner’s rights to terminate the contract are found in two places – the building contract itself, and the Contract and Commercial Law Act 2017 (the “CCLA”). The CCLA says that the contract is paramount.
So it is only if the contract doesn’t state when you can terminate that the CCLA rules apply. That is more likely to happen where there is no written building contract, or the terms of it are only recorded in the fine print on the building company’s quote. In those situations, the CCLA rules fill the gap, and they replace the old rules developed by the courts over the past few centuries.
All the standard-form building contracts contain rules stating when the owner can terminate. The three most common situations are where the building company has become insolvent, where it is seriously in breach of contract, and where it has abandoned the project.
Where the termination is based on insolvency it’s usually clear-cut because the building company is in receivership or liquidation. Where that hasn’t happened and the owner merely suspects that the building company is insolvent, it would be a major gamble to terminate on that ground. Where the termination is based on breach of contract, there is no manual you can look up to see what breaches are serious enough to justify termination, so there is usually a judgment call required. And even assuming the breach is serious enough, the owner generally has to give the building company a reasonable opportunity to rectify its default before the owner can terminate.
The New Zealand Standards contracts, for example, allow for termination where the building company has persistently, flagrantly or wilfully neglected to carry out its obligations. The New Zealand Institute of Architects contracts talk about a failure to comply with a notice from the architect to correct defective work, or a repeated or deliberate failure to carry out obligations. In any of those cases the building company has 10 working days to remedy the default.
Where the termination is based on abandonment there is also scope for argument. The legal term for abandonment is “repudiation”, which means showing by words or conduct that you no longer intend to see the contract through to the end.
That will be self-evident where the building company has told the owner it is done with the project, and has packed up and moved off site for good. However, it is less clear-cut when the building company has merely suspended work while it waits for an outstanding payment to be made or a dispute to be resolved.
If the building company has made it clear that it is ready, willing and able to resume work once that is done, then it will be very difficult to establish that it has repudiated the contract or abandoned the project.
Termination is risky
For those reasons the owner takes a big risk in terminating the building contract for serious breach or repudiation, because it is a matter of judgment whether that has actually happened or not.
If the building company has not in fact repudiated or its breaches of contract aren’t sufficiently serious, then the owner won’t legally be entitled to terminate, and his attempt to do so will be seen as a breach of contract on his own part. That will entitle the building company to damages for the losses it suffers as a result.
Of course it may be that the aggrieved owner does not go far as to formally terminate the contract, but what the owner does do is kick the building company off the site, retake possession, and withhold payment of the building company’s latest invoice. The justification for these actions is generally the same as for termination — defects, delays, and overcharging. And the risks are the same.
One of the biggest mistakes that owners make in this situation is to base their purported termination or withholding of payment, on alleged defective workmanship or materials.
The conceptual difficulty the owner faces is that if the building work is incomplete (regardless of whether it is halted half-way through, or prior to the expiry of the defects liability period), then it cannot yet be defective. How can the building work be defective when the building company could have, and presumably would have, completed it to a satisfactory standard before handing it over?
Not surprisingly the courts have cottoned on to this, and there has been a series of judgments emphasising the point, all of which are neatly summarised in the 2016 judgment of Judge G M Harrison in the Waitakere District Court in the case known as Tugaga v Westend Painters Ltd, which was upheld by the High Court the following year.
There will be exceptions to the rule, of course, most notably where the building company has had several unsuccessful attempts to fix the problem, or has made it clear that it has finished that portion of the work and has no intention of revisiting it.
But in all other situations, the standard of workmanship is judged at the completion of the project, not at the time when the owner prematurely brings it to an end, and prevents the building company from achieving the standard of workmanship that it is capable of.