Defects and completion of construction contract stages

Standard residential construction contracts entitle a builder upon completion of a nominated stage defined in the contract to submit a payment claim.  If the stage payment claim is not paid, the builder has various options available, such as suspension of the building work, referral to mediation and ultimately, termination of the contract.  Before terminating a contract in reliance upon non-payment of a stage payment claim, it is imperative the stage relied upon has in fact been completed.  Termination of a contract midway through its performance has, for both parties, significant legal and financial implications which can quickly overshadow any initial dispute between them.

Case Example – Partington & Anor v Urquhart (No 2) [2018] QCATA 120

These issues are no better illustrated than Partington & Anor v Urquhart (No 2) [2018] QCATA 120.  This sorry saga commenced in August 2008 when the parties entered into a residential construction contract.

Under the contract the builder was entitled to claim 30% ($145,122.00) of the contract price upon achieving the enclosed stage.  On 20 April 2009 the builder submitted a stage progress claim for completion of the enclosed stage.  The homeowners asserted the enclosed stage had not been achieved, on grounds including but not limited to, there being numerous building defects that needed to be remedied.  The enclosed stage payment claim was not paid and the builder terminated the contract.

The dispute was first heard by QCAT in February 2013, was appealed to the QCAT Appeal Tribunal in 2015 and then appealed to the Court of Appeal in 2016, which remitted the matter back to the QCAT Appeal Tribunal for determination according to law.  One of the issues for consideration upon remission back to the Appeal Tribunal was whether in fact the enclosed stage had been achieved in 2009.

In considering this question, the Appeal Tribunal rejected the argument the doctrine of substantial performance applied.  The builder argued that while there may have been some defects, he had until practical completion to remedy any defects.  The Appeal Tribunal held in circumstances when there was no contractual entitlement to any set-off and where the achievement of the enclosed stage was a condition precedent for payment of the progress claim, the doctrine of substantial performance could not apply.

On the proper construction of the contract the question was whether defects, other than those of a minor or trivial nature or omission, precluded completion of the enclosed stage.  The Appeal Tribunal considered the contract had to be read such that minor defects and omissions did not preclude a progress stage from being completed, but anything more significant might.  The Appeal Tribunal rejected the submission the defects liability period should be seen as a safety net for all defective work, especially when substantial components of the relevant progress stage had to be totally redone.  The Appeal Tribunal concluded the nature and extent of the defective work identified by the evidence meant the enclosed stage had not been achieved.

Thus, the condition precedent for payment of the enclosed stage claim had not been satisfied as the works required to be completed had not been satisfactorily completed at the time the progress claim was made.  It followed the homeowners refusal to pay the enclosed stage claim was justified as the builder was not entitled to claim the enclosed stage.

In light of the above, the builder was not entitled to terminate the contract.

That said, the Appeal Tribunal went on to find the builder was entitled to a quantum meruit claim for the work performed up to the date of termination, the ascertained value of that claim being offset by the homeowners’ claims for rectification of the defective building work and final completion of the works under the contract.

The homeowners’ claims for other heads of damage such as rent, report costs and the like were either heavily discounted or determined to be costs of the proceedings in the event a costs order was made.

Thus, after a dispute extending over almost 9 years, the builder was liable to pay to the homeowners roughly $12,000 with there to be further legal argument about whether the builder was entitled to interest on his quantum meruit claim and then the costs of the parties in the proceedings.

Takeaways

Before terminating a contract mid-performance take legal advice and be sure your grounds in doing so are sound.  Always remain open to negotiate a settlement as litigation can be an expensive and risky last resort.

Links and further references

Cases

Partington & Anor v Urquhart (No 2) [2018] QCATA 120

Further information about construction law

If you need advice on defects and completion of construction contract stages, contact us for a confidential and obligation-free and discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.