Terminating a Residential Building Contract in Queensland

Are you thinking about terminating a residential building contract in Queensland?

Terminating a residential building contract does not come without its share of risk and so it is very important that you get the termination correct.

However, if the breaching party is in substantial breach of the Queensland building contract, then the non-breaching party can elect to take steps to terminate the contract.

There are three (3) main ways to terminate a residential building contract in Queensland, they include the following:

1. Terminate pursuant to the building contract; and/or
2. Terminate pursuant to the common law; or
3. Terminate by agreement.

In this article, our building and construction lawyers will explain the process of each of the above, provide some risks of terminating the building contract, and provide some practical considerations.

Never attempt terminating a residential building contract before speaking to a solicitor

Terminating a Residential Building Contract

In most (if not all) residential building contracts there are express provisions regarding terminating a residential building contract for a substantial breach of the contract.  A non-breaching party can only issue the notice if the breaching party is in substantial breach, not just a breach.

Unless it is obvious, or an action that is defined in the building contract as a substantial breach, a person will usually need to check the case law to see how the Courts have ruled to be a “substantial breach” in relation to terminating a residential building contract.

This will usually mean that the non-breaching party will have to serve on the breaching party a notice to remedy the substantial breach of the contract.

This notice to remedy substantial breach will usually give the breaching party 5 or 10 business days to remedy the substantial breach of the contract, or to show cause why:

1. it is not a substantial breach; or
2. why the contract should not be terminated.

When terminating a residential building contract, and serving a notice to remedy breach, the notice must contain (at a minimum):

1. Outline in detail the grounds relied upon as a basis for the notice; and
2. State the period of time to remedy the breach; and
3. Be in the correct format and contain all the required information; and
4. State that a failure to comply will mean that the contract may be terminated; and
5. Served in accordance with “giving notice” provisions in the contract, and be addressed to the correct person in the contract; and
6. Anything else that the correct clause in your contract states must be done.

If you do not get a response from the builder, they fail to show cause why the breaches complained of were not substantial breaches, or they fail to remedy the breach – then the non-breaching party can elect to terminate the contract.

Terminating a residential building contract is done by issuing a notice of termination.

But what is a “substantial breach” of a building and construction contract?

What is a “Substantial Breach”?

A substantial breach of the building contract may occur when the builder:

1. Fails to have or maintain the required insurance under the contract.
2. Fails to have an active license in the appropriate class to perform the works.
3. Fails to perform the work under the contract competently (as a competent builder).
4. Fails to provide the correct materials in accordance with the specifications of the contract.
5. Fails to perform the work diligently without delay.
6. Unreasonably suspends the works or fails to maintain reasonable progress.
7. Unreasonably fails to replace or remedy defective materials or defective work.
8. Is otherwise in substantial breach of the contract.

That’s right! Most building contracts will have a clause which says a person is in substantial breach … if the person is in substantial breach.

This is actually a good thing because it means that the parties can go to the cases to find some case law which supports their own factual position, if their facts do not fit neatly into the contractual definitions.

A substantial breach of the building contract may occur when the owner:

1. Fails to pay the progress payment due under the contract.
2. Fails to give the builder uninterrupted access to the site.
3. Takes possession of the site, without consent, before paying the final claim.

Dixon J said in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99 in relation to substantial breach:

For a breach to be substantial it must be of real or actual significance with respect to the important qualities of the bargain between the parties. The consequences of the conduct must be material, or important, to the substance of the contract.

Ultimately, if a party to the contract is in substantial breach (say for example unlawful price increase), then the non-breaching party can serve a notice to remedy breach and take the required steps terminating a residential building contract.

Terminating a Residential Building Contract for Substantial Breach

Terminating a residential building contract for breach is very complicated and should not be done without seeking legal advice.

Wrongful termination can itself be a breach or repudiation allowing the other party to terminate and commence commercial litigation proceedings to recover damages against you.

Never attempt terminating a residential building contract before speaking to a solicitor

Terminating a Residential Building Contract – Common Law

In Australian common law, a contract (including a residential building contract) can be terminated in a few different ways, including:

1. A breach of an essential or fundamental term of the contract; and/or
2. A serious breach of a non-essential term, or a number of different actions amounting to a serious breach of a non-essential term; and/or
3. A repudiation / repudiatory breach of the contract.

We will explain what these things mean below.

Breach of an Essential Term

Firstly, the non-breaching party can terminate a contract if the breaching party breaches an essential or fundamental term of the contract.

In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd [1938] NSWStRp 37, the Court defined a fundamental term to mean:

A term of the contract which went so directly to the substance of the contract or was so essential to its very nature that its non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all.

The Tramways case was also cited with approval by the High Court of Australia in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61 where they said:

The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise

This statement has been cited and followed in Superior Queensland Courts too.

