Case summary: Modscape Residential Pty Ltd v Adams (Building and Property)  VCAT 653
Termination or Repudiation – Is it a Zero Sum Game?
The recent decision of the Tribunal in Modscape Residential Pty Ltd v Adams  VCAT 653 serves as an example of what issues can arise if an owner ends a domestic building contract on the basis of defective works and late performance of the works and a builder seeks recovery of the final payment claim in litigation. In doing so, this case illustrates some of the risks associated with terminating a building contract. It also clarifies that the issue of whether a purported termination of a contract is valid or not is not the only key question that will be addressed in litigation: there is still a need to consider the extent to which works are defective or not and the cost of rectifying any defective works.
In 2013, Mr Adams and Mrs Ella-Adams (Owners) purchased a residential property in Brunswick. The Owners engaged Modscape Residential Pty Ltd (Builder) for the construction of their new home. On 18 February 2019, the Owners and the Builder signed a building contract being a HIA standard contract, ‘Victorian Factory Built / Transportable Homes Contract’ for a contract price of $1,960,135.00 (Contract) for the construction of a new modular home (Works). The modular home was primarily built at the Builder’s factory, with subsequent delivery and installation at site. The Contract provided for a construction period of 119 days from the date of delivery of steel to the builder’s factory. The Contract also provided that any delay in completion of the works would result in liquidated damages of $1,500.00 per week. The completion of the works was due to occur by 14 October 2019. However, by December 2019, the works remained incomplete, and the Builder had made no extension of time claims.
On 3 December 2019, the Builder provided the Owners with a notice of completion and its final payment claim ($203,242.44). On 6 December 2019, the parties inspected the property. On 8 December 2019, the Builder received a list of defective and incomplete items of work and began rectifying these issues.
On 20 January 2020, the Owners sent the Builder a notice alleging a substantial breach of Contract on the part of the Builder being defective works and a failure to complete the works with due expedition and without delay. The notice required the Builder to remedy these issues and show cause. The Builder’s lawyer responded to the notice and rejected the Owner’s allegations of substantial breach. In the response letter, the Builder emphasised the procedures that must be taken to bring the building project to completion and reaffirmed the Builder’s intention to continue to rectify any remaining defects under the defect rectification provisions of the Contract.
On 3 February 2020, the Owner purported to terminate the Contract, refused to pay the Builder’s final payment claim, changed the locks and took possession of the property.
Termination or Repudiation?
The Builder sued the Owners in the Tribunal and argued that the Owners’ termination and possession of the property was a repudiation of the Contract. The Builder, therefore, claimed damages in the sum of the final payment claim ($203,242.44) plus interest and legal costs.
The Owners rejected such a claim and argued that the Builder substantially breached the Contract and that the Owners validly terminated the Contract. The Owners claimed the expenses they had incurred to rectify defects and the estimated cost for the rectification of other allegedly defective works. The Owners also asserted that they were entitled to liquidated damages of $24,000.00 for delay.
The central issues in this case were:
- Whether the Contract was validly terminated by the Owners or repudiated by the Owners; and
- How should the Builder’s claim for the final payment claim be considered in the context of the Owners’ claim for a significant number of defective work items?
Did the builder substantially breach the contract?
For an act or collection of acts to amount to substantive breach of contract, such an act must be more than ephemeral or ‘de minis’ (i.e. minor) in character. The substantiveness of a breach can only be assessed by identifying the term(s) breached and evaluated by considering the nature and consequences of the breach.
The two primary grounds upon which the Owner asserted that the Builder substantially breached the contract on the grounds that it failed to:
- Proceed with the Works with due expedition resulting to delay (‘Ground One’); and
- Construct the Works in a proper and workmanlike manner in accordance with the plans and specification (‘Ground Two’).
