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What can go wrong in building a house?
The answer should begin with a more fundamental question: WHAT ARE THE HOME OWNERS’ OBJECTIVES WHEN THEY UNDERTAKE A HOME BUILDING PROJECT?
The home owners’ objectives are to have the project come in:
• ON TIME
• ON BUDGET
• IN ACCORDANCE WITH THE PLANS
• FREE OF DEFECTS
To achieve those four objectives the home owner will have to successfully negotiate the four phases of the home building project:
• BEFORE CONTRACTING
• NEGOTIATING THE CONTRACT
• DURING THE CONSTRUCTION PHASE OF THE CONTRACT
• AFTER THE CONTRACT WORKS ARE COMPLETED
BEFORE CONTRACTING
Do not enter into a contract too early.
In a recent matter the builder was proposing to enter into a contract with our client based on a set of plans it had prepared when there was no Development Application, no Construction Certificate, there were no engineering details, no hydraulic plan, no electrical details, no geotechnical report, no dilapidation report and the plans had not been approved by Council. What this means is that when the builder obtains the approvals and the plans, if there are any conditions that Council or the engineer require which necessitates a change or variation to the original plans, the builder will be able to claim for the additional cost of that extra work as a variation and will charge you for the cost of that work and a profit margin as well increasing the contract price. Often such plans are of the most vague kind, and the further detailing of them in to usable building drawings will give rise to additional claims for every new detail on the basis that “we did not have that in mind when we agreed to build this house for you.” This may cause the costs of the building works to blow out. Essentially the builder is trying to tie the owner down to a contractual arrangement while not really committing itself as to what is to be built or to the price.
One builder’s solution to these issues was a special condition which said:
This contract is subject to Development Application conditions of approval, Construction Certificate conditions and any further requirements as advised by any statutory or other authority on terms and conditions acceptable to both the builder and the owner;
To give the builder credit, this was an attempt to make the situation fairer but the words “acceptable to both the builder and the owner” really just makes the contract void for uncertainty. The problem also is that by the time the new price is set the home owners feel committed to the builder and usually go ahead at a price which is higher than they would have wanted to which means with the inevitable price increases which occur during the course of a building project, their budget will blow out.
Home owners should be advised to hold their horses and wait until the approved plans and specifications and the development approval and the other items referred to above can all be annexed to the home building contract and every page of them initialed. The idea that time may be saved in the building process by entering into a contract too early is an illusion. You can’t start until you get the building approvals. This is just an device to rush the home owners into committing themselves.
Exhibition Homes
If the home owners are desperate to contract early, perhaps seeking to secure a special discount price that the home builder is offering them, and they refuse to listen to you, you may be able to achieve some protection if the owners have seen an exhibition home or other houses built by the builder. It goes without saying that the owners should, if possible, examine an exhibition home or other examples of the work of the builder prior to deciding to engage him. If they find the exhibition home satisfactory and engage the builder on the strength of it they will naturally expect a home of a matching high standard.
Section 9 (3) of the Home Building Act 1989 provides:
9 Exhibition homes
(1) In this section, exhibition home means a dwelling made available for inspection to persons who are invited, expressly or
impliedly, to enter into a contract for the construction of a similar dwelling.
(2) A person who makes an exhibition home available for inspection or who advertises that an exhibition home is so
available is guilty of an offence if, at any time it is available for inspection, there is not prominently displayed at the home:
(a) a copy of the plans and specifications relating to its construction, and
(b) if the person is aware that persons are to be invited to enter into building contracts for the construction of similar
dwellings by use of a standard form of building contract, a copy of that form of contract.
Maximum penalty: 80 penalty units in the case of a corporation and 40 penalty units in any other case.
(3) If:
(a) a contract is entered into with the holder of a contractor licence for the construction of a dwelling that is similar to an
exhibition home, and
(b) the holder knows that it was entered into after the other party to the contract had inspected the home, and
(c) the contract in any way identifies the dwelling to be built by reference to the home,
the contract is to be taken to contain a provision that the dwelling will be constructed according to the same plans and
specifications, standards of workmanship and quality of materials as the exhibition home, except to the extent (if any) that the contract and its accompanying plans and specifications provide for any departure from them.
So if an owner enters into a home building contract with a licensed builder to build a home similar to the builder's exhibition home, and the license holder knows that it was entered into after the owner inspected the home, and the contract in any way identifies the dwelling to be built by reference to the exhibition home, then the contract is to be taken to contain a provision that the dwelling will be constructed according to the same plans and specifications, standards of workmanship and quality of materials as the exhibition home, except to the extent (if any) that the contract and its accompanying plans and specifications provide for any departure from them.
Some builders, perhaps to avoid the effects of this provision, will give a different name to the house model in the contract to that which the owners inspected. For example the contract will refer to a "Cholmondley", instead of what the owner inspected which was a "Beauchamp" (I hasten to add that I know of no home builders which use these names), and there are no examples of the "Cholmondley" built in Australia. This appears to be for the purpose of ensuring that there is no model in Australia which might be used for comparison.
The solution is to amend the contract to refer to the actual model inspected by the owners: “Unless this agreement expressly provides otherwise the house is to be constructed to the same plans, specifications, standards of workmanship and quality of materials as the builder's display home which the owners inspected at ..............(address)” This incorporates the all important terms as to quality, even though the plans may differ.
Pre contract planning and development approval services
The home owners usually first meet the building company’s sales person at the building company’s display home when they are about to purchase their building block. They ask the sales person if the builder will prepare a set of plans for them based on the display home. The sales person will usually then offer them a plan preparation agreement whereby for about $6,000.00 his company will prepare plans for their approval and then get the necessary approvals from the Local Government Authority for the plans. The agreement will usually say that the money the owners spend on the plan preparation will be deducted from the eventual contract price if they decide to go ahead with the building company as the builder. The home owners do not, as a general rule, obtain legal advice, even though the agreement has a lot of other terms which they do not really understand, because it seems a good deal. The home owners then sign the agreement and the building company goes ahead.
Various scenarios then arise:
The home owners are not happy with the plans produced.
The home owners are happy with the plans produced but the contract price the builder asks for to build the house is too high and the home owners know that they can get it done cheaper by another builder.
The home owners are not happy with the plans produced.If the home owners are not happy with the plans he produces, and often they are simply the result of some $200.00 worth of drafting done by a semi skilled draftsman employed in the builder’s office, they have a set of plans of no value to them and have spent $6,000.00. The unreasonable part of that sum may be recoverable in the Consumer Trader and Tenancy Tribunal but the home owners will have to spend the time and money required to do so.
If the home owners are happy with the plans the builder produces but not the contract price it asks to build the house
The home owners then ask the builder to match the price offered by another builder to do the work. It refuses to do so and it points out that the plan preparation agreement reserves the copyright in the plans exclusively to it. That is, it can prevent the home owners using another builder to build to those plans. If the home owners wish to proceed using another builder the builder will then offer to sell them a license to use the plans for, say, $15,000.00. The home owners may have provided the builder with all the sketches and the ideas but it now says that those ideas now belong to it. To sum up, even at this pre contract stage it is a good idea to get competent legal advice before home owners sign anything.
Watch out for people who offer to prepare plans and arrange for a builder at this stage.
