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If you sign a building contract, can you change your mind and cancel it?

By Geoff Hardy - 27 May 2019

This situation arises surprisingly often. Occasionally the builder finds that he has over-committed himself, and doesn't have the resources to do justice to all the projects he has on the go. Sometimes that is because the building firm has lost one or more of its experienced personnel through death or natural attrition. Or the builder might discover that the property owner is very difficult to deal with and it is clear that they are going to be at loggerheads throughout the entire duration of the project. Of course the property owner might reach the same conclusion about the builder, and want to be rid of him. Or the property owner might simply run out of money, or discover that the project is going to turn out a lot more expensive than anticipated, perhaps because the site requires a lot of excavation and removal of rock, or the building contains asbestos which is going to take months to remove safely.

It may surprise you to know that in general, you cannot simply change your mind and bring the project to an end, whether you are the builder or the property owner. A deal is a deal, and in the case of a building project, the deal is that the builder will build the whole thing until it is completed, and the owner will pay for it all. You can understand why the law takes that stance. If a builder bails out halfway through the project then the building owner is going to be left with a half-completed structure, and no guarantee of finding another builder to take up where the last one left off. And from the builder's point of view, he was counting on seeing that project through to the end, to feed his kids and keep his creditors at bay. He has probably turned away work in reliance on this job continuing, and he won't be able to pick up more work just like that. Plus, he has probably taken on staff, hired subcontractors and purchased building materials in the expectation that it would go the full distance.

However there are some exceptions to the rule. A sophisticated building contract will allow either party to cancel the contract in certain circumstances - most commonly where the other party is in breach of his or her obligations, or has gone bust. Sometimes the building project can be "frustrated" which in legal terms means it is no longer possible to perform it - for example if the owner is unable to obtain resource consent or a building consent from the Council. Or the parties may be prevented from performing their obligations because of some "Act of God" or "force majeure" - some event outside the parties' reasonable control, such as the building site subsiding into the sea.

Then there are a couple of options that are unique to building projects. Sometimes the building contract allows the builder to cancel it if the property owner has failed to make a payment because of financial difficulties, and the owner doesn't rectify the default after a lengthy period or provide security for future payment that is satisfactory to the builder. There is also the possibility that the property owner might direct the builder to do what is known as a "negative variation" - in other words to remove some of the planned construction work so that the project can come in within budget. However it is highly questionable whether the property owner could use this device to remove all of the remaining work altogether - at least without compensating the builder for the losses it will cause him.

The important point is that cancellation of a building contract is fraught with risk, and it is not something you should do as a knee-jerk reaction, at least without the benefit of proper legal advice.


Geoff Hardy


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