Increasing construction costs? Negotiate, don’t repudiate!

14 December 2022

Addinos Pty Ltd v OJ Pippin Homes Pty Ltd [2022] QDC 205 reiterates the principle of repudiation where one party demonstrates an intention to longer be bound by the contract. In this case, the builder’s termination of a building contract, without any lawful basis, due to significant price increases in the construction industry, evinced an intention to no longer be bound by the contract, being ordered to pay $159,169.69 together with interest and costs on an indemnity basis.

What happened?

Addinos Pty Ltd (Addinos), a property developer, entered a contract with OJ Pippin Homes Pty Ltd (OJ Pippin), a construction company, to construct six three story townhouses (Contract).

Addinos alleged that OJ Pippin repudiated the Contract on 17 March 2016 by sending an email attaching a letter which relevantly stated:

We write to advise you that OJ Pippin Homes Pty Ltd will be terminating the build contract…
The construction cost have increased significantly since the project was priced, almost 12 months ago. The building approval has been extremely lengthy and we no longer have the capacity to undertake the works within our production schedule.

This was followed by a text message referring to OJ Pippin’s inability to build the project as a result of costs ‘going through the roof’ and the loss of relevant staff.

On 23 June 2016, Addinos accepted OJ Pippin’s repudiation and engaged another builder to complete the contracted works. As at the time of termination, the demolition works were complete but the excavation and construction work had yet to commence.

Addinos claimed that as a result of the repudiation, it suffered loss and damage. This was claimed under various heads of damage which included amounts for increased construction costs, additional interest and bank fees resulting from the delays, and other miscellaneous damages.

In its defence, OJ Pippin pleaded, amongst other things, that Addinos had first repudiated the contract by its failure to obtain the approvals required for the works in a timely manner.

What did the Court find?

Rinaudo J found that OJ Pippin has no lawful basis to terminate the Contract and by its letter of 17 March 2016, OJ Pippin demonstrated its intention to no longer be bound by the Contract. Accordingly, His Honour held that OJ Pippin repudiated the Contract.

The Court accepted that OJ Pippin had no intention to carry on with the Contract because of issues solely related OJ Pippin, and not to any delay on the part of Addinos. In relation to OJ Pippin’s defence, His Honour found the evidence did not establish that Addinos refused to arrange the approvals or acted in a way which would demonstrate it had ceased or suspended the process of obtaining the approvals.

As a result of its repudiation, OJ Pippin was ordered to pay Addinos damages of $159,169.69, which included $85,656.25 in respect of the increased construction costs of construction and $323,423.15 in additional interest and bank costs arising from the delay caused by engaging a new builder.

Why is it important?

While the rights and obligations of contracting parties will be largely determined by the terms of the individual contract, this case succinctly confirms that cost increases do not entitle a party to terminate a contract, absent an express provision providing such a right.

What do you need to do?

This case demonstrates that it is unwise to communicate to the other party that you are unable to carry out your contracted obligations. Many contractors have been successful in negotiating outcomes with clients in light of the unprecedent cost increases and supply chain difficulties, however that process needs to be managed carefully to avoid any allegation of repudiation.

How can HWLE help you?

We are at the forefront of changes in the construction industry and our lawyers can provide tailored and commercial advice at all stages of a contract, including the negotiation, performance and termination stages.

This article was written by Colin Harris, Partner and Kelly Brook, Solicitor.

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