At this stage the home owners my be approached by unlicensed people who offer to prepare plans and a budget and engage a builder for a lump sum fee. It is not advisable to deal with such people if only for the simple reason that engaging such an intermediary inevitably means an additional layer of cost and there is simply no guarantee that the plans prepared will be such that a builder can be found who will build them for the home owners’ budget price or in the desired time frame. Misunderstandings in that regard have caused home owners much distress in the past. Deal direct with a licensed builder who can provide you with a set of plans and a firm quote for the work set out in those plans at the same time.
Some Questions You Should Ask Before Entering Into A Home Building Contract
Are there any easements, rights of way, stock routes or RTA affectations which might affect what can be built and where?
Have you checked the site for reactive soil, fill, landslip potential, rocky outcrops requiring removal, watercourses and springs that might affect building works and for features such as cliffs or gullies that will affect access for builders or occupants? To prevent the builder claiming extra costs for unusual site conditions which an ordinary site inspection should have revealed to him, insert a term to the effect that:- "The builder is deemed to have visited the site before contracting and to have made himself aware of all site conditions perceivable by visual inspection."
Does the contract require the owner to provide the builder with all weather access to the land? If the builder has to provide this access it will be at the owner's expense and will be an additional charge. In the case of some sites this could be very costly. I recommend the insertion in the contract of a statement that:-"The builder has visited the site and warrants that all weather access of the type referred to will cost $................"
Are water, gas, electricity or sewage available to the site? Does the house have to be constructed to a certain level to enable gravity discharge to the sewer? Will the owner have to pay for headworks for the supply of any of these services?
What are the council's usual requirements for development approvals? Can the owner afford to meet them?
Does the building approval require any additional construction or works not included in the builder's quotation? Get the builder to amend the quotation and specifically include the additional work and give a cost for it. Annex the building approval to the contract.
Are the plans which are the basis of the quotation and the contract the approved plans? Are they are identified in the contract as being the contract plans?
Have the owners got the funds to pay for the works or are the funds guaranteed? Some contracts require that the builder be given proof that the owners have the funds before the builder is required to commence building. Failure to provide that proof may be a breach. Annex proof that the owner has the funds (e.g. copy of a letter from the finance provider) to the contract.
Is all the work that needs to be done clearly set out in the plans and specifications? If not ensure that the additional matters are referred to in the quotation. Annex the quotation to the contract.
Does the quotation exclude any necessary part of the works? Sometimes the builder omits to include necessary works in his quotation and then seeks to claim for them later as extras. Insert the following:-"Except where an express exclusion has been made herein, the Contract Price includes all matters that could be reasonably necessary for the completion of the works covered by the agreement and the plans."
Will the owners be residing in the premises whilst the building work is going on? Where the owners are to be in residence during construction or alterations most of the standard building contracts are not applicable since they contemplate the builder having exclusive possession of the site. For example, in most of the standard building contracts the owner's entry into occupation of any part of the premises releases the builder from his or her obligation to progress the works to practical completion. There are contracts specially designed for in residence construction, such as the Housing Industry Association Contract for Renovations and Additions, and these should be used, with appropriate modifications.
Does the builder hold the appropriate licence? Visit the Office of Fair Trading website to check that the builder's licence matches the name on the contract, matches the name on the certificate of insurance, entitles him or her to do the building work contemplated, and is current, how long he or she has been licensed, whether there has been any disciplinary action taken against him or her by the Office and whether there are any current complaints against him or her being investigated by the Office.
NEGOTIATING THE CONTRACT
The home owner will need help in negotiating the terms of the contract, even if the builder is using one of the standard form home building contracts. This is because:
• The home builder has entered into these contracts many times and knows how to protect his own interests. The home owner has probably never even seen a standard form home building contract before.
• The standard form home building contract is usually one prepared by the builder’s own association, such as the Master Builders Association or the Housing Industry Association and, naturally, has been drafted to suit the builder’s interests, not the interests of the home owners.
• Even if the standard form home building contract the builder is proposing to use is the Office of Fair Trading Contract, it can be
manipulated to unfairly favour the builder because of how the dotted lines of the contract are filled out and by the introduction of a few, apparently innocuous, special conditions
• If, on the other hand, the proposed contract form is the builder’s own proprietary standard form home building contract then the home owner will really need help as there are some extraordinarily unfair contracts currently being used by some builders.
• The home owner has a huge amount of money at stake and can't afford to have things go wrong.
The Standard Form Home Building Contracts
The Vulnerable Nature of Home Owners
Most home owners enter into home building contracts without legal advice despite the often huge amounts of money involved. When I have asked home owners who have later had to come to me for assistance why they entered into these contracts without obtaining legal advice, they has said such things such as: “Since the builder was not legally represented we did not feel we needed legal assistance ourselves, and after all, it was a Standard Form Contract!”
It seems an article of faith with home owners that if a building contract is a “Standard Form Contract” the contract will be perfectly fair and everything will be all right. This is so even where the “Standard Form Contracts” are the standard form contracts of the builder’s industry associations! This attitude has not changed even when the ACCC has been specifically empowered to take action against unfair terms in standard form contracts.
The homeowner’s delusion that they may safely enter into such contracts no doubt reflects the enormous success that such legislative expedients as the New South Wales Fair Trading Act and the Commonwealth Trade Practices Act and its successor the Australian Consumer Law have had over the past 40 years. Home owners just cannot believe that, in relation to having a house built, which is the largest consumer transaction of their lives, the law does not adequately protect them.
The Builder’s Own Proprietary Standard Form Home Building Contract
Home owners are even more at risk when they enter into the builder’s own home building contract. A builder’s “home made” home renovation contract with which was brought to me perfectly illustrated this problem. It was imposed on a young couple who later became clients of mine. By the time they came to see me they and their children had been sleeping on mattresses on the floor for some 18 months longer than the contract contemplated. The work was still incomplete and the builder went to the site only when he wished to do so. He claimed an extension of time for every day in which the weather bureau reports showed even the smallest amount of rain fell, even days when he was not on site and on days after the roof was on and rain would not have affected the progress of the work. He believed that the contract allowed him to do this. Inserted into the definitions was a definition of inclement weather which said that “inclement weather means any weather that, in the opinion of the builder, prevents the work being carried out in the usual manner.”. This was only one of many such clauses in the contract which gave an unfair advantage to the builder. Although the draftsman of the contract clearly not heard of the contra proferentum rule, these clauses still created a thicket of problems and dealing with them in the ordinary way with litigation was going to generate huge legal costs, costs totally beyond the means of the young couple in question. It would have been much easier to protect the home owners, and indeed the builder might not have “tried it on”, if the contract had not contained these clauses. In dealing with such matters I often wish that the clients had taken legal advice before contracting.
THINK OF THE MAJOR RISKS THAT ARISE IN A HOME BUILDING CONTRACT:
(a) the risk that the builder may have underestimated his costs and underpriced the job,
(b) the risk that the work may not be completed in the time provided for in the contract
(c) the risk that the work may be defective and require expensive rectification
(d) the risk that the work will not conform to the plans or specifications.
The question arises who is going to bear a given risk? The building contract acts as a formula for allocating those risks between the parties.
Contractual Risk Allocation
The golden rule of contractual risk allocation is that the party who should bear the risk of an event occurring is the party who is in the best position to avoid that event occurring
BASIC TYPES OF CONTRACTS USED IN HOME BUILDING
The two basic types of contract normally used in home building are lump sum contracts and cost plus contracts.
