Ending a building contract is a complex matter and it should be carefully considered by both parties prior to a decision being made.
Things to consider before ending a contract
Options other than ending the contract
Other ways to overcome some of the factors that have led you to consider whether or not to end the building contract include:
- Suspending the building work and asking for extensions of time
This may provide some additional time to secure labour and materials at an acceptable cost.
- Product substitution
If delays are unacceptable and there are viable alternatives, talk to your client about substituting their chosen product or material for another product or material that can be supplied in a more acceptable timeframe. You will need to explain to your client that generally product substitution will require a variation to the contract and can affect the contract price.
- Talk to your bank about financing options should disruptions during construction delay your ability to claim milestone payments.
Having a line of credit or other finance available may help relieve pressures associated with price increases, supplier and subcontractor payments and ensure work can continue.
Terminating a building contract without your client’s agreement or simply ‘walking away from the job’ should only be considered as a very last option and once all other avenues have been exhausted. There can be serious consequences for ending the contract without solid grounds.
- Incomplete building work may be considered defective.
If the contract is not legally terminated and you simply stop work the project may be considered defective. This will trigger your statutory warranty obligations and may require that you rectify the works. A failure to comply with these obligations can have implications for your license/registration as well as a potential liability to pay for the work undertaken through insurance.
Your client may be able to claim compensation or ‘damages’ from you to compensate them for any loss they have incurred as a result of your unlawful termination e.g. loss of the HomeBuilder grant.
This may lead to lengthy and costly legal proceedings and, in some cases these costs and damages may amount to more than you would have lost on the job had you seen it through.
Simply walking away from a job may jeopardise your license or registration. Most jurisdictions require that license holders are ‘fit and proper’. Walking away from building works and leaving your client in the lurch may be at odds with this obligation.
Be aware that in Queensland, a client can make an insurance claim if incomplete work is considered defective. In some other places, a loss of license can also result in an insurance claim. You may become personably liable if such claims are paid out.
Using the contract conditions
Contracts where work has not commenced
If the works have not started you may be able to terminate the contract if your client has failed to satisfy any of a number of matters that are critical to the commencement of work.
For example, if your client has been unable to secure finance, planning or building approval, you may have grounds to terminate your contract.
Be aware, if your client is eligible for the Federal HomeBuilder grant or other state grants, termination of the contract may jeopardise this and be exposed to a claim for compensation from the client. Strict requirements were in place that limited the application of the Federal HomeBuilder grant and Tasmanian Homebuilder grant to contracts signed prior to March 2021 and the WA Building Bonus to contracts signed before 31 December 2020.
Contracts where onsite work is underway
There are some limited circumstances in which you may be able to terminate the contract during the works.
If your client has breached the contract by, for example, failing to pay a progress payment on time, you may be able to terminate the contract.
Your local HIA contract sets out a process for providing notice to your client that they are in breach of the contract and allows your client an opportunity to fix the breach e.g. make the payment. This process must be followed before making any move towards termination.
Agreement to terminate
At any point during the building work, including prior to its commencement, you and your client can mutually agree to end the contract.
If you do agree to mutually end the contract there are a number of things to consider:
- The stage of the building work.
For example, an agreement to terminate a contract under which works have not yet commenced is a very different scenario from a mutual termination occurring when works are 75 per cent complete. It is generally more attractive to terminate earlier in the building works as this will reduce the risks and costs for both parties.
- Progress payments made and owed.
Consider how much you are owed for works completed since the last progress payment. Are you willing to consider foregoing payment for those works? Or, do you expect to be paid for them? These considerations will need to be a part of the discussion with your client.
- Ongoing responsibility for your statutory obligations in relation to works completed.
Despite an agreement to terminate, you remain responsible for your statutory warranty obligations. This means you are still required to investigate claims of defective work and rectify if necessary irrespective of the fact that the contract has been mutually ended.
- Arrangements you have in place with subcontractors, suppliers, and any other relevant professionals.
You will need to consider what ongoing obligations you may have to them despite the termination of the contract with your client.
- Any agreement to terminate the contract should be put in writing.
What should I do after ending the contract?
On the termination of a building contract you should:
- If the termination is mutual, enter into a written agreement called a deed of mutual termination and comply with any commitments made under that agreement.
- If termination is not mutual, put your grounds for termination in writing and follow the process for termination set out in your contract.
- Advise your insurers e.g. warranty insurance and public liability insurance.
- Talk to your subcontractors, suppliers and other professionals engaged on the job and advise them that the works will not be continuing.
- Pass on all relevant documentation including, for example approved plans and engineers drawings, to the client.
- Take photos and maintain other documentation of the work that is completed at the time of ending the contract.
Whether you are considering entering into an agreement with your client to end the contract or ending the contract for a breach, you should obtain legal advice to completely understand the risks and consequences involved