Are oral contracts illegal or unenforceable?

Case Update: Nichols v Earth Spirit Home Pty Ltd 

Queensland legislation requires builders to record their contracts in writing.^[1] The consequences of failing to do so were demonstrated in the recent case of Nichols v Earth Spirit Home Pty Ltd (‘Nichols’).^[2]

Nichols concerned the enforceability of an oral building agreement and related issues arising from the parties’ failure to record their building contract in writing.

Background

Mr Nichols and Earth Spirit Home Pty Ltd (the “Builder”) entered into a written contract concerning the construction of 10 houses. After a dispute arose between the parties, the contract was terminated. The parties subsequently reached an oral agreement stating that Mr Nichols would pay the Builder weekly instalments to finance the completion of the project. The payments were secured by a $250,000 deposit lodged with the Masters Building Association.

After a conflict regarding the payment instalments arose, Mr Nichols took the matter to the Queensland Civil and Administrative Tribunal (‘QCAT’). The primary issue before QCAT was whether the oral building contract was enforceable at law.^[3]

The issue of the enforceability of an oral building contract arose because section 67G of the Queensland Building and Construction Commission Act 1991 (Qld) (the “QBCC Act”) provides that it is an offence for a registered builder to enter into a wholly oral building contract.

On the basis of section 67G of the QBCC Act, Mr Nichols asserted that the parties’ oral contract was an illegal contract and that he was therefore not liable to pay the Builder.

Despite section 67G of the QBCC Act, QCAT held that Mr Nichols could not evade his contractual obligations to pay the Builder and found that the parties’ oral building contract was enforceable.

Mr Nichols appealed QCAT’s decision to the Queensland Court of Appeal (‘QCA’). The QCA dismissed Mr Nichols’ appeal and upheld QCAT’s decision at first instance that the parties’ oral building contract was enforceable.^[4]

Enforceability of oral building contracts

In reaching its decision, the QCA interpreted section 67G in the context of the QBCC Act as a whole and held as follows (in summary):

• A registered builder who enters into an oral building contract is likely to attract a penalty for having committed an offence under section 67G of the QBCC Act; and
• Despite being penalised under section 67G of the QBCC Act, a registered builder may still seek compensation for work carried out under an oral building contract

Consequently, the penal liability imposed by the QBCC Act did not preclude the Builder from recovering payment from Mr Nichols. As the oral building contract was wholly enforceable in these circumstances, it was ordered that payment should be made in accordance with its terms.

The QCA declined to consider whether payment might have been recoverable under the contract if it had instead been unenforceable.

Public Policy

Notably, certain public policy considerations were raised in this case. In particular, the QCA contemplated whether a party may lawfully enforce an illegal building contract.^[5]

The QCA held that there may be instances where the nature and severity of the illegality in question will make a contract unenforceable. An important element of the QCA’s decision, however, was that it found the Builder had not intentionally violated the Act.

The building contract in Nichols was therefore also enforceable as a matter of public policy.

Implications for builders

The decision in Nichols has a number of important implications for builders.

For instance:

• it remains possible for an oral building contract to be declared void or of no effect in which case a builder may risk losing the right to payment for work already carried out; and
• the enforceability of an oral building contract in Queensland is evaluated on a case by case basis, depending on the specific terms agreed by the parties;
• an oral agreement containing a provision which is expressly prohibited by the QBCC Act may be void and of no effect (for example, it is prohibited under the QBCC Act to contract out of the QBCC Act itself);^[6] and
• builders who fail to enter into written building contracts in compliance with the QBCC Act may be subject to penalties, irrespective of whether their oral building contract is declared void.

To avoid potential contracts being declared void and/or penalties being issued under the QBCC Act, it is good practice for builders to ensure their contracts are in writing and do not include terms prohibited under the QBCC Act.

Implications for home owners

The decision in Nichols also has implications for home owners.

For instance:

• It may be difficult for home owners who enter into oral building contracts with builders to enforce the terms of such a contract and, in turn, suffer loss and damage. For instance, this might apply to key terms in respect of:
  • remedies for defective works;
  • variations to the contract price and/or scope works; and/or
  • recovery of costs incurred due to delays and extensions of time caused by the builder.^[7]

Finally, whether you are a developer, builder, subcontractor or home owner, and are considering entering into a building agreement in Queensland, you should seek comprehensive legal advice before doing so.

Contact our friendly team at Ramsden Lawyers today to discuss how you can best protect yourself when entering into a contract for building and construction work or services.

[1] Queensland Building and Construction Commission Act 1991 (Qld), s 67G.
[2] Nichols v Earth Spirit Home Pty Ltd [2015] QCA
[3] Nichols v Blacklow t/as Earth Spirit Home Pty Ltd [2013] QCAT 213.
[4] Nichols v Earth Spirit Home Pty Ltd [2015] QCA 219.
[5] Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 427; Miller v Miller (2011) 242 CLR 446 at [24]-[26] quoted in Nichols v Earth Spirit Home Pty Ltd [2015] QCA 219.
[6] Queensland Building and Construction Commission Act 1991 (Qld), s 108D; Miller v Miller (2011) 242 CLR 446 at [24] quoted in Nichols v Earth Spirit Home Pty Ltd [2015] QCA 219.
[7]Queensland Building and Construction Commission, ‘Consumer Building Guide: Your building contractor must give you this guide before you sign the contract’, (22 February 2016);  The Law Handbook, ‘Building Contracts’, <http://www.lawhandbook.org.au/06_03_03_building_contracts/> (22 February 2016).