Can you imply into a building contract a term allowing the owners to terminate?


Timothy Bates and Carlo Wan of Auckland law firm Legal Vision examine a recent High Court decision in which the High Court was required to consider (on appeal) whether it was appropriate to imply a term into a contract allowing the owners to terminate a building contract.

The claim before the High Court — Van Der Wal Builders & Contractors Ltd v Hanham [2013] NZHC 2284 — was an appeal of a decision in the North Shore District Court.
The appellant (the builder) was contracted by the respondent (the owners) to carry out building works on their house at Greenhithe (“the house”). The contract was in writing and in the standard form published by the Registered Master Builders Federation of New Zealand.

The parties had agreed the work would be done on a “charge up” basis. It is also relevant to note clause 33 of the contract stipulated that in the event that additional work was required by the territorial authority as a condition of granting or retention of a building consent or otherwise, then:
• The builder and the owner would consult concerning the requirement for additional work,
• If the requirement by the territorial authority for additional work was due to discrepancy, error or defects in the plans or specification provided by the owners; or otherwise due to non-compliance with the territorial authority, or legislative requirements, then the costs of the works would be borne by the owners.

Once the work commenced, the council required extensive works to be carried out on the basis that they were necessary to bring the existing house into compliance with the Building Code. These were weathertight related.

This led to a significant increase in the works needed to be done, and its cost. The parties did not contemplate these requirements or the extent of work needed to be done to satisfy these requirements when entering into the building contract.

The owners were concerned that while work had only been advanced on Stage One, the sum of the amounts charged by the builder at that point was approaching the total amount expected for completing all three stages.

Eventually, the owners decided they could no longer afford to continue with the works, and purported to give the builder notice by terminating the contract, on expiry of a two-week period after the notice was given.

The builder’s claim in the District Court asserted that the purported cancellation was in breach of contract.
The District Court held that there was an implied term which entitled the owners to cancel the contract. This decision was appealed to the High Court.

Implied terms
Generally, terms are implied in order to set out what the instrument actually means. There are five factors that need to be satisfied before the court will readily imply a term into a contract:
1 The implied term must be reasonable and equitable,
2 It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it,
3 It must be so obvious that it “goes without saying”,
4 It must be capable of clear expression, and
5 It must not contradict any express term of the contract.

High Court’s finding
The High Court decided that the traditional response of implying a term where a situation arises which was not contemplated at the time of entering an agreement was too broad.
In the present case, if the term was not implied, the purported cancellation would have been ineffective.
The High Court then looked at the five factors again and found that:
• It is fair and reasonable to allocate the relevant risks in the builder’s favour.
• The implying of the term does not give business efficacy to the contract; because the construction contract specifically dealt with the additional work required by the council under clause 33. Both parties had turned their mind to the extra work required by the council, dealing with it to the extent thought appropriate. If the builder breached its obligation under clause 33, then there would be a remedy under the contract.
• The implied term had not been clearly expressed in the pleading nor by the District Court judge. The implied term relied upon by the owners was ambiguous.
• Although the implied term did not contradict any of the express terms in the contract, it did deal with subject matters that were dealt with by some of the express terms in a supplemental way.
Overall, the High Court decided that it was not appropriate to imply a term in this case.

This decision illustrates the difficulties a litigant will face when attempting to imply terms into contracts that already specifically deal with situations the implied term purports to cover.

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision or Building Today to anyone who relies on the information contained in this article.




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