In Zonebar P/L v Surfers Paradise Inv P/L [1997] QSC 196, Shepherdson J cited Tramways by saying:

The absence of the certificate could not on any view be said to be a breach of a term which went so directly to the substance of the contract or was so essential to its very nature that its non-performance may fairly be considered by the plaintiff as a substantial failure to perform the contract at all.

In Fewstone Pty Ltd v Ross Nielson Properties Pty Ltd and George (No 171) Pty Ltd [2003] QSC 82, Atkinson J said:

The test was succinctly stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd. The decision was reversed on appeal, but his Honour’s statement of the law is not affected.

In relation to terminating a residential building contract, to determine if a breach of contract constitutes a material or fundamental breach will entirely depend on the contract and the surrounding facts and circumstances of each individual case, with everything considered together.

It is also discretionary with the final determination being made by the Courts, and so every matter is different and carries its own risks.

Serious Breach (or breaches) of a Non-Essential Term

Usually, a breach of a non-essential (or intermediate) term of the contract doesn’t give rise to a right of termination but may give rise to an action to recover damages for the breach.

However, a serious breach of an intermediate term, or a number of different actions or breaches amounting to a serious breach/s of an intermediate term, may give rise to a right to terminate.

This/these breaches must deprive the non-breaching party of substantially the whole benefit of the contract.

In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7 the Court said:

Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?

Following Hong Kong Fir Shipping above, White J said in Fuentes v Bondi Beachside Pty Ltd [2016] NSWSC 531 at [49]:

Without descending into the debate on taxonomies, the critical question is whether the breach of special condition 63, which is not an essential term, substantially deprived the vendor of a substantial part of the benefit of the contract.

If there is a serious breach intermediate term, or a number of different actions amounting to a serious breach, the non-breaching party may be entitled to terminate the contract but only if the breach deprives them of substantially the whole benefit they were intending to obtain by performance of the contract.

Again, to determine if a serious breach (or breaches) of an intermediate term allows a party to terminate will entirely depend on the contract and the surrounding facts and circumstances of each individual case, with everything considered together.

Again, it is discretionary with the final determination being made by the Courts, and so every matter is different and carry their own risks.

Terminating a Residential Building Contract for Repudiation

In Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor (2007) 233 CLR 115 the High Court of Australia said that repudiatory conduct is:

Conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations

So, a repudiation of the contract may happen if your builder shows/displays:

1. An unwillingness or an inability to render substantial performance of the contract; and/or
2. An intention no longer to be bound by the contract; and/or
3. A failure to fulfil the contract a manner substantially inconsistent with their obligations.

The test for repudiation is an objective test (not subjective).  As stated in Koompahtoo above, a court must determine:

… whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.

The breaching party is considered to have repudiated a building contract only if there is evidence of:

1. the actual inability to perform their contractual obligation; or
2. the repudiatory words and conduct.

If a party to a contract repudiated the contract, then the other party can elect to do one of two (2) things:

1. Accept the repudiation and terminate the contract; or
2. Affirm the contract and so the contract continues until (or if) the breach occurs.

Elect to Accept the Repudiation and Terminate the Contract

If a party to a contract repudiates the contract then the other party may exercise their right to elect to accept the repudiation, and terminate the contract.

If a party elects to terminate the contract after repudiatory conduct, then, as long as the conduct does amount to repudiation, the non-breaching party can commence legal proceedings to recover damages for the repudiation after termination.

However, a non-breaching party does not have to elect to accept the repudiation and terminate the contract.  Instead, the aggrieved party can elect to affirm the contract.

Elect to Affirm the Contract

If a party repudiates a contract then the other party may exercise their right to elect to affirm the contract.

An affirmation of a contract is an election by the aggrieved person to continue on with the contract, at least until the actual breach occurs (if at all).

Electing to affirm the contract, as stated above, must be clear unequivocal in nature.  However, an affirmation of a contract can also be elected by clear and unequivocal conduct.

However, for an election to have occurred, the aggrieved party must have knowledge of the repudiation to allow him or her to make the choice to elect, either by words or by conduct.

Again, to determine if the conduct of the builder is repudiation will entirely depend on the contract and the surrounding facts and circumstances of each individual case, with everything considered together.

It is also discretionary with the final determination being made by the Courts, and so every matter is different and so each case carries its own unique risks.

Care should be taken when terminating a contract for repudiation.  In Shevill v Builders Licensing Board (1982) 149 CLR 620 the High Court of Australia said:

Repudiation of a contract is a serious matter and is not to be lightly found or inferred … In considering it, one must look to all the circumstances of the case to see whether the conduct “amounts to a renunciation, to an absolute refusal to perform the contract”

Terminating a Residential Building Contract by Agreement

A contract can be amended by mutual consent of the parties to the contract, and a contract can be brought to an end if the parties agree to the termination.

