Building and Construction Disputes

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Executive Summary

In the dynamic world of construction, where dreams are built brick by brick, there lurks an often-unseen adversary - building and construction disputes.

These disputes, whether they stem from contractual disagreements, construction delays, defects in workmanship, or payment issues, are not just common, but almost an inherent part of the construction industry. The complexity of construction projects, with their multitude of parties, intricate designs, and stringent timelines, can often be a breeding ground for such disputes.

The repercussions? They can be severe, leading to costly legal proceedings, project delays, and financial losses. The arena for these battles can range from litigation to arbitration or mediation, influenced by the construction contract’s terms, the dispute’s nature, and the parties’ willingness to negotiate.

For those navigating the challenging terrain of the construction industry, understanding the potential triggers and resolutions for these disputes is not just beneficial, but essential. It aids in not only preventing and managing disputes when they arise but also resolving them in a manner that is both time and cost-efficient. This understanding forms the cornerstone of successful project execution in the construction industry.

Whether you are a builder, contractor, developer, owner or investor, our building and construction lawyers can assist in all aspects to ensure an effective and efficient projects for all those involved, by reviewing a draft contract and providing advice or assisting you with your building and construction dispute and providing you with a tailored strategy to approach to resolve your matter.

Impact of COVID-19 on the Construction Industry

We have observed that the COVID-19 pandemic has had and continues to have a significant impact on the construction industry, leading to an increase in building and construction disputes. The pandemic had introduced new challenges such as government-mandated shutdowns, supply chain interruptions, labour shortages, and increased safety protocols. These factors led to project delays, changes in productivity, escalating labour and material costs, and increased overheads.

In Australia, the construction sector has faced lasting legacies from the pandemic. According to a survey by the Royal Institution of Chartered Surveyors (RICS), over 40% of professionals reported an increase in disputes since the onset of the COVID-19 crisis (as at 2021). This suggests that the pandemic has exerted further pressure on an already stressed industry, which has continued today.

At Odyssey Legal, our building and construction lawyers are well-equipped to navigate these complexities and provide strategic advice and robust representation to protect your interests in these challenging times, whether you are an owner of a residential property, an owner of a commercial property, a residential builder or contractor, a commercial builder or contract or any other form of contractor or subcontractor, developer, architect or engineer.

What is a building and construction dispute?

A building and construction dispute can occur under a domestic or commercial contract and can involve a variety of issues, including but not limited to:

1. Contractual Disagreements;
   

2. Defective or Incomplete Works;
   

3. Delay Claims;
   

4. Breaches of the Contract or Termination of the Contract;
   

5. Insurance claims;
   

6. Subcontractor charges;
   

7. Payment Disputes; and
   

8. Licensing and QBCC matters.

A domestic or commercial construction dispute may arise between a variety of parties, including:

1. a homeowner and a builder under a domestic building contract;
   

2. a homeowner and third parties, including architects, engineers, quantity surveyors, building certifiers, pest inspectors and suppliers or manufacturers of building materials;
   

3. a body corporate and a builder or contractor under a domestic or commercial building contract;
   

4. a developer and a contractor under a commercial building contract;
   

5. a principal and a contractor under a commercial building contract;
   

6. a contractor and a subcontractor under a subcontract agreement;

Within this segment, our building and construction lawyers will discuss possible avenues to address the issues or dispute.

Open Communication

In our experience, a substantial amount of disputes arose simply due to a lack of clear and consistent communication between the parties, leading to misunderstandings, disagreements and subsequently disputes.

In a lot of cases, simply having open and transparent communication could have resolved a lot of disputes, prior to them become more serious and requiring legal intervention.

If an issue or a dispute has arisen, the most cost-effective step is to raise it with the other party and attempt to work together to determine it can be resolved efficiently, to progress the build without delay.

If you are unable to resolve it through this approach, then alternative steps can be taken.

Alternative Dispute Resolution

Under a building contract (domestic/residential or commercial), whether it be a Housing Industry Association (HIA), Queensland Building and Construction Commission (QBCC) or a Master Builder’s contract, there will often be a clause within the contract that provides the parties with steps to deal with the dispute through alternative dispute resolution.

This can include:

1. Notice of Dispute – Under this provision, the party that has the issue or the dispute must write to other, particularising the dispute and the outcome sought. Upon receipt of the Notice, the parties will discuss and attempt to negotiate to resolve the issue or the dispute. The purpose of this provision is to ensure that all parties are aware of the issue and have an opportunity to attempt to resolve it before it escalates.
   

