House Owner Pays Price for Contract Failure

Failure to make contractual terms clear is a sure recipe for trouble and in construction contracts, where the sums of money involved can be substantial, getting the contract terms agreed up front is always sensible.

In a recent case, a woman arranged with a property developer that the developer should carry out refurbishment work on her property. The development of the property was to proceed in three stages and it was agreed that the developer would start the first phase as soon as the necessary planning permission and building control permission were obtained.

The woman made up-front payments to cover professional fees and to fund the commencement of the works. Unsatisfied with the subsequent progress, she demanded an account of how the money had been spent and decided that now was the time to have a formal contract. She refused to make further payments until a schedule of payments based on progress achieved was agreed. The developer refused to continue without further progress payments. He sent a solicitor’s letter to the woman demanding payment of the sums due.

Each side accused the other of repudiating the original contract and eventually the dispute ended up in court.

The court had to decide the following issues:

1. Was there a binding contract or contracts?
2. If there was a binding contract or contracts, what were the contractual terms?
3. If there was a binding contract or contracts, was either party to the dispute in breach of the contract(s)? and
4. If there was a breach of contract, what damages resulted?

The court concluded that the woman had entered into two separate contracts with the developer. The first was with regard to the first phase of the works. She had repudiated this contract when she regarded the developer’s breach of the contract as a repudiation of it. Her response had not been the correct one. She had herself created a repudiatory breach of contract by failing to pay the second instalments due under the contracts. The developer was therefore entitled to damages for the profits he would have made had the contracts been completed and paid for as agreed.

This case shows how what may seem to be a reasonable reaction – in this case declining to make payments when a development falls behind schedule – can lead to difficulties. In this case, the problem was compounded by the woman’s response to the solicitor’s letter sent on behalf of the developer. Had the original contract contained a clause which linked payments to the meeting of specific targets, then each side would have known where it stood and the dispute could probably have been avoided.