Lump Sum Contracts
A lump sum contract is an “ordinary” building contract in which the builder promises to produce a completed house to the owners for a fixed or lump sum. This does not mean that the contract price is never going to change, for example when the contract is varied and more or less work is done, or in circumstances where an item hard to estimate, such as the costs of excavation, is allocated a provisional allowance. In terms of risk allocation the most important virtue of a lump sum contract is that it mimimises the likelihood of a budget blow out for the owners because the builder bears the risk of cost increases in all but the provisional items.
Cost Plus Contracts
A Cost Plus contract is one where, under it, the parties agree that the builder is to be paid the cost of the work done plus a profit percentage. The contract is usually preceded by an "estimate" produced by the builder. In my experience this "estimate" is seldom, if ever, included in the contract. That "estimate" is usually a very low one. Often the builder tenders to do the work for a much higher fixed-price contract and persuades the owners to enter into the Cost Plus contract on the basis that "it will be much cheaper this way." In my experience it never turns out to be so.
Try to prevent your clients entering into Cost Plus Home Building Contracts. In every important aspect, the Cost Plus contracts breach the golden rule of contractual risk allocation. To illustrate this, Schedule 1 of the Master Builders Association Cost Plus Contract provides that among the costs which the builder is entitled to claim are:
o all wages and other entitlements payable to the builder's employees or payable by reason of such employment...
o the builder's own work....,
o costs of any services ....
o costs of all trade contractors.....
o cost of hired equipment ....
o cost for the use of plant and equipment belonging to the builder....
o the cost of correcting modifying or changing work already completed, which is changed by reason of a variation by the Owner, or which is defective for reasons other than due to materials provided by the Builder or the workmanship of the Builder.
o the cost of complying with any site specific issues such as safety and pollution and waste disposal......
o any other costs or expenses which the builder is liable for or incurs by reason of carrying out the work including insurance costs......
The essential thing to realise is that every one of these costs, could be greater or lesser according to the approach and conduct of the builder. The risk of these costs increasing will however not be borne by the builder under the cost pus contract. Indeed if the builder is careless and, as a result, these costs increase, the builder will be rewarded for his carelessness by an equivalent increase in his profit, as any increase in the cost of the works is going to increase what he is paid as a percentage of that cost. The structure of the contract is also almost an open invitation to fraud in that the builder can exaggerate the hours which he or his employees have spent on the job and unless the owners have someone observing the site at all times, it will be impossible to prove that the hours claimed were not spent on site. I have known of unscrupulous builders arranging for the labour on projects of their own to be entirely paid for by the owners of another site in this way. Even if the builder is not so unscrupulous, he is unlikely to be driving his workers as it is not to his commercial advantage to do so.
With respect to the builder's optimistic estimates of cost, Clause 3(d) of the Master Builders Association Cost Plus Contract provides that:
Contract Represents Entire Agreement
It is commonplace to find clauses such as this in Standard Form Home Building Contacts:
(d) Apart from any terms implied by Statute, the whole of the terms, conditions and warranties of this Contract are set out in the Contract, drawings and specifications (as per Schedule 3) and will not and are not in any way varied or affected by reference to any prior negotiations, stipulations or agreement, whether written or verbal.
What this means is that all the optimistic estimates of costs, and the things that the builder said about the ultimate cost of the works, are not part of the contract.
Limitation of liability
The builder will sometimes attempt to limit its liability for damages for breach of the contract to a sum that does not exceed the contract price:
Notwithstanding anything herein contained to the contrary the builder shall not be liable to the owner in respect of any claim whatsoever arising hereunder or out of the contract or in any way connected with the building works or the execution thereof in a sum in excess of the contract price. In any event the builder shall not be liable to the owner in any way whatsoever for any claim in respect of proceedings in respect of injury or damage to such of the owner’s fittings, finishings, fixtures or any other item, matter or thing which do not form part of the contract documents.
Should the builder construct a house that is so defective that it needs to be demolished and rebuilt it would most likely cost in excess of the contract price to rectify. The home owners should not allow their potential claim for damages against the builder to be capped at the contract price.
Watch Out for Provisional Sums
We have earlier mentioned that provisional sums are one area in which there can be cost increases even in a lump sum contract. Often the contract involves the performance of work for which the builder is unable, or unwilling, to fix a price. Sometimes this is because the works involve a need for rock breaking equipment during excavation or the need for piering down to bedrock when the ground will not support the works. In these circumstances an allowance called a "provisional sum" will be added to the contract price to provide for those works. That allowance will almost invariably be the builder's own estimate. The contracts provide, however, that if that allowance is inadequate, not only will the owner have to pay the additional costs of the work but he will also have to pay a percentage of the additional cost (usually 15%) to the builder to cover profit and overheads.
The reason that the use of provisional sums should be avoided is that, if too many items are made provisional, what you get is essentially a Cost Plus Contract. I have known builders to list, in a schedule of provisional sums, provisional allowances for everything such as:
o the initial survey,
o the excavation,
o the piering,
o the foundations,
o the slab,
o the frame,
o the brickwork,
o the gyprocking and internal fit out and
o the tiling.
That is they have made almost all the contract works into provisional items and thereby insulated themselves from any risk of their estimates being wrong. This is simply a device to change a Lump Sum Contract into a Cost Plus Contract so that the builder does not have to bear the risk that his estimates of the cost of the works are wrong.
Sometimes less scrupulous builders have, when competing for a building job, used this term to reduce the apparent contract price by underestimating the provisional items, knowing that the owner is obliged under the contract to pay the amount by which the costs have been underestimated and to pay the builder a percentage of the sum into the bargain. The owner is almost invariably relying on the builder's skill and judgement in such matters and the contract should contain a term requiring that the builder's estimates be reasonable estimates based on current costs.
Deemed Inspection of the Site.
Sometimes a builder might seek an increase in price because of site conditions which the builder should have made himself aware of before contracting by an inspection of the site. To avoid these problems a clause along the following lines is a good idea.
Before signing this agreement the contractor shall have inspected the site, its access and its surroundings and shall have:
(a) examined all information relevant to the risks and contingencies and other circumstances having an effect on this
agreement
and obtainable by making reasonable inquires; and
(b) examined all information made available in writing by the owner to the builder;
and have used that information in the estimation of the cost of provisional items.
It is suggested that a term along these lines be incorporated into all home building contracts.
Front End Loading
Another, related, way in which the contract may be used unfairly to oppress the owners is by the misuse of the progress payment schedule in clause 12. Progress payments are generally paid by way of "milestones", or stages, in the construction of the house, such as:
" the excavation stage,
" the piering stage,
" the foundations stage,
" the slab stage,
" the frame stage,
" the brickwork stage,
" the gyprocking and internal fit out stage and
" the installation of kitchen and white goods.
What sometimes happens is that the builder produces a progress payment schedule whereby the amounts to be paid for the work exceed the contract value of the work in all but the last progress payment. This is generally not apparent to the owners who have no experience in the relative value of stages of the building works. What then happens is that, towards the end of the job, the builder begins to lose interest in finishing as he knows that there is no more profit in the job for him. For example, there may be only $5,000.00 left to be paid but there may be $25,000.00 worth of work to do. The builder will often then cease work, particularly if there is no effective liquidated damages clause in the contract, and try to pressure the owners into agreeing to terminate the contract on the basis that he leaves them to complete the work and they do not pay him the last progress payment.