Terminating a residential building contract by consent allows both parties to terminate the contract without either party completing their obligations.

This is sometimes known as mutual discharge and occurs when parties agree that each party should be released from their agreed contractual obligations.

An agreement for mutual terminating of a residential building contract must be approached carefully because if an owner says that they want to be released from their contract, this conduct could amount to repudiation and may allow the builder to accept the repudiation and terminate the contract.

These negotiations should be approached on a without prejudice basis.

Another risk with mutual termination / discharge is that the non-breaching party will be essentially discharging the breaching party from their liabilities (except for some statutory liabilities).

This essentially means that you will be trading risk for damages – that means, trading the risk of terminating a contract and all of the uncertainties of contract termination, for the right to sue for damages.

Without Prejudice Save as to Costs

One of the first requirements for anyone terminating a residential building contract by negotiation is the requirement of the phrase “Without Prejudice Save as to Costs”.

Without prejudice is a privilege which attaches to settlement negotiations. The primary reason is to encourage parties to settle their dispute without the matters raised in these without prejudice negotiations being used against them, or to their prejudice in the course of proceedings.

To start with, a non-breaching party can issue a without prejudice letter to their builder, outlining their grievances, all of the potential substantial breaches of the contract, and then seeking to negotiate a settlement of the dispute.  This can include a refund / payment of some money, and a mutual release from the residential building contract.

The correspondence stops being without prejudice when it is a final, legally binding agreement.

See our article on without prejudice negotiations – Settling Litigation Early – Calderbank Offers

Extreme care should be taken when going through this entire process that the non-breaching party does not inadvertently lose some rights.  Also, a mutual termination will also usually mean that there will be a mutual release, so the non-breaching party may not have a right to seek damages (as above).

This is the best course of action for people who just want the breaching party out of their lives and are happy to wear some extra costs and move on.

Risks Involved with Terminating a Residential Building Contract

There are a number of risks in terminating residential building contracts, including:

1. The court could find against you
2. Wrongful termination may be repudiation
3. The costs of legal action
4. Battle to obtain a refund/damages
5. Current building industry problems
6. Leaving the house unbuilt
7. Insolvency of the builder
8. The other party can apply for dispute resolution
9. Inherent risks of litigation
10. Other party in breach

We explain these risks in a little more detail below.

The Court could find Against You

You could think that you have a solid basis for terminating, but if the Court exercises its discretion in the other direction and awards damages to the other party, then you may be ordered to pay their legal costs.

Litigation always carries an element of risk, and there are never any guarantees even if you think you have the most solid case a Court may find that the owner terminated without grounds.

Wrongful Termination may be Repudiation

If you terminate without grounds, then this can be a repudiation of the contract allowing the other party to terminate and seek damages.

Their builders damages would be the loss of profit from the contract plus interest and legal costs.

The owners damages could be the cost of engaging a new builder to complete the works (or the difference in contract prices).

There are some very serious consequences if a party terminates a contract without sufficient grounds or does it somehow unlawfully.

The costs of Legal Action

If you terminate without grounds then the other party can commence legal action against the party.

As well as the cost of the parties own legal fees, if a party is successful in their Court action, then that party may claim its legal costs and interest.

This could be tens of thousands of dollars (or hundreds of thousands depending on the case).

Battle to Obtain a Refund/Damages

The builder may not refund your money.  An owner could legally terminate and the builder just do nothing.

If this happens than you will need to take them to Court or QCAT to recover any funds.

That could take over a year (or more) and cost thousands of dollars.

You may ultimately win the case, get a full refund and 70% of your legal costs back, but there is always a risk in litigation that you may not be successful.

Current Building Industry Problems

It is known that the building industry is experiencing problems.

The builder might be able to construct an argument that their breach was not their fault, but just industry standard, and then try to make a frustration argument.

Leaving the House Unbuilt

If a party terminates a contract, then the house could potentially remain unbuilt until there is a resolution of the dispute.

This may weaken the concreate slab, cause weather damage, or other structural and non-structural defects to the building works.

Insolvency of the Builder

It is also possible that the builder may voluntarily apply for bankruptcy or winding up / liquidation proceedings.

If this happens then, except with leave of the Court, the owner / plaintiff will be unable to continue to claim, or enforce a judgment, against the builder.

Unless there is any money in the insolvency the owner may lose damages and legal costs.

The Other Party can Apply for Dispute Resolution

In some contracts there are clauses which prevent a party from terminating the contract where a complaint has been made to the QBCC.

Care should be taken when terminating that this dispute resolution process has not been commenced, as this may be considered a repudiation of the residential building contract.

