Like many things in life, building contracts can lead to disputes, which in turn may lead to litigation in the courts or at the Victorian Civil and Administrative Tribunal (VCAT). Litigation is generally costly, time-consuming and stressful, with no absolute certainty as to the outcome. In order to minimise the likelihood of being involved in a dispute, it pays to have your building contract reviewed, whether you are an owner, developer, builder or sub-contractor.

Standard form building contracts

Generally, a building contract will be drafted by one of the parties, and often this comes as a standard form contract. Usually, the party who has drafted the terms of the contract would have done so in a way that is to their advantage. Unlike many other standard form contracts where those who have drafted the contract are unlikely to accept proposed amendments (such as bank loans or utility agreements), building work is fairly competitive and as a result, the drafting party will usually agree to any proposed changes, or at least be willing to enter into negotiations.

Breaches, repudiation and termination

Some key matters which are repeatedly not dealt with properly, or at all, are those regarding liquidated damages and termination rights.

Particularly in commercial building contracts, termination provisions often only provide express termination rights under the contract to the party that drafted the contract. If you did not draft the contract, in these circumstances you will be left with only common law rights of termination. In practice, this means that you will need to convince a court or tribunal that the party that drafted the contract has committed a fundamental breach of the contract, known as repudiation, and that you are entitled to accept that repudiation and terminate the contract.

Breaches of the contract and whether they are characterized as repudiation are often not clear at their time of occurrence. This can lead to uncertainty and risk, if you did not draft the contract and are seeking to terminate for repudiation. Wrongful termination of the contract can result in a damages claim being brought against the terminating party for breach of contract. If you have your contract reviewed, you will have the opportunity to negotiate with the other party to include well drafted breach and termination terms, which can prevent this issue from arising, and provide you with peace of mind in the event that you are required to terminate the contract.

Liquidated damages

Liquidated damages is a pre-agreed amount payable for delays caused by a party. The benefit of having an agreed amount for liquidated damages is that if there is a breach of the contract by reason of delay, the other party does not have to provide evidence to prove their actual losses – they can simply rely on the liquidated damages amount, which is generally a weekly or daily fixed sum.

Often, however, building contracts, and in particular domestic building contracts, provide a very small amount for liquidated damages, which parties commonly either do not notice or do not properly turn their minds to when signing. For example, $250.00 per week or similar may be inserted as a default measure for liquidated damages. This amount is generally inadequate, as liquidated damages are required to accurately reflect the costs incurred as a result of the delay.

If you are an owner, the amount agreed should reflect the holding costs, such as any bank loan interest that would be incurred as a result of the delay, or any loss of profit, such as if the property was to be used as a rental investment property.

If you are a builder, the amount agreed should cover any wages, sub-contractor costs, hire costs and/or interest that is likely to be incurred if construction is delayed.

How can Sharrock Pitman Legal help?

These are just two of the many key matters that should be reviewed carefully before you enter into a building contract. Other matters include definition of scope of works, insurance, extensions of time, variations, prime costs and provisional sums, amount of deposit and progress claims, retention moneys, and charges, just to name a few. If you are thinking about entering into a building contract, it pays to have it checked first. Please contact our Commercial Litigation team to obtain a fixed price to review your building contract on 1300 205 506, or send an email to litigation@sharrocktpiman.com.au.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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