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Avoiding Disputes – The Essential Guide for Builders in Victoria

(Domestic Building Contracts within the jurisdiction of Victoria)

Undergoing a major project like domestic building works in the form of building a house, renovating, repairing etc… can be highly stressful for both Builder and client, causing disputes to arise. There are simple steps to take which may significantly minimise the chances of you encountering conflict when undergoing domestic building works. They are as follows;

1. Recording any variations:
Putting variations in writing is crucial and essential. If they are not written down, they do not compromise terms of the contract, which can mean the builder does not get paid for them. Ensure that you put them in writing, confirm them with the owner and get them signed by the owner, to indicate that the variations are now a term of the contract, approved by both contracting parties. Recording any changes is always a good practice, and one of the only ways to ensure your security in case of dispute.

Some rules to keep in mind include:

  • In the case of any variations, the owner must inform the builder. If the variation in question is reasonable within its context, does not require alteration of permits, does not delay works and does raise the cost of the contract more than 2%, then the builder is obligated to carry out the variation in question.
  • In the case of the variation increasing the cost of the contract more than 2%, it is required the builder record this variation, and add it to the Domestic Building Contract, explaining all details in relation to the variation and the its impact on the cost of the contract and the scheduled date of completion as per the express terms of the contract.
  • If the builder refuses to conduct a variation due to the cost being too high or for any other reason, they MUST advise the owner and explain why this cannot be reasonably done. This is a good practice as the builder and owner can negotiate an alternative arrangement and avoid future dispute.
  • Any variation to the contract must first be approved by the owner.

 

Builders should keep in mind that not recording variations (written proof) means that they cannot then claim for that specific variation. The owner need not pay for the variation in certain circumstances (perhaps if the variation was a result of the builder’s negligence). This is only in exceptional circumstances, and the owner is required to prove this.

In some circumstances, the owner may be reluctant to pay for the variation, resulting in arguments and disputing. To avoid this, it is essential that variations get approved by the owner in writing. If approved, it is unlikely they will be hesitant to pay. This must be done prior to commencement of any works, so that if the owner does not approve, the work won’t be carried out. Documenting ALL variations is of the utmost importance when avoiding disputes. If properly documented and approved by the Owner, the Builder is then enabled to increase the costs reasonably and the timeframe stated in the contract. This can be done properly and honestly.

Owners are likely to debate:

  • That the said variation was a term of contract, not a variation.
  • The work was carried out without their knowledge, hence they are not liable, as it was the builder’s mistake.
  • The variation was only necessary because of defects caused by the Builder’s negligence.

 

2. Advanced Payments are illegal.

It is important to remember that asking the owner for payments in advance is an illegal practice and can land you, the Builder, in serious trouble.

Apart from a deposit, advanced payments are not permitted by law. Builders are only permitted to ask for payment of a certain percentage of the overall contract price.

The schedule within the Domestic Building Contracts Act 1995 (VIC) should be consulted when deciphering what the appropriate percentage is.

Payment can also be in accordance with the progress of the building works.

Based on the Contract in question, it is possible for both owner and builder to agree to use different methods to decide what percentage is applicable to each stage of work as they go. This means it is possible for both parties to contract out of the requirements of the abovementioned act. It must be acknowledged by the owner that this is what is occurring, and they are signing away their right as per the usual method.

Builders are only permitted to claim for payment once the particular stage is complete. They may only claim for the sum stipulated in the Domestic Building Contract, save for variations that may incur additional costs.

There may be confusion about when a stage is actually complete. Some stages include:
– base stage
– lock-up stage
– fixing stage
– completion

3. What happens when you need more time: 

Delay to completion is one of the most significant issue causing disputes amongst owners and builders. When more time is required, you must provide the owner with Extension of Time Requests, in written form, so this can later be used as proof/ security for the Builder. This will protect you from liquidated damages which the owner will be able to claim if they do not receive adequate notification (only if allowed as per Domestic Building Contract). The possibility of the owner withholding that sum from the final payment, or next stage of payment, is very likely.

Builders are granted the power to reduce the owners right to claim for delays if:
– The reason for delay was not within the builder’s control, e.g. weather, suspension of works, lack of materials/ supply, delays stemming from the owner.
– the delay was caused by the owner not doing something on time, such as, result of variation, not providing specifications on time etc…

In the case of the owner not responding to a request for an extension of time, it will be assumed the owner has been provided with it, and is aware. The owner may respond to the request, and dispute it in writing. They must provide reasons as to why they want to reject the request.

If the owner rejects the extension of time request, and a dispute arises, the builder may still be granted a reasonable extension of time for completion of the domestic building works.

Alternatively, damages for delay may be claimed at the next progress payment stage by the owner, if the delays caused were unreasonable.