It is recommended that a special condition be inserted into the contract along the lines of : "The Contractor warrants that the Progress Payments set out herein equate to the value of the work done at that stage of the Building Works."
Matching progress payments with bank valuations
There is a further problem when Front End Loading results in the value of the work performed to a certain stage being less than the value ascribed to it in the schedule of payments. In those circumstances the finance provider such as a bank or building society is unlikely to pay an inflated progress claim, they will only pay the value of the work as assessed by their assessor. The builder will then receive less than the contractually agreed progress payment for that stage and, unless the home owner can cover the shortfall, the home owner will then be in breach of contract, which may have serious consequences.
It is recommended that a special condition be inserted into the contract to provide that where part or all of the contract price is to be provided by a third party finance provider with payments being based on the finance provider's valuation of the work, the builder will accept, as the progress payment for that stage, a sum representing the reasonable value as assessed by the finance provider. This is not unfair on the builder because he will get paid any shortfall at the end of the job with the final payment.
Exclusions
Sometimes the builder inserts a typed list of exclusions saying: "Those are my usual exclusions." Read them carefully. There have been times where the home owner expected that all the work the subject of the approved plans was to be done for the contract price, then, after contracting, found that major items such as retaining walls and services connections had been excluded by these "usual exclusions."
Liquidated Damages Clause
The proper function of a liquidated damages clause is to reimburse the homeowner for the cost of temporary accommodation and storage of effects if the builder fails to complete the works on time
In the recent case of Knott v Beechwood Homes (Home Building) [2012] NSWCTTT 393 (3 October 2012) the Consumer Trader and Tenancy Tribunal found that the builder had been guilty of delay under the contract. The applicant owner, who was paying for rental accommodation during the period of the delay, sought damages being that lost rental.
The builder relied upon a term of the home building contract which read as follows:
“53. Should the building works not be completed by the date for Practical Completion, then it is agreed that an amount of one dollar per day is an agreed pre-estimate of the owner’s general and liquidated damages. “
The owner asserted that the clause was unfair and that he did not understand its implications at the time he entered into the contract. That argument was not accepted by the Tribunal which applied the contract in strict accordance with its terms. It should be noted that there is a statutory warranty implied by section 18D of the Home Building Act which is as follows:
the work will be done with due diligence and within the time stipulated in the contract, or if no time stipulated, within a reasonable time;
and a further provision, section 18G which provides:
Warranties may not be excluded
A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.
Despite these provisions the Tribunal has consistently taken the view that such clauses should be allowed full force and effect according to their terms.
I strongly recommend that the contract be amended to provide that,
"Should the builder fail to complete the works within the time stipulated in the contract as provided for in section 18D, the owner shall become entitled to liquidated damages being interest on the contract sum at the rate provided by the Uniform Civil Procedure Act for unpaid monies until the works are practically completed, which money may be deducted by the owner from progress payments as they fall due and to the extent that such liquidated damages are unpaid, the contract price shall be reduced, and, to the extent that such liquidated damages exceed the balance of the contract sum payable, they shall be a debt recoverable by the owner against the builder."
Even if there is a liquidated damages clause, it may be deliberately drafted to be ineffective. For example the latest MBA BC4 contract provides for liquidated damages being payable to the homeowners all right, but it then says that the liquidated damages cannot be deducted until Practical Completion has been achieved.
If the final progress claim is a small one, which it usually is, that means there will be insufficient money to satisfy the Owner's rights to liquidated damages. That effectively deprives the homeowners of the benefits of the liquidated damages clause which gives the owners’ damages a fixed money value, so that they can be deducted from the contract sum before it is paid.
The practical effect of that is to deprive the homeowners of any benefit they could obtain from the liquidated damages clause
Rights of Termination for Excessive Delay
I am currently dealing with a number of home building contacts which are years late and where the builder only attends site when he feels like it. Needless to say, the liquidated damages have been fixed by the contracts as $1.00 per day. The current provisions of the HIA Standard Home Building Contract provides a notice of default may be served by the owner if there has been a substantial breach by the builder. Substantial Breach in that situation is defined as follows:
33.1 A substantial breach of this contract by the builder includes but is not limited to if the builder:
(a) has its licence cancelled;
(b) suspends the carrying out of the building works other than under Clause 32.
This causes a problem in that, where the builder has been guilty of delay, the owner must establish that the delay in question is a 'substantial breach'. The meaning of the term 'substantial breach' has not been judicially decided in this context but it is almost certain to mean a breach which would, at common law, constitute a repudiation justifying the other party ending the contract. It would seem that, in order to safely use this provision when the breach is that the builder has failed to proceed with due diligence, the owner must first allow the delay to extend to such lengths as would also constitute a repudiation at common law. That could be a very long delay necessary to raise the inference '..that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise..' Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd. [1985] HCA 14; (1985) 157 CLR 17, at page 32
In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd, Mason CJ said:
4. The difference between a contract which contains a stipulated day for performance of an essential term and a contract which, expressly or impliedly, requires performance within a reasonable time is important when the question is whether, on failure to perform within the time limited by the contract, the innocent party is entitled to rescind. In the former case, a right to rescind arises at law when the stipulated day passes; in the latter, that right does not necessarily arise when the reasonable time expires but only when repudiation is clearly to be inferred from the circumstances in which the delay occurs. Delay will amount to repudiation if the defaulting party "evinces an intention no longer to be bound by the contract ... or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way": Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, at pp 625 626; Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd. [1985] HCA 14; (1985) 157 CLR 17, at pp 33, 40. If the inference to be drawn from the circumstances is that the defaulting party intends to perform an essential promise after some minor delay, repudiation cannot be inferred; but if the inference is that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise, repudiation can be inferred. The inference is not lightly drawn: Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd., at p 32.
The advantage of the notice of default provisions in a case of delay is that the conduct giving rise to the delay can be brought to a head and the builder can be required to demonstrate due diligence within the following ten working days. Termination of a building contract must be done strictly in accordance with the terms of the contract. Every step of the ritual must be carried out exactly as the contract says it should. To do otherwise is tantamount to contractual suicide. The home building contracts generally provide for a notice of default whereby the aggrieved party notifies the other party that he or she (or it) is in default of the contract and that the contract may be terminated if the default is not remedied within the default period set out in the contract - usually ten business days.
A vexed question has been the level of detail required in such a notice and, where the notice complains of lack of due diligence in the builder, what level of activity over that ten business day period will be viewed as sufficient to remedy the breach. A decision of the Court of Appeal has helped to clarify what is a necessary and sufficient notice of default in this regard. That decision is Hometeam Constructions P/L v McCauley [2005] NSWCA 303. McColl AJ said that it was sufficient for the Notice of Default to simply assert, for example, that the builder had failed to proceed with the building works with due diligence. A reasonable recipient of the Notice of Default with knowledge of the history of the works would have had no difficulty in understanding that it was informing the appellant it had not been proceeding with the works with the diligence required by the Contract.
Further in Hometeam McColl AJ said that delay in progress during construction could amount to failure to perform the building works with due diligence if there was a failure to carry out a reasonable amount of work by a given time, measured by reference to all the work performed under the Contract or, in absolute terms, by reference to a lack of activity on the site over a significant period that could not be satisfactorily explained. Accordingly in order to establish that the Works, including the rectification work, had not been performed with due diligence, it was incumbent on the owner to call evidence to establish that, at the time the Notice of Default was served, the Works were seriously incomplete and there were no circumstances preventing the builder from having performed the Works at a more rapid rate.
