John Green, founder and director of the Building Disputes Tribunal, a building and construction dispute resolution service provider in New Zealand, has spoken out in a recent article about the unfair and ‘draconian’ nature of many residential construction contracts.
In his opinion, residential contracts are skewed in favour of builders for two main reasons:
- The contracts are usually drafted by the builders’ lawyers, or giant member organisations.
- Most homeowners will accept a contract at face value, and won’t seek legal advice, or negotiate alterations to the terms of their contracts.
John Green’s largest concerns relate to contracts that appear to allow contractors, often builders, to give grossly inaccurate estimates, when the law requires estimates to be produced with reasonable care and skill. In his experience, this frequently results in large cost overruns that homeowners may struggle to pay for.
It is important to remember that estimates and quotes are distinct. A quote is an offer to do a job for a fixed price. If a person accepts this quote, and a contract is entered into, the contractor is bound to complete the work for this price (subject to any variation in the scope of the works entitling the contractor to additional costs).
An estimate is roughly how much a contractor, exercising skill and experience, thinks that a particular piece of work will cost. While an estimate is not contractually binding, if a homeowner agrees to proceed with the work on the basis of the estimate, and it turns out that this estimate is grossly incorrect, they may have a remedy in negligent misstatement against the contractor on the basis that the contractor breached a duty of care he or she owed to the homeowner.
This position was established in the case of J & J C Abrams Ltd v Ancliffe  2 NZLR 420. This case concerned a contractor who gave an estimate of $30,500 for a job, and 10 months later, after having completed substantial work on the property, updated this estimate to $57,500. While the homeowner acknowledged that he expected the costs to be higher than originally estimated, he did not expect these to be double the original estimate. The homeowner confirmed that he would not have gone ahead with the job if he knew the costs would be that high.
The Court found that the contractor owed a duty of care to the homeowner, to provide him with reliable information of the building costs as these increased, and before the point in time where the homeowner became committed to the uneconomic completion of the project. The contractor breached that duty by failing to provide an updated estimate until the costs had reached $57,500.
These comments by John Green are an important reminder for contractors to ensure that their estimates are accurate, and updated estimates are communicated to a homeowner as circumstances change. For homeowners, fixed price contracts may be preferable, to safeguard against dramatic price increases during a construction project.