We have noticed an increase in builders seeking to either terminate or increase the contract sum for fixed lump sum building contracts.

It is no secret that the past few years have been challenging for builders, subcontractors and homeowners alike when embarking on new residential building work.

It has been commonplace for builders to offer fixed price building contracts for residential building work. While this practice was successful for a number of years, many builders are now finding that the profits from these jobs have been significantly eroded by delays due to labour shortages and increases in the cost of materials.

What are my rights?

Your rights under a contract are largely governed by the terms of the building contract, although you may also have rights under the general law or under legislation.

Many builders use the template residential building contracts prepared by Master Builders or the Housing Industry Association.

In particular, these contracts typically set out what both parties need to do before the works are commenced. This can include obtaining building approval, evidence that the homeowner in fact owns the land and evidence that the homeowner can pay for the work (or notice from a lender that it has provided loan approval for the work).

Right to terminate

Where a party does not strictly comply with these requirements, this may allow the other party to terminate because either the contract says they can terminate, or because the party has breached the contract.

That does not mean that a party can terminate the contract simply because the other party has not complied with the contract. Unless the contract states that a party can terminate the contract, the party will need to demonstrate that there has been a breach of the contract, and that the breach goes to the heart of the contract.

Even where there is a fundamental breach, there are circumstances in which a party may have waived their right to insist on compliance with the contract. For instance, if the builder tells the homeowner not to worry about providing a letter from the financier to confirm the loan approval, it would be difficult for the builder to later claim that the homeowner has breached the agreement by failing to provide the loan approval as the builder has likely waived the obligation on the homeowner to comply with this requirement.

Right to vary the contract sum

Some fixed sum building contracts allow the builder to increase the contract sum in certain circumstances. For residential building works, most states require the builder to provide the homeowner with warnings about the builder’s right to increase the contract sum. If the builder does not give proper warnings then the clause allowing the builder to increase the contract sum may be unenforceable.

The right to increase the contract sum has recently come under scrutiny by the Queensland District Court (you can see our previous article on this case here). This case illustrates that builders should exercise care when preparing fixed lump sum building contracts. In particular, if the builder wishes to include a clause entitling the builder to increase the contract sum in certain circumstances, care needs to be taken to ensure that this clause complies with the relevant home building legislation.

If you are a builder or homeowner with questions about termination of a home building contract or increasing the contract sum under a fixed lump sum home building contract, call Rose Litigation Lawyers on (07) 3211 2922 or (07) 5574 0011 to speak with an experienced building and construction lawyer.

The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive nor does it constitute legal advice, and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.