2. Mediation– This provision will require the parties to attend a mediation, which can be held by the QBCC or Master Builder’s (or an alternative dispute resolution centre) for the purposes of requiring the parties to negotiate to attempt to resolve the disputes. Often, there will be an independent third party (mediator or a member of the QBCC/ Master Builder’s Association) to facilitate frank and transparent communication and encourage the parties to consider an amicable outcome.
   

3. Arbitration – If the parties are unable to reach a resolution through the above avenues, then they may consider Arbitration. Arbitration involves engaging an independent third party (arbitrator) to review each parties’ respective arguments and evidence and making a binding determination on the issue or dispute.
   

These provisions are designed to allow the parties to try resolve any issue or dispute between them efficiently, and cost-effectively, prior to them escalating and requiring legal intervention.

Breaches of Contract

In circumstances where a party is in substantial breach of the building contract, the contract will contain provisions to allow you to address the breaches.

Notice to Remedy

In the first instance, the contract will require the non-breaching party a notice to the breaching party, specifying:

1. That the breaching party is substantial breach of the contract;
   

2. The particulars of the substantial breach/es of the contract;
   

3. That they require the breaching party to remedy the substantial breach/es within ten (10) business or workings (subject to the respective contract); and
   

4. That if the breaching party fails to remedy the substantial breach/es within the required timeframe, then the non-breaching party intends to terminate the contract.

What is a Substantial Breach?

Not every breach of a contract will amount to a substantial breach and therefore, legal advice should be obtained before issuing a notice to remedy breach or seeking to terminate a building contract.

In Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99, Dixon J said:

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

Generally, a building contract (residential and commercial) will provide some examples of a substantial breach of the contract, which can include:

Substantial Breach by Contractor

1. A failure to hold an appropriate QBCC licence to perform the works;
   

2. A failure to perform the works diligently and competently;
   

3. A failure to maintain the required insurance under the contract;
   

4. A failure to perform the works in compliance with the contract, including the plans and specifications;
   

5. A failure to perform the works to the Australian Standards and an unreasonable refusal or failure to replace or remedy any defective materials or defective work.
   

6. The contractor unreasonably suspends performance of the works or fails to maintain reasonable progress.
   

7. The contractor is otherwise in substantial breach of the contract. Substantial Breach by Owner (residential contract) or Principal (commercial contract)
   

8. A failure to pay a progress payment due under the contract;
   

9. The owner or principal unlawfully taking possession of the property (or site) before paying the contract price (as may be adjusted).
   

10. A failure to provide the contractor with uninterrupted access to the property (or site).
    

11. The owner or principal interfering with the contractor, their employees or other subcontractors.
    

12. The owner or principal is otherwise in substantial breach of the contract.

Notice to Terminate

Under most contracts (residential and commercial), they will allow a non-breaching party to issue a termination notice, if:

1. the breaching party has failed to comply with a notice to remedy breach and has otherwise failed to remedy the breach/es within the required timeframe; or
   

2. a party to the contract becomes bankrupt (for individuals or sole traders), enters into an arrangement with creditors (for individuals or companies), enters into administration or liquidation (for companies) or otherwise commits an act of bankruptcy or is insolvent.

Following the effects of COVID-19, we have seen various contractors be placed into liquidation due to the ever-increasing cost of materials and labour, as well as increase in delays of materials and labour. This has naturally resulted in the principal or owner’s ability to terminate the contract by written notice.

Additionally, under section 4 of Schedule 6 of the Queensland Building and Construction Commission Regulation 2018 (Qld), a fixed-price contract ends if:

1. the contract is validly terminated on the default of the licensed contractor; or
   

2. the licensed contractor dies; or
   

3. the licensed contractor is a company and the company no longer; or
   

4. both of the following apply:

a. the licensed contractor is bankrupt or insolvent, or takes advantage of the laws of bankruptcy as a debtor under the Bankruptcy Act 1966 (Cth) or similar law of a foreign jurisdiction; and

b. the licensed contractor’s licence is cancelled.

In circumstances where paragraphs 2 – 4 above arise (paragraph 4 is most common), this means that you do not have to issue a notice of termination, as the contract is automatically at an end. This has the effect of mitigating the risks of incorrectly terminating the contract.

