HIGH COURT DECISION HIGHLIGHTS THE NEED FOR CLEAR CONTRACTS
From the port to the peninsula, Northland is currently a hive of construction activity. While the days of construction based on a handshake have gone, plenty of construction contracts leave grey areas which can cause problems.
A recent High Court decision sets out the consequences of not including a clear pricing mechanism and scope of works in the contract. This is important for new and existing projects. Even if a project has begun, parties can agree to fair terms to add to their contract on a “just in case” basis.
The case involved two parties carrying out remedial building work without a written pricing mechanism. The builder sent invoices totaling $2.53 million and the home owner refused to pay and claimed over-charging.
The Court held that if a construction contract does not contain adequate reference to price, a term will be implied that the contractor is to be paid a ‘reasonable’ price. The tricky bit is that one person’s “reasonable” is another’s “outrageous”. The Court had to carefully consider price estimates from various building experts. In the end it was found that the reasonable price was approximately half of the invoice charged. Unless a builder is making a 50% margin that sort of outcome means a significant loss on a project of any scale.
Scope of works
Another issue in the case was the builder’s scope of works. The initial scope of works was based on plans and designs that were amended, and were poorly documented in writing (via email). The scope of works subsequently increased throughout the project. The Court therefore had to determine what the actual scope of works was. Again, that involved a time-consuming and costly exercise based on the available documents with experts weighing in.
What does this mean for you?
While this case focuses on a discrete set of facts and prices, disagreements about variations, scope and pricing are common in construction. The difficulty arises where the contractor either has no contract or their contract doesn’t properly provide for how price will be calculated.
The messaging of this decision is clear – if a pricing method is ambiguous the door is open to challenging the reasonableness of charges. A fixed price (or schedule of rates) and a well-defined scope of works are a good start.
How can we help?
Our experienced, specialist construction law team will be happy to talk through your situation and review your contracts, whether existing or before you sign. You can view our construction law team here, please give us a call.
Our thanks to Laura Lee and Simon Davies-Colley for writing this article.