Australia: Quantum meruit – no longer the panacea of the contractor

On 9 October 2019 the High Court of Australia delivered a watershed judgment with regard to quantum meruit claims brought by contractors following a repudiation of a construction contract.

It had been well established (although with some judicial reservation) that contractors could elect to claim a quantum meruit – that is, a claim for the reasonable value of work performed as an alternative to damages where a contract had been terminated for repudiation or breach. This often led to contractors receiving a windfall gain as the "reasonable value" of the work performed exceeded the contract price that had been agreed. It also operated to enable Contractors to recover on loss making contracts when they were terminated.

In the case of Peter Mann & Anor v Paterson Constructions Pty Ltd [2019] HCA 32 (Paterson) the High Court allowed an appeal from the Victorian Supreme Court of Appeal that effectively ends a contractor's ability to claim on a quantum meruit basis in excess of the contract price for work performed where rights are accrued.

Prior to the High Court's decision the leading authority in Victoria on the restitutionary remedy of quantum meruit was the Victorian Supreme Court of Appeal decision in Sopov v Kane Constructions Pty Ltd [No 2] (2009) 24 VR 510 (Sopov). In Sopov, the Court held that the builder was entitled to advance a claim based on quantum meruit for works completed and rights accrued in lieu of a claim for damages in circumstances where a builder terminates for an owner's repudiation.

Background

Mr and Mrs Mann (Owners) entered into a major domestic building contract (Contract) with Paterson Constructions Pty Ltd (Builder) for the construction of two townhouses on the Owner's land. The Contract was a fixed price building contract. Pursuant to section 38 of the Domestic Building Contracts Act 1995 (Vic) (DBCA), under a major domestic building contract any request for a variation to the specifications of the work undertaken by a builder must be made in writing to that builder. The builder then must give to the owner a notice which states what effect the variation will have on the work being carried out under the contract (if any) together with an estimate of the time delays caused to the program for the work and the variance in cost that the variation will have on the contract price.

The Owners verbally requested 42 variations without giving any written notice to the Builder, as required by the Contract and as required by s 38 of the DBCA. After an invoice claiming the cost of the variations was issued by the Builder to the Owners, the Owners repudiated the contract and the Builder accepted the repudiation, bringing the Contract to an end.

A claim in VCAT was brought by the Builder. VCAT, following the decision in Sopov, upheld the Builder's claim for restitution upon a quantum meruit ordering that the Builder be entitled to a sum reflective of the reasonable costs of the work and expenditure of materials of the Builder, and the benefit which the Owners received; the remedy being considerably more than if the Builder claimed damages for breach of contract. VCAT additionally held that s 38 of the DBCA did not apply to a claim for restitution. The Owners appealed the decision to the Victorian Supreme Court of Appeal who upheld the VCAT judgment.

The Owners subsequently successfully appealed to the High Court.

Decision

The High Court allowed the Owners' appeal and determined that the builder's right to recovery will depend upon at what stage and what works have been completed under the contract at the time of termination as follows:

• where the builder has completed a stage of the contract or where rights are accrued when termination occurs, the right to recovery is for the amount due under the contract for that work and any damages for breach. The builder's right to recovery in respect of completed stages does not lie in quantum meruit but is limited to the builder's rights under the contract or damages for breach of contract;
• where there are uncompleted stages of work at the time of termination, the builder is entailed to claim damages or alternatively on a quantum meruit basis but the amount recoverable should not exceed a fair value calculated by reference to the contract price.
• with respect to claims for variations claims under major domestic building contracts, section 38 of the Act excluded a quantum meruit or a restitutionary remedy and required compliance with the provisions of the Act to enable recovery.

Conclusion

The decision is of significance for the construction industry as it removes the ability of builders and contractors to seek restitution or quantum meruit based claims following termination where stages of work have been completed and rights have accrued under the contract. The decision represents a fairer outcome in determining the rights of recovery in holding the parties to their bargain where rights have accrued. Where contracts are terminated on the basis of a repudiation the recovery of damages in excess of the contract price is now restricted. Prior to the decision, the quantum meruit basis of recovery would often solve the problem of a loss making contract for a contractor where a contract was terminated. Consequently builders and contractors will now need to carefully consider what recovery rights are available in deciding whether to terminate a contract.