Regarding residential building contracts, caution should be taken regarding the QBCC’s strict timeframes for making a claim, because if you do not make a claim within the required timeframes, then you will lose the opportunity to do so, and your claim will be rejected (incl. defective works or non-completion).

In our experience, there can be a decent period between a contractor becoming insolvent and their licence being suspended (sometimes a couple months). Therefore, consideration should be given to the timeframes to make the claim and whether a notice of termination should be issued, to allow you to make a claim prior to the timeframe expiring.

Terminating a residential or commercial building contract can be complex and should not be contemplated without first seeking legal advice.

This is because the unlawful termination of a building contract can be a substantial breach or the contract or repudiation (explained further below), allowing the other party to terminate the contract and commencing proceedings to recover damages.

Termination under Common Law

In addition to a parties’ ability to terminate on the above grounds, a building contract (residential and commercial) will often contain a provision that the terms of the contract do not prevent a party from exercising any other rights or remedies that may be available to them.

This is generally a reference to a non-breaching parties’ ability to terminate a contract under common law, which can be terminated in a few different ways, namely:

1. Breach of an essential or fundamental term of the contract:

The Court defined what constitutes a fundamental term in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd [1938] NSWStRp37 as:

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

Further, in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61, the High Court cited the Tramways case with approval, stating:

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

2. Serious breach of a non-essential term, or alternatively, various conduct amounting to a serious breach (or breaches) of a non-essential term:

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

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

The High Court in the Koompahtoo case endorsed the approach of classifying some contractual terms as ‘intermediate terms’. Intermediate terms are a sub-category of non-essential terms that may or may not, depending on the seriousness and consequences of the actual breach, give rise to a right to terminate.

3. Repudiation / Repudiatory Conduct:

The High Court in the Koompahtoo case said that repudiatory conduct is:

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

To put it simply, repudiation requires a party to indicate (by their words or their conduct) an absence of readiness and willingness to perform the contract, or an intention to no longer be bound by the contract, or to fulfil the contract in a manner substantially inconsistent with their obligations.

The High Court went on further to determine that the test for repudiation is an objective test (not subject), stating:

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

The High Court in Shevill v Builders Licensing Board [1982] HCA 47; 149 CLR 620; 56 ALJR 793; 42 ALR 305 confirmed that repudiation is to be seen as quite a ‘serious matter and is not to be lightly found.’ Therefore, it must be clear through conduct or communication that a party to an agreement has repudiated.

A recent example is a homeowner, without any reason, telling the contractor to leave the property and to not return and that they would get another contractor to perform the works. This repudiatory conduct may also amount to a breach of the contract or a common law breach.

Once a party to the contract has repudiated the contract, the innocent party can elect to:

1. Accept the repudiation, terminate the contract and commence proceedings for damages, or make a claim to QBCC (for residential building contracts); or
   

2. Elect to affirm the contract, requiring the parties to continue with the contract, at least until the actual breach occurs.

Any election must be clear and unequivocally, however, an election to affirm the contract may be constituted and unequivocal by reason of the innocent party’s conduct.

Risks

If you are considering terminating a residential or commercial building contract, you should be aware that there several risks involved, which can include:

1. The Court (or any administrative tribunal) may find that you did not have sufficient grounds to terminate contract, thereby the termination was unlawful, allowing the other party to seek damages against you.
   

2. Incorrectly terminating the contract may amount to repudiation and a substantial breach of the contract, allowing the other party to commence proceedings to seek damages against you.
   

3. The costs to be incurred in any legal proceedings, in addition to a costs order that may be made against you if you are unsuccessful (you pay the other parties costs).
   

4. Current building industry issues and the increased costs to engage a new contractor.
   

5. Delays in completion of the house or site.
   

6. Insolvency of the contractor, or alternatively, bankruptcy or insolvency of the owner or the principal.
   

7. The inherent risks of litigation.

Conclusion

In conclusion, our building and construction lawyers understand that building and construction disputes can be complex and fraught with risk. These disputes can lead to significant financial losses, project delays, and damaged relationships. Risks can stem from a variety of sources, including incorrectly terminating the contract, contractual disagreements, unforeseen site conditions, changes in scope, or non-compliance with building codes and standards.

Odyssey Legal is committed to navigating these challenges, providing strategic advice, and advocating for your interests. We strive to mitigate these risks and resolve disputes efficiently, allowing you to focus on what matters most - the successful completion of your project.