Australia: When mitigation becomes repudiation: the perils of terminating a building contract

Last Updated: 7 March 2016
Article by Andrew Murray

In brief - Consider risk of mitigatory conduct and seek professional advice

A decision of the Appeal Panel of the Civil and Administrative Tribunal of New South Wales, delivered on 12 February 2016, is a timely reminder of how easily an act of mitigation can be construed as an act of repudiation. While the "one must mitigate one's loss" mantra is so ingrained in the minds of principals, contractors and practitioners alike, careful consideration should be given to how intentions are communicated when terminating a contract.

Principal seeks to terminate contract in residential building dispute

D&R Constructions (Aust) Pty Limited v Wesiak [2016] NSWCATAP 38 concerned a residential building dispute. The appellant, D&R Constructions (Aust) Pty Limited (Contractor) had entered into a building contract with the respondents, Leela and Bernard Wesiak (Principal) to carry out building works under a standard Master Builders Association style contract.

Disputes arose regarding the rate of progress, the scope of the work to be performed and the difference between the value of work carried out and the amount of the contract sum remaining to be paid. Solicitors were engaged and voluminous correspondence ensued. On 26 July 2013, the Contractor suspended building work by reason of an alleged failure on the part of the Principal to pay an outstanding invoice of $27,000. A mediation was held, but was unsuccessful.

By solicitors' letter dated 13 September 2013, the Principal advised the Contractor that it had grounds to terminate the contract because, amongst other things, the Contractor had failed to proceed with the works with due diligence and in a competent manner and had wrongfully suspended the works.

By letter dated 16 September 2013, the Contractor's solicitors addressed issues of scope of the outstanding works and made a settlement proposal.

Principal and Contractor both claim wrongful repudiation of the contract

In their response dated 17 September 2013, the Principal's solicitors wrote the following fateful words:

...For the reasons set out in our letter of 13 September 2013, our clients must mitigate their losses and intend to proceed to terminate the Contract... Our clients are presently seeking quotations for the completion of the works. Upon receipt of an acceptable quotation, they will terminate the Contract and engage a new contractor to complete the works. We are not instructed as to when that will occur but we understand that those discussions are well underway... In the intervening period and until such time as our client terminates the Contract, we invite a reply to this letter. We urge your client to act promptly.

No response was made by the Contractor to the Principal's letter of 17 September 2013 and, on 26 September 2013, the Principal's solicitors again invited a response, asserting an accrued right to terminate the contract but concluding:

If your clients have anything to say to our clients before the Contract is terminated, please advise promptly. Our clients otherwise reserve their rights – whether under the Contract or at law.

Ultimately, it was the Contractor, and not the Principal, who brought about the termination of the contract. By letter dated 20 October 2013, the Contractor asserted that the Principal had "indicated an intention not to be bound by the Contract", as evidenced by the failure to pay the sum of $27,000 within time and the statement that "they intend to terminate the Contract and retain persons unknown to complete the building works". The Contractor characterised this conduct as wrongful repudiation of the contract and purported to terminate the contract as a consequence.

In typical manner, the Principal subsequently alleged that the Contractor's manner of termination was itself unlawful and amounted to a repudiation of the contract.

Each party applied to the Tribunal for damages.

Tribunal finds Contractor's termination invalid

At first instance, the Tribunal found in favour of the Principal, concluding that the progress claim for the sum of $27,000 (the non-payment of which was relied upon by the Contractor as part of its purported termination right) had not been validly issued, with the effect that the Contractor's termination on 20 October 2013 was invalid.

The decision referred to but omitted to provide detailed consideration to the second basis of termination. Ultimately, this omission was held to constitute an error of law that enlivened the Contractor's right of appeal.

Appeal Panel finds that Principal's letter showed intention not to be bound by the contract

The Appeal Panel of the Tribunal allowed the appeal and found that the Principal's conduct, as evidenced by its letter of 17 September 2013, demonstrated an intention not to be bound by the contract. In doing so, the Appeal Panel relied upon a number of authorities, including the statement of Fullagar J in Carr v J.A. Berriman Pty Limited (1953) 89 CLR 327 at 351, in which his Honour found that the following factual scenario constituted repudiatory conduct on the part of the owner:

It is in this state of affairs that the building owner announces that he has engaged another contractor to carry out a large part of the work comprised in the contract. A reasonable man could hardly draw any other inference than that the building owner does not intend to take the contract seriously, that he is prepared to carry out his part of the contract only if and when it suits him.

The Appeal Panel found that, viewed objectively, the Principal's letter of 17 September 2013 "manifested an intention to terminate the contract once the respondents had received quotations from others for the completion of the work" – a process evidently already embarked upon by the Principal – and was not expressed to be conditional upon anything other than receipt of an acceptable quotation.

The finding that the Principal was entitled to payment of damages was quashed and the whole matter remitted to the originally constituted Tribunal to determine the outstanding issues of quantum.

Courts may consider issuing requests for tender as showing intention to repudiate contract

Lest it be said that the decision of the Appeal Panel in D&R Constructions turned entirely upon an unfortunately worded solicitors' letter and is not of general application, consider the following (not infrequent) scenario:

  • a principal becomes aware that it may shortly have a right to terminate a construction contract with its head contractor, whether by reason of the likely insolvency of the head contractor or the commission of substantial breaches of contract
  • the right to terminate accrues only after an event that appears imminent but has not yet taken place (such as an admission of insolvency or the appointment of an administrator, receiver or liquidator) or the completion of contractual machinery (such as a show cause process)
  • the principal, understandably, wishes to mitigate the loss and damage it will suffer if the termination event occurs and shorten the period of time before a suitable replacement head contractor is engaged
  • whilst awaiting the occurrence of the trigger for termination, the Principal issues a request for tender to the market (or a selection of potential head contractors) for work which includes the incomplete works the subject of the existing head contract

In the hands of the incumbent head contractor, such request for tender may well, depending upon its terms, have every bit of evidentiary force as the Principal's letter of 17 September 2013 in D&R Constructions and permit that head contractor, despite any substantial breaches of its own, to contend that the principal has itself repudiated the head contract, entitling the head contractor to the payment of damages.

Seek professional advice when considering terminating a contract

Whilst the desire to mitigate loss in the face of unfortunate circumstances is understandable and, in most cases, rewarded by legal doctrine, in some situations mitigatory conduct can expose a principal to significant risk. The same considerations apply equally to head contractors when dealing with subcontractors.

That is not to say that a principal or head contractor can never invite quotations for work being performed by an incumbent builder – the key lies in the manner in which the invitation is communicated.

When faced with prospects of terminating a contract, all parties should proceed with utmost care and seek professional advice as to the potential consequences of their actions.

Andrew Murray
Construction and engineering
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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