Disclaimer: The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.
The home owners’ objectives are to have the project come in:
• ON TIME
• ON BUDGET
• IN ACCORDANCE WITH THE PLANS
• FREE OF DEFECTS
To achieve those four objectives the home owner will have to successfully negotiate the four phases of the home building project:
• BEFORE CONTRACTING
• NEGOTIATING THE CONTRACT
• DURING THE CONSTRUCTION PHASE OF THE CONTRACT
• AFTER THE CONTRACT WORKS ARE COMPLETED
BEFORE CONTRACTING
Do not enter into a contract too early.
In a recent matter the builder was proposing to enter into a contract with our client based on a set of plans it had prepared when there was no Development Application, no Construction Certificate, there were no engineering details, no hydraulic plan, no electrical details, no geotechnical report, no dilapidation report and the plans had not been approved by Council. What this means is that when the builder obtains the approvals and the plans, if there are any conditions that Council or the engineer require which necessitates a change or variation to the original plans, the builder will be able to claim for the additional cost of that extra work as a variation and will charge you for the cost of that work and a profit margin as well increasing the contract price. Often such plans are of the most vague kind, and the further detailing of them in to usable building drawings will give rise to additional claims for every new detail on the basis that “we did not have that in mind when we agreed to build this house for you.” This may cause the costs of the building works to blow out. Essentially the builder is trying to tie the owner down to a contractual arrangement while not really committing itself as to what is to be built or to the price.
One builder’s solution to these issues was a special condition which said:
This contract is subject to Development Application conditions of approval, Construction Certificate conditions and any further requirements as advised by any statutory or other authority on terms and conditions acceptable to both the builder and the owner;
To give the builder credit, this was an attempt to make the situation fairer but the words “acceptable to both the builder and the owner” really just makes the contract void for uncertainty. The problem also is that by the time the new price is set the home owners feel committed to the builder and usually go ahead at a price which is higher than they would have wanted to which means with the inevitable price increases which occur during the course of a building project, their budget will blow out.
Home owners should be advised to hold their horses and wait until the approved plans and specifications and the development approval and the other items referred to above can all be annexed to the home building contract and every page of them initialed. The idea that time may be saved in the building process by entering into a contract too early is an illusion. You can’t start until you get the building approvals. This is just an device to rush the home owners into committing themselves.
Exhibition Homes
If the home owners are desperate to contract early, perhaps seeking to secure a special discount price that the home builder is offering them, and they refuse to listen to you, you may be able to achieve some protection if the owners have seen an exhibition home or other houses built by the builder. It goes without saying that the owners should, if possible, examine an exhibition home or other examples of the work of the builder prior to deciding to engage him. If they find the exhibition home satisfactory and engage the builder on the strength of it they will naturally expect a home of a matching high standard.
Section 9 (3) of the Home Building Act 1989 provides:
9 Exhibition homes
(1) In this section, exhibition home means a dwelling made available for inspection to persons who are invited, expressly or
impliedly, to enter into a contract for the construction of a similar dwelling.
(2) A person who makes an exhibition home available for inspection or who advertises that an exhibition home is so
available is guilty of an offence if, at any time it is available for inspection, there is not prominently displayed at the home:
(a) a copy of the plans and specifications relating to its construction, and
(b) if the person is aware that persons are to be invited to enter into building contracts for the construction of similar
dwellings by use of a standard form of building contract, a copy of that form of contract.
Maximum penalty: 80 penalty units in the case of a corporation and 40 penalty units in any other case.
(3) If:
(a) a contract is entered into with the holder of a contractor licence for the construction of a dwelling that is similar to an
exhibition home, and
(b) the holder knows that it was entered into after the other party to the contract had inspected the home, and
(c) the contract in any way identifies the dwelling to be built by reference to the home,
the contract is to be taken to contain a provision that the dwelling will be constructed according to the same plans and
specifications, standards of workmanship and quality of materials as the exhibition home, except to the extent (if any) that the contract and its accompanying plans and specifications provide for any departure from them.
So if an owner enters into a home building contract with a licensed builder to build a home similar to the builder's exhibition home, and the license holder knows that it was entered into after the owner inspected the home, and the contract in any way identifies the dwelling to be built by reference to the exhibition home, then the contract is to be taken to contain a provision that the dwelling will be constructed according to the same plans and specifications, standards of workmanship and quality of materials as the exhibition home, except to the extent (if any) that the contract and its accompanying plans and specifications provide for any departure from them.
Some builders, perhaps to avoid the effects of this provision, will give a different name to the house model in the contract to that which the owners inspected. For example the contract will refer to a "Cholmondley", instead of what the owner inspected which was a "Beauchamp" (I hasten to add that I know of no home builders which use these names), and there are no examples of the "Cholmondley" built in Australia. This appears to be for the purpose of ensuring that there is no model in Australia which might be used for comparison.
The solution is to amend the contract to refer to the actual model inspected by the owners: “Unless this agreement expressly provides otherwise the house is to be constructed to the same plans, specifications, standards of workmanship and quality of materials as the builder's display home which the owners inspected at ..............(address)” This incorporates the all important terms as to quality, even though the plans may differ.
Pre contract planning and development approval services
The home owners usually first meet the building company’s sales person at the building company’s display home when they are about to purchase their building block. They ask the sales person if the builder will prepare a set of plans for them based on the display home. The sales person will usually then offer them a plan preparation agreement whereby for about $6,000.00 his company will prepare plans for their approval and then get the necessary approvals from the Local Government Authority for the plans. The agreement will usually say that the money the owners spend on the plan preparation will be deducted from the eventual contract price if they decide to go ahead with the building company as the builder. The home owners do not, as a general rule, obtain legal advice, even though the agreement has a lot of other terms which they do not really understand, because it seems a good deal. The home owners then sign the agreement and the building company goes ahead.
Various scenarios then arise:
The home owners are not happy with the plans produced.
The home owners are happy with the plans produced but the contract price the builder asks for to build the house is too high and the home owners know that they can get it done cheaper by another builder.
The home owners are not happy with the plans produced.If the home owners are not happy with the plans he produces, and often they are simply the result of some $200.00 worth of drafting done by a semi skilled draftsman employed in the builder’s office, they have a set of plans of no value to them and have spent $6,000.00. The unreasonable part of that sum may be recoverable in the Consumer Trader and Tenancy Tribunal but the home owners will have to spend the time and money required to do so.
If the home owners are happy with the plans the builder produces but not the contract price it asks to build the house
The home owners then ask the builder to match the price offered by another builder to do the work. It refuses to do so and it points out that the plan preparation agreement reserves the copyright in the plans exclusively to it. That is, it can prevent the home owners using another builder to build to those plans. If the home owners wish to proceed using another builder the builder will then offer to sell them a license to use the plans for, say, $15,000.00. The home owners may have provided the builder with all the sketches and the ideas but it now says that those ideas now belong to it. To sum up, even at this pre contract stage it is a good idea to get competent legal advice before home owners sign anything.
Watch out for people who offer to prepare plans and arrange for a builder at this stage.
At this stage the home owners my be approached by unlicensed people who offer to prepare plans and a budget and engage a builder for a lump sum fee. It is not advisable to deal with such people if only for the simple reason that engaging such an intermediary inevitably means an additional layer of cost and there is simply no guarantee that the plans prepared will be such that a builder can be found who will build them for the home owners’ budget price or in the desired time frame. Misunderstandings in that regard have caused home owners much distress in the past. Deal direct with a licensed builder who can provide you with a set of plans and a firm quote for the work set out in those plans at the same time.
