When a build goes wrong - termination, defects & delays

The decision in Kensington Homes (NSW) Pty Ltd v McMullen NSWCATCD 138 provides vital insights into the interpretation and application of the Home Building Act 1989 (NSW) (HB Act), contract repudiation and termination, defective works, and remedies and exposure related to delays on construction projects.

The contract and key dates

On 29 June 2020, Kensington Homes (NSW) Pty Ltd (Builder) entered into a residential building contract (Contract) with Mr McMullen (Owner) for the construction of a new home in Sydney.

The contract had a contract price of circa $610,000 and a 210-day construction period (ending on 5 November 2021).

On 17 December 2020 work began.

On 31 August 2021, the Owners' consultant identified construction issues, including a slab 1.42m higher than specified, visible concrete piers and a damaged termite barrier.

On 8 December 2021, the Owners lodged a complaint with NSW Fair Trading.

On 7 January 2022, the Owners asked the Builder to stop work. They then instructed the Builder to resume on 13 January 2022.

On 24 January 2022, the parties met to discuss issues, including floor height, piers, termite barrier damage and septic concerns.

On 31 January 2022, the Builder revised the completion date to 9 May 2022.

On 4 May 2022, the Builder revised the completion date to 19 June 2022.

On 11 May 2022, painting work began.

On 15 June 2022, the builder notified of a further revised completion date of 1 July 2022.

On 17 June 2022, the Builder issued a Notice of Dispute, proposing a revised completion date of 7 July 2022.

On 4 August 2022, the Owners terminated the Contract, alleging the Builder repudiated the contract (or demonstrated an intention to not be bound by the Contract), which the Builder disputed as being premature and unlawful.

The Builder objected, saying that it did not repudiate, that the Owners’ attempt to terminate was itself repudiatory, and the Builder sought to terminate the contract itself.

On 16 November 2022, the Builder initiated proceedings in the NSW Civil and Administrative Tribunal (Tribunal), seeking $68,714.86 in damages for loss of profit and later amending the claim to $197,372.81 in restitution.

The Owners filed a cross-claim, asserting they validly terminated the Contract due to the Builder’s repudiation and they sought damages for, amongst other things, defective and incomplete works, delays and mistaken payments.

Key legal issues

The Tribunal was required to address several key legal issues, including:

• whether the Owners lawfully terminated the contract or whether their termination constituted a repudiation;

• whether the Builder was entitled to damages for loss of profit or restitution damages;

• the extent of defective and incomplete works and the appropriate remedies; and

• whether the Owners were entitled to delay damages under the contract.

Termination and repudiation

The Tribunal considered the relevant principles surrounding termination. Generally speaking, rights to terminate a contract are available:

• if a party breaches an essential (fundamental) term of the contract (an essential or fundamental term is one which is so fundamental, goes to the root of the contract, and the parties always envisaged would justify termination if breached);

• if there is a sufficiently serious breach of an intermediate term; or

• if a party evinces a clear intention no longer to be bound by the contract (ie. repudiation).

In respect of whether a party has repudiated a contract:

• it is determined objectively, based on conduct indicating an unwillingness or inability to perform, or performance only in a manner substantially inconsistent with obligations under the contract; and

• it does not depend on inquiries into the subjective state of mind, but rather objective conduct of the relevant party.

The Tribunal found that:

• the Builder failed to complete the Works within the 210-day Construction Period stipulated in the Contract, resulting in substantial delay beyond the contractual date for completion;

• the Builder did not perform the Works with due diligence, breaching the statutory warranties (contained in section 18B of the Home Building Act 1989 (NSW) and the Contract terms, which constituted repudiatory conduct;

• the Builder failed to provide any satisfactory explanation for the delay (some 273 days beyond the Construction Period), including proper substantiation of assertions that COVID-19 delayed the works and other circumstances, despite opportunities under the Contract to do so; and

• the Builder’s failures were not just limited to delay, but included deficiencies in addressing complaints and documented issues with workmanship and compliance.

The Tribunal found that the Owners lawfully terminated the Contract by accepting the Builder’s repudiation, and that they were entitled to claim damages for defective and incomplete works as the party who lawfully terminated the Contract.

The Builder’s claim for damages was dismissed, as the Tribunal found the Owners did not repudiate the Contract.

Defect rectification

The Tribunal also considered the relevant principles surrounding allegations of defects and defect rectification.

In particular:

• an order for rectification is not automatic once a defect is found - the Tribunal must be satisfied the proposed scope is reasonable in the circumstances;

• the key test is proportionality - rectification will be refused if it is out of all proportion to the benefit obtained, even where there is a technical breach;

• rectification must restore the contractual position, not deliver a superior outcome. Therefore, scope that goes beyond the original bargain amounts to betterment and will not be allowed; and

• speculative future risk or theoretical concerns are insufficient to justify major rectification where no present failure is demonstrated.

The Tribunal found that:

• the Builder breached statutory warranties under section 18B(1)(a) of the Home Building Act (which provides a guarantee that the work will be done with due care and skill and in accordance with the plans and specifications set out in the contract) by failing to construct the dwelling in accordance with certified plans and specifications;

• the Tribunal determined that the slab was defective due to its construction approximately 1.4m higher than the finished floor levels specified in the architectural drawings;

• the Tribunal also said that the expert evidence confirmed that the slab was structurally adequate and performing well, and therefore no rectification was deemed necessary; and

• for other defective items, such as the pantry wall, external cladding, insulation, and termite barrier, the Tribunal accepted the scope of works and costings provided by the Owners' expert as reasonable and proportionate to the contractual objectives.

Section 48MA of the Home Building Act was also considered by the Tribunal, which prescribes the rectification of defective work by the responsible party as the "preferred outcome", over an order for the payment of money. However, the Tribunal exercised its discretion to depart from this principle due to the Builder's failure to complete the works within the contractual period, the fraught relations between the parties, and the likelihood of further disputes if rectification order was issued. 

Delay damages

The Tribunal also determined that the Owners’ entitlement to delay damages under the Contract accrued from the day after the end of the Construction Period until the lawful termination of the contract.

This yielded a total delay damages amount of $1,365.00 (particularly given the relatively low daily rate of delay damages stipulated in this specific Contract).

Key takeaways

The Tribunal’s decision in this case provides some key lessons for parties to construction contracts, namely:

• builders should adhere to contractual terms regarding timing, particularly in respect of procedures to claim extensions of time in a timely and valid manner;

• parties should review, consider and if appropriate, negotiate the circumstances that give a builder the right to an extension of time;

• builders should properly document and communicate claims regarding delays. This lack of documentation ultimately worked against the Builder in this case, and therefore the Tribunal was unable to accepts its claims regarding the reasons for the delays and the associated costs;

• builders should ensure effective contract administration, which includes:

  • maintaining detailed records of all communications, variations, and delays and providing those records together with any contractual claims;

  • ensuring that all variations are documented and (if required), approved in writing;

  • keeping accurate and up-to-date project schedules/programmes; and

  • communicating the relevant records with the extension of time notice.

While rectification is preferred under section 48MA of the Home Building Act, monetary damages may be awarded if rectification is impractical due to delays, defects, or strained relations.

If you require any assistance in respect of termination, potential repudiation, defects or delays in construction projects, please do not hesitate to contact Anish Wilson, Special Counsel, or Isaac Choice, Lawyer.

Authors: Anish Wilson & Isaac Choice

 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.