Frustrated Building Contacts
Introduction
This newsletter considers the effect of frustration on a building contract. This area of law is quite complex, although there have been some attempts to deal with its consequences by legislation in Victoria.
Essentially, a contract is frustrated when it ends and has not been:
- completed (or discharged by both parties performing their obligations); or
- terminated for some breach of contract.
General Law
The general principles surrounding frustration have developed from case law in a predominantly commercial context. Frustration deals with the situation where the conditions for performing the contract are now radically different to those that prevailed when the contract was negotiated.
This is different from a contract being difficult to perform. For example, buying a car and then discovering it is impossible to obtain the required fuel in Australia would not amount to frustration under the general law (although there may be statutory remedies under the Trade Practices Act 1974 (Cth)).
It is also different from a party attempting to create circumstances where a contract would be frustrated. For example, a builder who knowingly engaged a subcontractor who would be unable to perform your obligations, could not rely on a claim of contractual frustration at a later stage.
Considering a building contract, the agreement could be potentially frustrated by the impossibility of performance (such as the occurrence of a natural disaster, war or serious industrial action) or the death or insolvency of a builder. As the effect of frustration is to automatically end the contract, this will have financial implications for both parties to a building contract.
Statutory Law in Victoria
In Victoria, the Fair Trading Act 1999 (Vic) aims to help parties deal with the consequences of a frustrated contract. However, it may not apply if the contract is designed to deal with frustration in a way different than the Act.
Upon frustration, all monies that have been paid under the contract must be refunded and any sums that were payable are no longer owed. However, monies may be retained to cover expenses incurred when a party was performing the contract. Additionally, the Court will determine a just amount that represents any benefit received by a party under the contract. The effect of these provisions is to provide a more certain method for compensating parties in the event of frustrated contract.
Conclusion
While Victoria has enacted some legislation to deal with the consequences of frustration in building contracts, it remains vital to receive appropriate advice before entering a building contract. This is particularly so when there is a risk that a party may be unable to perform their obligations. Dealing exclusively with properly licensed builders and speaking to a construction lawyer are excellent ways to start.