Some Questions You Should Ask Before Entering Into A Home Building Contract
Are there any easements, rights of way, stock routes or RTA affectations which might affect what can be built and where?
Have you checked the site for reactive soil, fill, landslip potential, rocky outcrops requiring removal, watercourses and springs that might affect building works and for features such as cliffs or gullies that will affect access for builders or occupants? To prevent the builder claiming extra costs for unusual site conditions which an ordinary site inspection should have revealed to him, insert a term to the effect that:- "The builder is deemed to have visited the site before contracting and to have made himself aware of all site conditions perceivable by visual inspection."
Does the contract require the owner to provide the builder with all weather access to the land? If the builder has to provide this access it will be at the owner's expense and will be an additional charge. In the case of some sites this could be very costly. I recommend the insertion in the contract of a statement that:-"The builder has visited the site and warrants that all weather access of the type referred to will cost $................"
Are water, gas, electricity or sewage available to the site? Does the house have to be constructed to a certain level to enable gravity discharge to the sewer? Will the owner have to pay for headworks for the supply of any of these services?
What are the council's usual requirements for development approvals? Can the owner afford to meet them?
Does the building approval require any additional construction or works not included in the builder's quotation? Get the builder to amend the quotation and specifically include the additional work and give a cost for it. Annex the building approval to the contract.
Are the plans which are the basis of the quotation and the contract the approved plans? Are they are identified in the contract as being the contract plans?
Have the owners got the funds to pay for the works or are the funds guaranteed? Some contracts require that the builder be given proof that the owners have the funds before the builder is required to commence building. Failure to provide that proof may be a breach. Annex proof that the owner has the funds (e.g. copy of a letter from the finance provider) to the contract.
Is all the work that needs to be done clearly set out in the plans and specifications? If not ensure that the additional matters are referred to in the quotation. Annex the quotation to the contract.
Does the quotation exclude any necessary part of the works? Sometimes the builder omits to include necessary works in his quotation and then seeks to claim for them later as extras. Insert the following:-"Except where an express exclusion has been made herein, the Contract Price includes all matters that could be reasonably necessary for the completion of the works covered by the agreement and the plans."
Will the owners be residing in the premises whilst the building work is going on? Where the owners are to be in residence during construction or alterations most of the standard building contracts are not applicable since they contemplate the builder having exclusive possession of the site. For example, in most of the standard building contracts the owner's entry into occupation of any part of the premises releases the builder from his or her obligation to progress the works to practical completion. There are contracts specially designed for in residence construction, such as the Housing Industry Association Contract for Renovations and Additions, and these should be used, with appropriate modifications.
Does the builder hold the appropriate licence? Visit the Office of Fair Trading website to check that the builder's licence matches the name on the contract, matches the name on the certificate of insurance, entitles him or her to do the building work contemplated, and is current, how long he or she has been licensed, whether there has been any disciplinary action taken against him or her by the Office and whether there are any current complaints against him or her being investigated by the Office.
NEGOTIATING THE CONTRACT
The home owner will need help in negotiating the terms of the contract, even if the builder is using one of the standard form home building contracts. This is because:
• The home builder has entered into these contracts many times and knows how to protect his own interests. The home owner has probably never even seen a standard form home building contract before.
• The standard form home building contract is usually one prepared by the builder’s own association, such as the Master Builders Association or the Housing Industry Association and, naturally, has been drafted to suit the builder’s interests, not the interests of the home owners.
• Even if the standard form home building contract the builder is proposing to use is the Office of Fair Trading Contract, it can be
manipulated to unfairly favour the builder because of how the dotted lines of the contract are filled out and by the introduction of a few, apparently innocuous, special conditions
• If, on the other hand, the proposed contract form is the builder’s own proprietary standard form home building contract then the home owner will really need help as there are some extraordinarily unfair contracts currently being used by some builders.
• The home owner has a huge amount of money at stake and can't afford to have things go wrong.
The Standard Form Home Building Contracts
The Vulnerable Nature of Home Owners
Most home owners enter into home building contracts without legal advice despite the often huge amounts of money involved. When I have asked home owners who have later had to come to me for assistance why they entered into these contracts without obtaining legal advice, they has said such things such as: “Since the builder was not legally represented we did not feel we needed legal assistance ourselves, and after all, it was a Standard Form Contract!”
It seems an article of faith with home owners that if a building contract is a “Standard Form Contract” the contract will be perfectly fair and everything will be all right. This is so even where the “Standard Form Contracts” are the standard form contracts of the builder’s industry associations! This attitude has not changed even when the ACCC has been specifically empowered to take action against unfair terms in standard form contracts.
The homeowner’s delusion that they may safely enter into such contracts no doubt reflects the enormous success that such legislative expedients as the New South Wales Fair Trading Act and the Commonwealth Trade Practices Act and its successor the Australian Consumer Law have had over the past 40 years. Home owners just cannot believe that, in relation to having a house built, which is the largest consumer transaction of their lives, the law does not adequately protect them.
The Builder’s Own Proprietary Standard Form Home Building Contract
Home owners are even more at risk when they enter into the builder’s own home building contract. A builder’s “home made” home renovation contract with which was brought to me perfectly illustrated this problem. It was imposed on a young couple who later became clients of mine. By the time they came to see me they and their children had been sleeping on mattresses on the floor for some 18 months longer than the contract contemplated. The work was still incomplete and the builder went to the site only when he wished to do so. He claimed an extension of time for every day in which the weather bureau reports showed even the smallest amount of rain fell, even days when he was not on site and on days after the roof was on and rain would not have affected the progress of the work. He believed that the contract allowed him to do this. Inserted into the definitions was a definition of inclement weather which said that “inclement weather means any weather that, in the opinion of the builder, prevents the work being carried out in the usual manner.”. This was only one of many such clauses in the contract which gave an unfair advantage to the builder. Although the draftsman of the contract clearly not heard of the contra proferentum rule, these clauses still created a thicket of problems and dealing with them in the ordinary way with litigation was going to generate huge legal costs, costs totally beyond the means of the young couple in question. It would have been much easier to protect the home owners, and indeed the builder might not have “tried it on”, if the contract had not contained these clauses. In dealing with such matters I often wish that the clients had taken legal advice before contracting.
THINK OF THE MAJOR RISKS THAT ARISE IN A HOME BUILDING CONTRACT:
(a) the risk that the builder may have underestimated his costs and underpriced the job,
(b) the risk that the work may not be completed in the time provided for in the contract
(c) the risk that the work may be defective and require expensive rectification
(d) the risk that the work will not conform to the plans or specifications.
The question arises who is going to bear a given risk? The building contract acts as a formula for allocating those risks between the parties.
Contractual Risk Allocation
The golden rule of contractual risk allocation is that the party who should bear the risk of an event occurring is the party who is in the best position to avoid that event occurring
BASIC TYPES OF CONTRACTS USED IN HOME BUILDING
The two basic types of contract normally used in home building are lump sum contracts and cost plus contracts.
