(Make Sure) The Price is Right

We’ve all been stung by ‘hidden extras’ in contracts before, and nothing can blow a hole in a budget, or cause more fights, than arguing about costs, exclusions and inclusions.

With the Federal Government recently introducing a range of packages for first home buyers, new home construction, and large renovations, there has been a flurry of enquiries about contracts for purchasing land, and for construction.  Don’t let a fight about costs derail your contract!

Generally, a good, well-written contract will set out the 4 W’s – Who, What, When, and hoW much.

For building and construction contracts, this means clearly defining the parties (the ‘who’), the scope of work (the ‘what’), the dates for commencement and completion (the ‘when’), and the price (the ‘how much’).

A contract should clearly set out the scope of works, including all items of work included, and all items of work excluded, as well as provide a detailed price breakdown for the work.

However, even with the best contract, between parties with the best of intentions, disputes can happen, relationships can go bad, and contracts can be terminated.

What happens if a dispute arises? 

If a contract is disputed, the outcome will be greatly affected by whether or not your contract was properly drafted, and whether you understood your rights and obligations throughout the process.

A good example of this was brought to light by recent High Court changes to how and when parties can make ‘quantum meruit’ contract claims. We explain below.

Generally, a contract will only be terminated by Party A where Party B fundamentally breaches the contract, or where Party B ‘repudiates’ the contract. Party B repudiates a contract when by its words or conduct it demonstrates that it no longer intends to perform the contract, or that it is no longer capable of doing so. That can be by stating that directly, or by its conduct.

Examples include where a party refuses to continue performing the work under a contract, or refuses to pay a progress claim.

If Party B repudiates, Party A can ‘accept’ the repudiation, and terminate the contract.

If a contract is terminated by a contractor for the owner’s repudiation in that situation, the work might only be partially complete, with many items of work left incomplete, as well as disputes about what has been paid and what is left to pay.

If a contract does not properly set out how, when, and how often payment can be claimed (or set out the scope of work, the cost/price for work items, labour, materials, and profit, and the specific amounts payable for the items) and then the contract is terminated, often the contractor could make a ‘quantum meruit’ claim for work performed. ‘Quantum meruit’ is a legal term derived from Latin meaning ‘what one has earned’.

In practical terms, a quantum meruit claim will involve a Court determining the reasonable value of the work that was completed. For several reasons (often deliberate adjustments, or just poor drafting), there could be a scenario where the amount that might have been left to pay under the Contract, is less than the amount the Court determines is the reasonable value of that work performed.

In some circumstances, a contract might under- or over-estimate the cost of a particular item of work.

This would mean the contractor received more for items of work under a quantum meruit claim than the amount they might have received under the terms of the contract.

Case in Point

In the recent case of Mann v Paterson Constructions Pty Ltd [2019] HCA 32, the High Court ruled that a contractor can only recover under a quantum meruit claim where the contract doesn’t clearly give a right to claim payment at the date of termination date - if the contract provided a right to payment for an item of work/amount, then the contractor’s claim would be limited to the maximum amount provided for those items in the contract.

While this may seem like overly technical mumbo jumbo, the key take away is then when disputes happen (and let’s face it, they happen often) and the contract is terminated, the Court will likely enforce the specific terms of the contract, rather than allow a party to make a quantum meruit claim.

A well-structured, detailed contract which clearly sets out ‘the 4 W’s’ (Who, What, When, and hoW much), will give you much better certainty and peace of mind, and go a long way to minimising disputes.

Don’t risk your new home or your business, or your bottom line, particularly when there are enough challenges around with COVID-19.  Come and see the expert team at Preston Law to assist with your building and construction contracts, issues, and disputes.  We can help you at the planning and contract stage, but we also have a team of tenacious litigation lawyers standing by if disputes arise.

Please contact our building and construction lawyers if you would like to discuss your new building contract, the standard contracts your business uses, or the building dispute you’re having.

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