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Mutual termination or cancellation of a building contract

Find out more about the use of a deed of termination when terminating or cancelling a building contract.
  1. Cancelling or terminating a building contract is a significant step which should not be taken lightly.
  2. Before taking any formal steps to end a building contract, you should talk to your client and see if you can reach an agreement to mutually end the contract.
  3. Any agreement to terminate a contract should be put in writing. One way to do this is through a deed of mutual termination.

How is a contract terminated?

A contract can be terminated in a number of ways, including by performance, breach, agreement, frustration or by law. In the building industry, contracts are more commonly terminated by performance, breach or agreement.

Termination by performance

A contract will come to its natural end when both parties have performed or completed all of their duties and obligations under the contract. A deed is not required in this instance.

Termination by breach

An innocent party may terminate a contract, depending on the terms of the contract, as a result of a breach by the other party.

Termination by agreement

The parties mutually agree to terminate the contract for any other reason. A deed of mutual termination may be used for both a termination by breach and termination by agreement.

What is a deed of mutual termination?

A deed of mutual termination is a separate written binding legal document which confirms both parties mutual intention to cancel the original contract.

The deed will bring the parties responsibilities and obligations under the contract to an end and depending on the terms of the deed, will relieve them of carrying out any obligations that would have otherwise arisen under the contract in the future.

When should I use a deed of mutual termination?

A deed of mutual termination should be used when:

  • Both parties agree to end the contract and there is still something required to be completed under the contract such as payment, building works or rectification of defects;
  • The parties do not want to trigger any clause which may ordinarily arise as a result of termination, for example the deed may allow the parties to avoid issuing formal breach notices and formal termination which may lead to claims for costs and damages by one party; or
  • The contract does not provide a right to terminate.

Case Study

  • A builder and home owner entered into a building contract;
  • Whilst the works were on foot, the builder and the home owner entered into a dispute regarding the completion date for the works;
  • The home owner and the builder agree to terminate the contract, however as works are incomplete, a deed of mutual termination is appropriate to record:
    • the terms of any payment to be made by the home owner to the builder for the works completed;
    • the requirements for the builder to complete any works;
    • the works the builder will not be required to complete; and
    • that the home owner has agreed not to pursue the builder for anything that the builder would have otherwise been liable for under the contract, including requirements to rectify defects or provide statutory warranties for works not completed.

What should be included in a deed?

The terms of a deed will vary depending on a range of factors such as the stage of works at which termination will occur, any money owing or agreed to be paid, any further works required to be carried out prior to termination or any defects to be rectified.

Below are just some examples of the type of details that should be included:

Important background details

Background details, known as ’recitals’ are not required for a deed, but can be useful in providing the background to the agreement.

The background details are often used to interpret the parties intention when entering into the agreement.

Accordingly, it is important that the recitals contain the key facts that describe the circumstances leading to the parties agreeing to enter into the deed.

Release

Parties may agree to release and waive one another from any claims relating to the subject matter (i.e. the building contract).

The parties cannot demand performance of any outstanding obligations or claim damages.

Preventing either party from bring any further actions

A ‘bar to action’ or ‘bar to proceedings’ clause is critical as it prevents the parties from bringing any further action, claim or demands in relation to the terminated contract.

Responsibility for any future losses that might arise under the original contract

A ‘no waiver’ clause may be included in a deed to allow one party to take action against the other if they have breached the original contract. These types of clauses can have serious implications on you as the execution of the deed does not prevent a claim being made for a breach of the original contract and does not necessarily mean that the matter has come to an end.

We strongly recommend that you seek legal advice in the event you receive a deed with a ‘no waiver’ or similar clause.

Settlement Payment

Where one party is to pay a sum of money to the other party, there should be clear terms identifying:

  • The sum of money to be exchanged
  • The date and method of payment
  • What happens in the event of non-payment (for example, the party can commence legal proceedings to recover the sum of money or claim interest on the settlement sum)
  • That the settlement payment is made in full and final settlement of the parties’ dispute.

Mutual Disparagement

A mutual disparagement clause may be important if parties have been involved in a lengthy dispute or the relationship has broken down. This clause prevents either parties from “bad-mouthing” the other or damaging the others reputation.

Confidentiality

Generally, the terms of a deed should be kept confidential and this will be stipulated in a confidentiality clause. This requires both parties to keep the terms of the deed confidential and may include the terms of the contract.

What happens if a breach of the deed occurs?

Breach of a deed may give the innocent party the right to commence legal proceedings to recover damages for any loss suffered as a result of the breach.

Beware, deeds will not release you from all obligations

All statutory obligations and warranties provided by a builder to a home owner will continue to apply following the termination of a contract and cannot be contracted out of.

To find out more, contact HIA's Workplace Services team

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