Lump Sum Contracts
A lump sum contract is an “ordinary” building contract in which the builder promises to produce a completed house to the owners for a fixed or lump sum. This does not mean that the contract price is never going to change, for example when the contract is varied and more or less work is done, or in circumstances where an item hard to estimate, such as the costs of excavation, is allocated a provisional allowance. In terms of risk allocation the most important virtue of a lump sum contract is that it mimimises the likelihood of a budget blow out for the owners because the builder bears the risk of cost increases in all but the provisional items.
Cost Plus Contracts
A Cost Plus contract is one where, under it, the parties agree that the builder is to be paid the cost of the work done plus a profit percentage. The contract is usually preceded by an "estimate" produced by the builder. In my experience this "estimate" is seldom, if ever, included in the contract. That "estimate" is usually a very low one. Often the builder tenders to do the work for a much higher fixed-price contract and persuades the owners to enter into the Cost Plus contract on the basis that "it will be much cheaper this way." In my experience it never turns out to be so.
Try to prevent your clients entering into Cost Plus Home Building Contracts. In every important aspect, the Cost Plus contracts breach the golden rule of contractual risk allocation. To illustrate this, Schedule 1 of the Master Builders Association Cost Plus Contract provides that among the costs which the builder is entitled to claim are:
o all wages and other entitlements payable to the builder's employees or payable by reason of such employment...
o the builder's own work....,
o costs of any services ....
o costs of all trade contractors.....
o cost of hired equipment ....
o cost for the use of plant and equipment belonging to the builder....
o the cost of correcting modifying or changing work already completed, which is changed by reason of a variation by the Owner, or which is defective for reasons other than due to materials provided by the Builder or the workmanship of the Builder.
o the cost of complying with any site specific issues such as safety and pollution and waste disposal......
o any other costs or expenses which the builder is liable for or incurs by reason of carrying out the work including insurance costs......
The essential thing to realise is that every one of these costs, could be greater or lesser according to the approach and conduct of the builder. The risk of these costs increasing will however not be borne by the builder under the cost pus contract. Indeed if the builder is careless and, as a result, these costs increase, the builder will be rewarded for his carelessness by an equivalent increase in his profit, as any increase in the cost of the works is going to increase what he is paid as a percentage of that cost. The structure of the contract is also almost an open invitation to fraud in that the builder can exaggerate the hours which he or his employees have spent on the job and unless the owners have someone observing the site at all times, it will be impossible to prove that the hours claimed were not spent on site. I have known of unscrupulous builders arranging for the labour on projects of their own to be entirely paid for by the owners of another site in this way. Even if the builder is not so unscrupulous, he is unlikely to be driving his workers as it is not to his commercial advantage to do so.
With respect to the builder's optimistic estimates of cost, Clause 3(d) of the Master Builders Association Cost Plus Contract provides that:
Contract Represents Entire Agreement
It is commonplace to find clauses such as this in Standard Form Home Building Contacts:
(d) Apart from any terms implied by Statute, the whole of the terms, conditions and warranties of this Contract are set out in the Contract, drawings and specifications (as per Schedule 3) and will not and are not in any way varied or affected by reference to any prior negotiations, stipulations or agreement, whether written or verbal.
What this means is that all the optimistic estimates of costs, and the things that the builder said about the ultimate cost of the works, are not part of the contract.
Limitation of liability
The builder will sometimes attempt to limit its liability for damages for breach of the contract to a sum that does not exceed the contract price:
Notwithstanding anything herein contained to the contrary the builder shall not be liable to the owner in respect of any claim whatsoever arising hereunder or out of the contract or in any way connected with the building works or the execution thereof in a sum in excess of the contract price. In any event the builder shall not be liable to the owner in any way whatsoever for any claim in respect of proceedings in respect of injury or damage to such of the owner’s fittings, finishings, fixtures or any other item, matter or thing which do not form part of the contract documents.
Should the builder construct a house that is so defective that it needs to be demolished and rebuilt it would most likely cost in excess of the contract price to rectify. The home owners should not allow their potential claim for damages against the builder to be capped at the contract price.
Watch Out for Provisional Sums
We have earlier mentioned that provisional sums are one area in which there can be cost increases even in a lump sum contract. Often the contract involves the performance of work for which the builder is unable, or unwilling, to fix a price. Sometimes this is because the works involve a need for rock breaking equipment during excavation or the need for piering down to bedrock when the ground will not support the works. In these circumstances an allowance called a "provisional sum" will be added to the contract price to provide for those works. That allowance will almost invariably be the builder's own estimate. The contracts provide, however, that if that allowance is inadequate, not only will the owner have to pay the additional costs of the work but he will also have to pay a percentage of the additional cost (usually 15%) to the builder to cover profit and overheads.
The reason that the use of provisional sums should be avoided is that, if too many items are made provisional, what you get is essentially a Cost Plus Contract. I have known builders to list, in a schedule of provisional sums, provisional allowances for everything such as:
o the initial survey,
o the excavation,
o the piering,
o the foundations,
o the slab,
o the frame,
o the brickwork,
o the gyprocking and internal fit out and
o the tiling.
That is they have made almost all the contract works into provisional items and thereby insulated themselves from any risk of their estimates being wrong. This is simply a device to change a Lump Sum Contract into a Cost Plus Contract so that the builder does not have to bear the risk that his estimates of the cost of the works are wrong.
Sometimes less scrupulous builders have, when competing for a building job, used this term to reduce the apparent contract price by underestimating the provisional items, knowing that the owner is obliged under the contract to pay the amount by which the costs have been underestimated and to pay the builder a percentage of the sum into the bargain. The owner is almost invariably relying on the builder's skill and judgement in such matters and the contract should contain a term requiring that the builder's estimates be reasonable estimates based on current costs.
Deemed Inspection of the Site.
Sometimes a builder might seek an increase in price because of site conditions which the builder should have made himself aware of before contracting by an inspection of the site. To avoid these problems a clause along the following lines is a good idea.
Before signing this agreement the contractor shall have inspected the site, its access and its surroundings and shall have:
(a) examined all information relevant to the risks and contingencies and other circumstances having an effect on this
agreement
and obtainable by making reasonable inquires; and
(b) examined all information made available in writing by the owner to the builder;
and have used that information in the estimation of the cost of provisional items.
It is suggested that a term along these lines be incorporated into all home building contracts.
Front End Loading
Another, related, way in which the contract may be used unfairly to oppress the owners is by the misuse of the progress payment schedule in clause 12. Progress payments are generally paid by way of "milestones", or stages, in the construction of the house, such as:
" the excavation stage,
" the piering stage,
" the foundations stage,
" the slab stage,
" the frame stage,
" the brickwork stage,
" the gyprocking and internal fit out stage and
" the installation of kitchen and white goods.
What sometimes happens is that the builder produces a progress payment schedule whereby the amounts to be paid for the work exceed the contract value of the work in all but the last progress payment. This is generally not apparent to the owners who have no experience in the relative value of stages of the building works. What then happens is that, towards the end of the job, the builder begins to lose interest in finishing as he knows that there is no more profit in the job for him. For example, there may be only $5,000.00 left to be paid but there may be $25,000.00 worth of work to do. The builder will often then cease work, particularly if there is no effective liquidated damages clause in the contract, and try to pressure the owners into agreeing to terminate the contract on the basis that he leaves them to complete the work and they do not pay him the last progress payment.
It is recommended that a special condition be inserted into the contract along the lines of : "The Contractor warrants that the Progress Payments set out herein equate to the value of the work done at that stage of the Building Works."