Although the delay in the completion of the Works was acknowledged, the Contract had no provisions to the effect that the late completion of the Works constituted a substantial breach of the Contract. Rather, the Contract featured:
- A built-in damages mechanism requiring the builder to pay the owner $1,500 in liquidated damages for each week for which the completion of the works was delayed; and
- Other grounds which were (unlike delay) deemed to be a substantial breach of the Contract by the Builder.
Senior Member Farrelly emphasised that delay of itself is not evidence of the Builder choosing to ignore its obligations under the Contract. The Tribunal did not accept that the Builder was in substantial breach of the Contract due to the delay as the Tribunal held that the Builder was ‘endeavouring to complete the works as soon as practicable’. Senior Member Farrelly held that: ‘The lateness of the works may attract the contractual entitlement in respect of agreed delay damages, but it does not constitute a substantial breach of the contract on the part of the builder.’
The Contract included warranties provided by the Builder in favour of the Owners in respect to the quality of work including the implied warranties in section 8 of the Domestic Building Contacts Act 1995 (Vic). The Contract did not provide that a failure of the Builder to meet the statutory warranties constituted a substantive breach of the Contract. Senior Member Farrelly did not accept that the list of defective works amounted to a substantial breach of Contract on the part of the Builder. Defective works of themselves are not evidence that the Builder choose to ignore their obligations under the Contract. Significantly, in the Builder’s lawyer’s letter dated 31 January 2020, the Builder confirmed that it intended to continue to perform its obligations under the Contract including to rectify the remaining defects in the Works. (The analysis of the validity of this ground of alleged substantial breach of Contract may well have had a different outcome if the Builder refused to accept that the works were in fact defective and/or refused to rectify such defective works).
What were the consequences of the owner’s repudiation of the contract?
As neither of the above grounds of substantial breach of Contract were made out, the Tribunal held that the Owner did not have the right to terminate the Contract. It followed that the Owners act of taking possession of the property and changing the locks rendered it impossible for the Builder to complete the Works. Such actions amounted to a repudiation of the Contract on the part of the Owners. Moreover, these actions constituted a substantial breach of the Contract under clause 42. The Owners’ repudiation resulted in the Builder losing the opportunity to complete rectification of defective and incomplete work under the Contract.
How were damages assessed?
There is often a misconception that the ‘winner’ of the termination/repudiation issue takes all as this type of dispute is inherently a zero-sum game. This case illustrates that this is not always the case. It may be that the calculation of damages will set-off the damages claimed by both of the parties against one another.
Senior Member Farrelly used the Builder’s final claim as the starting point for assessing the damages it was entitled to. In other words, the sum of the damages to be awarded to the Builder was the financial position the Builder would have been in, but for, the owner’s repudiation of the Contract. The sum was the amount of the Builder’s final claim ($203,242.44) less:
- Any reasonable costs that were incurred by the Owners to complete the incomplete and defective Works (but assessed at the hard cost of doing so without any builder’s margin as the Builder would have rectified/completed these items on this basis); and
- The liquidated damages owed by the Builder to the Owners for the delay.
When assessing the reasonable costs the Builder would have incurred to rectify the defective works, Senior Member Farrelly referred to the estimated base cost of the relevant works as at 2020. This is because the building work would have been completed in 2020 but for the Owner’s repudiation of the Contract.
For all works that were originally the responsibility of the Builder but has been attended to by the Owners, the actual cost incurred by the Owners were considered at first instance, provided there were no evidence suggesting the Builder would have incurred a lesser cost. Ultimately, the reasonable cost for rectifying the defective works was calculated to be $218,324.04. This sum together with the allowance for liquidated damages for delay, $24,000.00, totalled a sum of $242,324.04. This sum was offset against the sum of the Builder’s final unpaid claim of $203,242.44. The Owners, therefore, had a net award of damages of $39,081.60 against the Builder. Overall, this was a pyrrhic victory for the Builder who was successful on the unlawful termination and repudiation argument, but the net result was a modest payment of damages by the Builder to the Owners for rectifying defective works.
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