These are precarious times for the building and construction industry. This uncertainty is often heightened by standard form building contracts containing little in the way of guidance when it comes to a party being 'otherwise in substantial breach' of their obligations.

Terms such as 'substantial breach' are seldom defined in these building contracts, and it can be difficult for the parties to determine when appropriate action should be taken.

Further, taking action prematurely may expose you to liability to damages for wrongful termination.

This article considers the meaning of the term 'substantial breach' and the risk involved with taking steps prematurely to terminate a building contract for a party's substantial breach of contract.

Breach of contract

It is common for a building contract to contain a clause which expressly provides for the circumstances in which a particular party is in breach of their contractual obligations.

Clauses that determine when a builder is in breach of its contractual obligations usually provide:

"The Builder will be in breach of the contract where it:

(a) Unlawfully suspends the works under the contract;

(b) Has its builder's license cancelled; or

(c) Is otherwise in substantial breach of the contract."

In circumstances where a party is in breach of its obligations, building contracts generally require that a notice to remedy breach is given, which allows the party in breach a chance to remedy their breach of contractual obligations within a specified timeframe.

The problem which arises is that such contracts often do not define what a 'substantial breach' consists of. It can be difficult, for example, when facing an errant builder to determine when the builder's conduct constitutes a substantial breach of contract and, therefore, when to issue a notice to remedy breach. Where a contract does not define a particular term, its meaning can be derived from case law.

In a recent QCAT decision, the Tribunal stated that "to establish that the contractor is in substantial breach of the construction contract the principal does not have to go so far as to show that the breach goes to the very root of the contract."

In a Victorian Supreme Court decision, Justice Dixon said that "it requires that the conduct in breach be of real or actual significance with respect to the important qualities of the bargain."

These cases demonstrate that for a breach to amount to a substantial breach of contract it must be serious, not insignificant, but does not have to go to the root of the contract. That means that you do not have to show that the breach was so serious that it granted you (as the innocent party) a right to terminate without regard to the terms of the contract.

Timing

Another important consideration is timing. Where a builder does not perform the works under the contract in a timely manner, the builder may be in breach of its obligations.

That is not to say, however, that you are entitled to issue a notice to remedy breach the moment the builder disappears from the job site. It is a question of degree and involves a real risk that you may wrongfully terminate the contract if seeking to do so because the builder has failed to reasonably progress the works.

It is strongly recommended that legal advice is sought if you think that the other party to your building contract is in breach (substantial or otherwise) of their contractual obligations.

Acting too soon?

If you issue a notice to remedy breach and then terminate your building contract for the other party's substantial breach, and it is later found that the party was not in breach of their obligations under the contract, you will likely have repudiated the contract.

A repudiation occurs when one party engages in conduct which evinces an intention to no longer be bound by the contract or to fulfill it only in a manner which is substantially inconsistent with the party's obligations.

By issuing a notice to remedy breach in circumstances where the other party is not in substantial breach of the contract, you are expressing an intention to no longer be bound by the terms of the contract.

If you repudiate the contract, the builder may sue you for damages incurred as a result of the repudiation. It is crucial, then, that proper grounds for issuing a notice to remedy the breach exists.

In a 2019 QCAT decision, the Tribunal found that the homeowners were justified in terminating their building contract in circumstances where:

  1. the builder only performed work on 74 days during the 243-day contract period; and
  2. there were two periods in which there was nearly no work for two months.

The Tribunal held in that case that the builder had delayed progress of the works unreasonably. The extent of delay which constitutes a substantial breach of contract is decided on a case-by-case basis, taking into account all of the relevant circumstances.

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.