Dangers of terminating a building contract without complying with the prescribed process!
We are often contacted by clients and asked if they are able to terminate a contract with their builder (or owner) immediately. Our initial advice is DO NOT do so. It is extremely dangerous to terminate a contract if you do not have a proper cause and the consequences can be disastrous.
For example, if you engaged a builder to construct a dwelling on your land and the builder is taking longer to construct that dwelling than the contract states. Can you tell the builder that they are in breach of the contract and that their engagement is terminated?
You need to consider the following issues:
(1) Have you received any extension of time notices during the construction period?
(2) Were there any issues that delayed the builder from completing the works within the prescribed time?
(3) Did you or any of your agents do anything that possibly delayed the builder?
If any of the above applies, then the builder might still be well within the time frame as extended by the delays. If you terminate the builder’s engagement in any of the above circumstances, then you will be found to have terminated the contract unlawfully and be ordered to pay damages.
You cannot terminate the contract unless the following steps have been complied with:
- The other party is in substantial breach of the contract.
- You have prepared and served the other party with a Notice of Default detailing that substantial breach and advising them how they should rectify the breach;
- You gave the other party the required time (refer to your contract, it can be 10 or 14 days) to address the substantial breach; and
- If they do not address the substantial breach within the required time, then you may serve them with a Notice of Termination.
We can help you examine the situation and see if a Notice of Default is warranted. We can also draft a Notice of Default, as it is a very technical and detailed document and must be drafted properly.
If you do not comply with the above steps or if you issue a Notice of Default and then terminate the contract whist you are in substantial breach of the contract, or if there is no proper cause to terminate the contract, you will be in a situation where you will have to engage another builder to complete the project (which will be more expensive); the original builder will claim the amount for the work completed and also claim for a loss of profit on the remaining part of the contract. It can be very costly.
Contact us before you proceed with any steps in terminating a contract.
This article provides information that is general in nature and is not a substitute for legal advice.