Contract Basics for the Home Building Industry
April 27, 2015By Owen Hodge Lawyers
Regrettably, many owner, builders and subcontractors are failing to meet their contractual obligations either because they do not appreciate how contracts regulate their relationship with each other or they do not understand how the law governs their circumstances and the general effect which flows from a breach of contract by the other party. In this blog, we highlight some basic contract essentials relating to home building industry contracts.
Are Building Contracts Unique?
Building contracts possess characteristics which are common to other commercial or private contracts. They require offer, acceptance of the offer, consideration (the price), and an intention to create a legal relationship. There is no absolute rule that contracts must be in writing. However, it would be very unwise to have a building contract other than in writing. In fact in New South Wales, by virtue of the Home Building Act 1989 (HBA), all residential building work worth over $5,000 requires a written contract.
What should Building Contracts Include?
Standard home building contracts frequently used in New South Wales are:
the Housing Industry Association Cost Plus Contract;
the Master Builders Association CPC Residential Cost Plus Contract;
the Office of Fair Trading Home-Building Contract;
the Master Builders Association BC 4;
the Housing Industry Association Plain English Contract; or
the Housing Industry Association Contract for Renovations and Additions.
These contracts are all designed for small scale building projects where there is no supervising architect. Where there is a supervising architect a contract specially drafted by the Royal Australian Institute of Architects should be used.
A common feature in all the above mentioned home building contracts is a set of clauses that are regarded as 'basic and essential'. These include clauses on:
Scope of the works;
A realistic start and finish date with a time schedule for milestones;
Agreed Payment (Contract Price) and Terms of Payment;
Deposit Amount – For example, the limit is 10% for work costing $20,000 or less or 5% for work costing more than $20,000;
Contractor Licensing Information;
Materials to be used;
Which sub-contractors (if any) to be appointed;
A right to access premises whilst it is under construction (subject to safety);
Home Warranty Insurance – A contractor must have a policy of home warranty insurance under the HBA and provide a certificate of insurance before receiving any money under the contract (including a deposit) or before doing any work for more than 20,000;
Warranties – Statutory warranties dictate that works must be fit for purpose and that works must be built in accordance with the plans and specifications. Warranties also dictate that the works must be carried out in accordance with all relevant legislation and rules and the Building Code of Australia;
Liability capping where owners can sue builders and builders can sue subcontractors for a period of 10 years from the date upon which the building surveyor issues either an occupancy permit or a certificate of final inspection;
When termination is possible;
When compensations or damages become payable;
Appropriate alternative dispute resolution provisions in order to facilitate an orderly resolution of the dispute and the uninterrupted continuation of the project; and
Provision for a 5-days cooling off period after receiving a copy of the signed contract with the builder.
What can go wrong in Building Contracts?
Even with flawless drafting and a watertight agreement, there is no guarantee that a project will run smoothly and proceed to completion on time and on budget. This is because in most cases it is impossible to predict with any certainty the events which are likely to occur throughout the course of the building works. Costs and delays may be incurred by the following:
Regulatory consents; development applications and permissions;
Unavailability of building products and materials;
Delay in delivering building materials;
Lack of coordination of the different trades;
Weather interruptions or poor weather conditions; or
The introduction of variations (by either party) to the contract during the course of the project which can add costs, delay the project, or both.
Most modern forms of building contracts are framed broadly enough to cope with contingencies and there is usually a well-established process which is followed in the event that one or more of these takes place. Often the nature of the contingency will dictate where the cost will fall. For example, delays attributed to the owner's fault (example by introducing vast variations) will usually be at the owner's cost.
When Building Contracts go wrong
In any home building project, there are going to be risks.
The most common of these include:
Risk that the builder may have underestimated his costs and underpriced the job;
Risk that the work may not be completed in the time provided for in the contract;
Risk that the work may be defective and require expensive rectification; or
Risk that the work will not conform to the plans or specifications.
Who then is going to bear a given risk? The building contract acts as a formula for allocating a risk between the parties. The general rule of thumb of contractual risk allocation is that the party who is in the best position to avoid the risk event from occurring is the party who should bear the risk if it occurs.
Fundamental Breaches versus Breaches of Warranties
When faced with what appears to be a breach of contract by another party, one first needs to assess whether the other party's conduct is in truth a breach of an essential term of the contract (breach of a condition) entitling the party to terminate the contract or whether it is a breach of a lesser kind (sometimes called a breach of warranty) entitling the innocent party to sue for damages while keeping the contract intact.
This assessment is critical because a party who mistakenly believes a breach to be a fundamental breach and purports to terminate the contract may later be held by the court to have wrongly repudiated the contract entitling the other party to terminate. This puts the initially aggrieved party in the unfortunate position of being held liable for breach of a fundamental term and usually results in liability for payment of damages.
Likewise, a party to a contract faced with a fundamental breach by another party who either does not recognize that fact or who continues to perform the contract or who equivocates in his response to the breach, may later be held to have affirmed the contract and waived his right to terminate.
The law in this area is complex and several Australian cases have discussed this dualistic classification of terms into 'conditions' and 'warranties'. If in doubt as to whether a contract has been fundamentally breached or otherwise, it is best to contact your lawyer to guide you on your right course of action.
It is a tragic reality that many building contracts end up as disputes simply because parties have different views on what was agreed upon or because they have not clearly understood what they have signed up to.
At Owen Hodge Lawyers, we meet parties at the end of their contractual relationships and we understand that most 'failures' can be avoided or the damages and risks minimised if only parties clearly understand their contractual obligations. Whether you are an owner, a builder or a subcontractor, do contact our Property Development Lawyers at 1800 770 780 or via email at ohl@owenhodge.com.au for a consultation, so that we can help you understand your building contracts better.