The building and construction industry is facing increasing costs, and shortages of materials and trade supplies, leaving many building companies struggling to sustain their operations. Homeowners are often left in a disadvantaged position as a result.
When builders go bust, it is important that homeowners take appropriate steps to ensure completion of the construction of their home, including by lawfully terminating their building contract and contacting the Queensland Building and Construction Commission (“QBCC”).
This article discusses the risks involved in taking the wrong steps after the building company engaged to construct your home goes into liquidation or advises it will soon be doing so. However, this article does not discuss circumstances where a builder is placed into bankruptcy.
Securing your contractual rights
Standard HIA or Master Builders contracts often include a clause allowing the homeowner to issue the builder a notice to remedy breach (a “Notice to Remedy Breach”). This notice requires the builder to remedy the breach or breaches within a set timeframe, with the homeowner stating their intention to terminate the contract if the breach or breaches are not resolved within that period.
If the builder informs the homeowner of their insolvency and inability to complete the remaining work, it is crucial to seek legal advice before taking any action under the contract, including issuing a Notice to Remedy Breach, as this may amount to a repudiation depending on the circumstances.
A ‘repudiation’ occurs where one party engages in conduct which ‘evinces an intention’ to no longer be bound by the contract or to fulfil it only in a manner which is substantially inconsistent with the party’s obligations.
If the homeowner takes steps to terminate the contract, such as issuing a Notice to Remedy Breach, and the builder is later found to have not been in breach of the contract at the relevant time, the homeowner may have repudiated the contract. This is because, by issuing a Notice to Remedy Breach (stating the homeowner’s intention to terminate the contract if the relevant breaches are not remedied), the homeowner has likely evinced its intention to no longer be bound by the contract.
Should the homeowner repudiate the contract, the builder will be entitled to claim damages from the homeowner (which may be substantial) in connection with the repudiation.
Equally, where the builder informs the homeowner of its insolvency and inability to complete the remaining works, the builder has likely repudiated the contract because it suggests the builder no longer intends to be bound by the contract.
There can also be ancillary breaches of the contract in circumstances where the builder advises the homeowner of its insolvency. These include the builder unlawfully suspending the works, the builder’s QBCC license being cancelled, and the builder indicating it will no longer perform the balance of the works, which may amount to a ‘substantial breach’ of the contract.
Some standard form building contracts define a substantial breach of the contract as “a party’s failure or refusal to perform a substantial obligation under the contract (such as, for example, the owner’s failure to make payment on time).” The Queensland Civil and Administrative Tribunal has held that a substantial breach “requires that the conduct in breach be of real or actual significance” with respect to the contract1.
Where there has been a significant delay in the progress of the works, followed by the builder’s advice that it is insolvent and will no longer be performing the remaining works, it is possible that the builder’s conduct amounts to a substantial breach of the contract.
If your builder indicates it is going into liquidation (or is insolvent) and will be unable to perform the balance of the works under your building contract, it is important to obtain advice prior to taking any steps to terminate the contract because of the risk that you may unwittingly repudiate your contract with the builder.
Obtaining assistance from QBCC
The QBCC home warranty scheme is designed to provide protection to homeowners in the case of certain defective or incomplete building works (the “Warranty Scheme”). The maximum cover under the scheme is $200,000, and if a premium is paid within 30 business days of the contract being signed, the maximum cover is extended to $300,000.
The Warranty Scheme provides different levels of cover depending on whether:
- the contract was ended before the works commenced;
- the contract was ended after the works commenced but prior to completion of the works; or
- the works are defective.
The contract is considered to have ended if:
- the builder is bankrupt or insolvent and the Builder’s licence is cancelled;
- the contract is validly terminated because of the default of the Builder;
- the builder dies; or
- the builder is a company, and that company no longer exists.
Importantly, in the case of a builder’s bankruptcy or insolvency, the QBCC has the authority to cancel or suspend a builder’s QBCC licence. Where the building company goes into liquidation and has its QBCC licence cancelled, the contract is deemed to have ended for the purposes of the Warranty Scheme and you may make a claim for assistance to the QBCC.
If the building company has advised it is going into liquidation (rather than it actually being in liquidation), taking steps to lawfully terminate the contract might be required (if possible) instead of waiting for the building company to go into liquidation and have its QBCC licence cancelled. This will ensure that the QBCC process can be initiated earlier, and you may see completion of your build sooner.
There are strict time limitations that apply to making claims under the Warranty Scheme. Assistance will only be provided in respect of works which have not commenced or are incomplete if the contract ends within 2 years after the date that the works started under the contract, and a claim for assistance is made within 3 months after the day the contract ends. If the appropriate action is not taken within the above timeframes, any rights that homeowners might otherwise have had under the Warranty Scheme could be lost.
It is important to note that the above is not an exhaustive list of circumstances in which the Warranty Scheme will apply or the timeframes applicable to making certain claims.
Accordingly, homeowners should consult a solicitor as soon as possible if they think their building contract has ended or is about to end (for the purposes of the Warranty Scheme or otherwise).
Homeowners facing the actual or impending insolvency of their builder should obtain legal advice immediately and prior to taking any steps.
If you are concerned about your builder’s ability to complete your build or have been advised that the builder is insolvent or going into liquidation, contact the team at Sajen Legal to discuss how we can assist.
1 Allen & Taylor v Queensland Building and Construction Commission [2020] QCAT 63 at [36].
Tagged in: act of insolvency, bankruptcy, building contract, contract termination, QBCC, Warranty Scheme