Matching progress payments with bank valuations
There is a further problem when Front End Loading results in the value of the work performed to a certain stage being less than the value ascribed to it in the schedule of payments. In those circumstances the finance provider such as a bank or building society is unlikely to pay an inflated progress claim, they will only pay the value of the work as assessed by their assessor. The builder will then receive less than the contractually agreed progress payment for that stage and, unless the home owner can cover the shortfall, the home owner will then be in breach of contract, which may have serious consequences.
It is recommended that a special condition be inserted into the contract to provide that where part or all of the contract price is to be provided by a third party finance provider with payments being based on the finance provider's valuation of the work, the builder will accept, as the progress payment for that stage, a sum representing the reasonable value as assessed by the finance provider. This is not unfair on the builder because he will get paid any shortfall at the end of the job with the final payment.
Exclusions
Sometimes the builder inserts a typed list of exclusions saying: "Those are my usual exclusions." Read them carefully. There have been times where the home owner expected that all the work the subject of the approved plans was to be done for the contract price, then, after contracting, found that major items such as retaining walls and services connections had been excluded by these "usual exclusions."
Liquidated Damages Clause
The proper function of a liquidated damages clause is to reimburse the homeowner for the cost of temporary accommodation and storage of effects if the builder fails to complete the works on time
In the recent case of Knott v Beechwood Homes (Home Building) [2012] NSWCTTT 393 (3 October 2012) the Consumer Trader and Tenancy Tribunal found that the builder had been guilty of delay under the contract. The applicant owner, who was paying for rental accommodation during the period of the delay, sought damages being that lost rental.
The builder relied upon a term of the home building contract which read as follows:
“53. Should the building works not be completed by the date for Practical Completion, then it is agreed that an amount of one dollar per day is an agreed pre-estimate of the owner’s general and liquidated damages. “
The owner asserted that the clause was unfair and that he did not understand its implications at the time he entered into the contract. That argument was not accepted by the Tribunal which applied the contract in strict accordance with its terms. It should be noted that there is a statutory warranty implied by section 18D of the Home Building Act which is as follows:
the work will be done with due diligence and within the time stipulated in the contract, or if no time stipulated, within a reasonable time;
and a further provision, section 18G which provides:
Warranties may not be excluded
A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.
Despite these provisions the Tribunal has consistently taken the view that such clauses should be allowed full force and effect according to their terms.
I strongly recommend that the contract be amended to provide that,
"Should the builder fail to complete the works within the time stipulated in the contract as provided for in section 18D, the owner shall become entitled to liquidated damages being interest on the contract sum at the rate provided by the Uniform Civil Procedure Act for unpaid monies until the works are practically completed, which money may be deducted by the owner from progress payments as they fall due and to the extent that such liquidated damages are unpaid, the contract price shall be reduced, and, to the extent that such liquidated damages exceed the balance of the contract sum payable, they shall be a debt recoverable by the owner against the builder."
Even if there is a liquidated damages clause, it may be deliberately drafted to be ineffective. For example the latest MBA BC4 contract provides for liquidated damages being payable to the homeowners all right, but it then says that the liquidated damages cannot be deducted until Practical Completion has been achieved.
If the final progress claim is a small one, which it usually is, that means there will be insufficient money to satisfy the Owner's rights to liquidated damages. That effectively deprives the homeowners of the benefits of the liquidated damages clause which gives the owners’ damages a fixed money value, so that they can be deducted from the contract sum before it is paid.
The practical effect of that is to deprive the homeowners of any benefit they could obtain from the liquidated damages clause
Rights of Termination for Excessive Delay
I am currently dealing with a number of home building contacts which are years late and where the builder only attends site when he feels like it. Needless to say, the liquidated damages have been fixed by the contracts as $1.00 per day. The current provisions of the HIA Standard Home Building Contract provides a notice of default may be served by the owner if there has been a substantial breach by the builder. Substantial Breach in that situation is defined as follows:
33.1 A substantial breach of this contract by the builder includes but is not limited to if the builder:
(a) has its licence cancelled;
(b) suspends the carrying out of the building works other than under Clause 32.
This causes a problem in that, where the builder has been guilty of delay, the owner must establish that the delay in question is a 'substantial breach'. The meaning of the term 'substantial breach' has not been judicially decided in this context but it is almost certain to mean a breach which would, at common law, constitute a repudiation justifying the other party ending the contract. It would seem that, in order to safely use this provision when the breach is that the builder has failed to proceed with due diligence, the owner must first allow the delay to extend to such lengths as would also constitute a repudiation at common law. That could be a very long delay necessary to raise the inference '..that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise..' Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd. [1985] HCA 14; (1985) 157 CLR 17, at page 32
In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd, Mason CJ said:
4. The difference between a contract which contains a stipulated day for performance of an essential term and a contract which, expressly or impliedly, requires performance within a reasonable time is important when the question is whether, on failure to perform within the time limited by the contract, the innocent party is entitled to rescind. In the former case, a right to rescind arises at law when the stipulated day passes; in the latter, that right does not necessarily arise when the reasonable time expires but only when repudiation is clearly to be inferred from the circumstances in which the delay occurs. Delay will amount to repudiation if the defaulting party "evinces an intention no longer to be bound by the contract ... or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way": Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, at pp 625 626; Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd. [1985] HCA 14; (1985) 157 CLR 17, at pp 33, 40. If the inference to be drawn from the circumstances is that the defaulting party intends to perform an essential promise after some minor delay, repudiation cannot be inferred; but if the inference is that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise, repudiation can be inferred. The inference is not lightly drawn: Progressive Mailing House Pty.Ltd. v. Tabali Pty.Ltd., at p 32.
The advantage of the notice of default provisions in a case of delay is that the conduct giving rise to the delay can be brought to a head and the builder can be required to demonstrate due diligence within the following ten working days. Termination of a building contract must be done strictly in accordance with the terms of the contract. Every step of the ritual must be carried out exactly as the contract says it should. To do otherwise is tantamount to contractual suicide. The home building contracts generally provide for a notice of default whereby the aggrieved party notifies the other party that he or she (or it) is in default of the contract and that the contract may be terminated if the default is not remedied within the default period set out in the contract - usually ten business days.
A vexed question has been the level of detail required in such a notice and, where the notice complains of lack of due diligence in the builder, what level of activity over that ten business day period will be viewed as sufficient to remedy the breach. A decision of the Court of Appeal has helped to clarify what is a necessary and sufficient notice of default in this regard. That decision is Hometeam Constructions P/L v McCauley [2005] NSWCA 303. McColl AJ said that it was sufficient for the Notice of Default to simply assert, for example, that the builder had failed to proceed with the building works with due diligence. A reasonable recipient of the Notice of Default with knowledge of the history of the works would have had no difficulty in understanding that it was informing the appellant it had not been proceeding with the works with the diligence required by the Contract.
Further in Hometeam McColl AJ said that delay in progress during construction could amount to failure to perform the building works with due diligence if there was a failure to carry out a reasonable amount of work by a given time, measured by reference to all the work performed under the Contract or, in absolute terms, by reference to a lack of activity on the site over a significant period that could not be satisfactorily explained. Accordingly in order to establish that the Works, including the rectification work, had not been performed with due diligence, it was incumbent on the owner to call evidence to establish that, at the time the Notice of Default was served, the Works were seriously incomplete and there were no circumstances preventing the builder from having performed the Works at a more rapid rate.
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