Inherent Risks of Litigation

Litigation is inherently risky and uncertain because the result is not definite until judgment is given, and all appeal rights are exhausted.

Although it may be possible to give an opinion about prospects of success if it goes to trial, ultimately there is no certainty because of the adversarial nature of the process.

Other Party in Breach

A contract may contain a clause which says that a party cannot terminate if that party is also in substantial breach.

This typically could be non-payment of an invoice (for example).

There may be more risks based upon your specific circumstances.  This is not an exhaustive list, and there may well be some more risks, but this is an indication of some of the risks that can occur when terminating a residential building contract.

Practical Considerations when Terminating a Residential Building Contract

Here are some potential practical issues to consider:

1. The increased cost of the new contract
2. Do you have a license to use the plans?
3. You will need new finance
4. Delays causing increase costs & time
5. Retention of certificates & warranties
6. Delay damages
7. Opposition from new builder
8. Rectifying defective work

The Increased Cost of the New Contract

If you terminate your building contract you may have to engage a new builder.

If you engage a new builder then the cost of that new contract could be more that the original contract with the increase in the cost of materials and labour.

Do you have a License to use the Plans?

The building plans have copyright protection.

The owner usually has a license to use the plans if the plans have been paid for.

If the contract is terminated, and the deposit refund is given, then the owner may not have a license to use the plans.

Read our article on copyright in building plans after termination of a building contract.

You will need New Finance

With a new building contract, you may have to obtain new finance.

Depending on your borrowing capacity, your financial situation, the rate of inflation, and rising interest rates, an owner might not be able to obtain new finance.

You may have to build a different house on your land, or worse – have land settled and no loan for a home.

Delays Causing Increase Costs & Time

The new building contract and finance may take another six (6) months to start, which would cause more delays.

During these delays the owner may have to pay extra rent as well as the home loan for a much longer time, or if the new build is an investment property, then this will cause extra losses of rental income.

Retention of Certificates & Warranties

If an owner terminates a contract prior to practical completion, the builder may retain any certificates and paper warranties without providing them to you.

They might also keep keys, garage door openers, and things like that.

Delay Damages

The builder may (in certain circumstances) be entitled to delay damages, or damages pursuant to the contract.

Opposition from New Builder

An owner might face some opposition or attitude from new builders if asked to complete another builder’s unfinished work.

There may be issues around the new builder warranting the previous builder’s work.

Rectifying Defective Work

If there are defects, then it may be impractical to get the current builder to rectify any defects after termination. They may simply not respond and you will have to get the QBCC involved.

There may be more practical considerations based upon your specific circumstances.  This is not an exhaustive list, and there may well be some more practical considerations, but this is an indication of some of the practical considerations that can occur when terminating a building contract.

Never attempt terminating a residential building contract before speaking to a solicitor

Terminating a Residential Building Contract FAQ

We get a lot of questions in relation to terminating building contracts on a daily basis.  This frequently asked questions panel attempts to answer those most asked.

Can a builder walk away from a residential building contract?

No. A residential building contract binds both parties. The builder will need to lawfully terminate the contract before they can walk away.

Can you exit a residential building contract early?

You can exit a contract early if you (a) terminate the residential building contract; or (b) complete the works early; or (c) consent to a mutual termination with the other party to exit the residential building contract early.

What is a substantial breach of a residential building contract?

The residential building contract will define what is a substantial breach of a residential building contract. Anything not in the contract, for a breach to be substantial it must be of real or actual significance with respect to the important qualities of the bargain between the parties. The consequences of the conduct must be material, or important, to the substance of the contract.

What factors may lead to the termination of a residential building contract?

The factors may lead to the termination of a residential building contract include a substantial breach under the contract; and/or a breach of a fundamental term of the contract; and/or a serious breach of a non-fundamental term of the contract; and/or a repudiation of the contract.

Which is the most common remedy for breach of construction contracts?

Damages.  There are two main remedies, damages and specific performance, but damages is the most common remedy for breach of construction contracts.

How can a residential building contract be discharged?

A residential building contract be discharged by (a) agreement; and/or (b) breach of the contract; and/or (c) frustration of the contract; and/or (d) performance of the contract.

How do I write a notice of intention to terminate a contract?

When serving a notice to remedy breach, the notice must contain (at a minimum):

1. Outline in detail the grounds relied upon as a basis for the notice; and
2. State the period of time to remedy the breach; and
3. Be in the correct format and contain all the required information; and
4. State that a failure to comply will mean that the contract may be terminated; and
5. Anything else that the correct clause in your contract states must be done.

Can I terminate a contract by email?

Yes.  Most residential building contracts have a provision for sending the notices by email.  Best to check your residential building contract to see how the contract says that the parties must serve or give notices.

Never attempt terminating a residential building contract before speaking to a solicitor