4. Seeking legal advice before serving notices (Notice of Suspension of Works and Notice of Termination):

NOTICE OF SUSPENSION OF WORKS:
Builders must tread carefully when it comes to serving a notice of suspension of works. Seeking legal advice before doing so is of the utmost importance, as a notice served incorrectly could result in grave consequences, such as damages being claimed by the owner.

This notice should only be served in particular circumstances. Some reasons that are considered adequate for the use of this notice include:
– Owner does not pay progress payment
– Owner does not have claim for incomplete/ defective works yet does not make a progress payment
– Owner breaches/ repudiates the contract by not paying, failing to indicate the ability to pay, no evidence of ownership of land, interfering with the works being completed, bringing in sub contractors, taking possession before completion of the works.

If required, this notice should be served correctly. It is also possible for a builder to claim an extension of time for the period of time that the works will be suspended.

The correct way to serve a Notice of Suspension of Works:
– Via registered post
– Have confirmation that the owner has received the notice

NOTICE OF TERMINATION:
A notice of termination is only intended to be served in extreme circumstances. A builder may only terminate a contract where a substantial breach of contract has occurred. It is highly recommended that a builder consult a legal professional before the decision to terminate a Domestic Building Contract, as this process can be very stressful and tedious, and result in harsh consequences if not done correctly.

If a builder intends to terminate a Domestic building contract because of the owner’s breach, it must be ensured that the builder didn’t also breach the contract. It is important to follow the correct process of serving this notice to avoid the owner suing for damages. It is recommended highly that legal advice be sought. The correct process of serving this notice involves:
– serving a notice of Intention to terminate on the owner, and providing them with a brief period of time (usually 10-14 days) to amend their breach.
– if the owners does not comply with the notice, the builder may effectively terminate the contract by providing a Notice of Termination of Contract to the owner, in writing.

5. Ensuring absolute completion of works, before claiming for completion stage:

When the building work carried out matches the plans and specifications referred to in the Domestic Building Contract, the building works are then likely to be satisfied and completed. In accordance with the aforementioned act, it is essential the builder provide the owner with a Notice of Completion of works, claiming for final payment, but only once everything has been completed and the builder and owner are satisfied with the works completed.

It is common practice for a meeting to occur between the contracting parties, often on site, where the owner will inspect the works completed by the builder. If any works are incomplete, or defects are found, it is the builder’s duty to address each and every one of these, or else the works are not completed, and it is illegal for the builder to claim the final payment. Builders should note that they must provide owners with an occupancy permit/ certificate of final inspection before they are allowed to claim final stage payment. Only when EVERYTHING is completed can a builder request a final claim payment.

6. The Owner cannot take possession until after completion:

When all building works have concluded, and the builder has received the final payment, he must then provide possession of the land to the owner. This must be accompanied by any available documentation including warranties, certificates of compliances, and more.

In the case of the owner taking possession of the land prior to the completion of the final stage and prior to final payment, the builder is entitled to a number of things. These include;
– The builder may assume the owner has repudiated the Contract
– In the case of wanting to terminate the contract, the builder, in this situation is permitted to provide a Notice of Intention to Terminate
– Consider the actions of the owner as a variation to the contract, varying the scope of works listed within the contract, and hence remove works that have not been finished as of the date of the owner taking possession.

7. Common disputes arising amongst builders and owners:

The most common reasons for disputes arising is due to confusion and ambiguity in terms of claims for liquidated damages, defects, incomplete works and variations.

Keeping records of everything, and ensuring they are signed by the owner is the best way builders can protect themselves, and may perhaps be enough to resolve the dispute. If the disputing persists, many options are available, including taking the Builder or owner to Victorian Civil and Administrative Tribunal (VCAT).

VCAT usually will set the matter down for a mediation/ compulsory conference. Here both parties will attempt to negotiate to settle the matter. Evidence of any transactions, variations and more, will greatly assist in the mediation process.

Avoiding disputes is simple, when you follow the below tips;
1. Communicate as much as possible with the builder/ owner- organising a weekly or fortnightly meeting to ensure you are both on the same page can be very useful.
2. In the meetings, discuss the scope of works as per the contract, and any variations. When you both agree to the variations, sign off on it PRIOR to commencing the works in question.
3. Ensure that you note start and end dates within the Domestic Building Contract
4. Where possible, avoid prime cost items and provisional sum items. If unavoidable, the builder must ensure that these costs are calculated with reasonable care.

There is no doubt that the best way to protect yourself from dispute, whether you are a builder or owner, is seeking legal advice prior to signing a Domestic Building contract. Call Boutique Lawyers on 1300 556 140, or visit our website www.boutiquelawyer.com.au.

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