High Court provides clarity on a builder's entitlement to a quantum meruit claim
The High Court of Australia recently provided clarity with respect to the remedies available to contractors following termination of the contract as a consequence of repudiation.
In the decision of Mann v Paterson Constructions Pty Ltd  HCA 32, the High Court held that in addition to damages for breach of contract, the remedy of quantum meruit is available to contractors in circumstances where work is performed work for which the right to payment had not accrued prior to the date of termination. For instance, in circumstances of milestone payments, where the milestone had not been achieved before termination.
Notwithstanding, a quantum meruit claim for contract works cannot exceed the portion of the contract price prescribed by the contract for that stage of work.
The Owners had entered into a major domestic building contract with the Builder in accordance with the Domestic Building Contracts Act 1995 (VIC) (DBC Act) for the construction of two double-storey town houses for a fixed price of $971,000 (Contract).
About half way through the construction works, a dispute arose between the parties with regard to alleged variations of $50,000.
The Owners alleged that the Builder refused to carry out further works until the invoice for the variation work was paid, and by doing this together with other alleged breaches, the Builder's conduct amounted to repudiation, which the Owners accepted. The Builder, in return, purported that the Owners conduct was itself repudiatory, which the Builder subsequently accepted.
The Builder commenced proceedings seeking damages and in the alternative, a balance of moneys for work and labour done and materials provided up to the date of termination.
The decisions of the Tribunal and initial appeals
By applying the principles set out in Sopov v Kane Constructions Pty Ltd (No 2)1 (Sopov), the Victorian Civil and Administrative Tribunal (VCAT) held that the Owners wrongfully repudiated the Contract. In such circumstances, the VCAT held that the Contract was "void ab initio" (or "invalid" in simple terms) and section 38 of the DBC Act, which provides builders with the ability to progress low value and low impact variations and a regime for notifying other variations and has no equivalent in NSW, did not apply to limit the amount recoverable by the Builder for variations, meaning the Builder was entitled to recover payment for the variation work on a quantum meruit basis. This was assessed at $660,526.41.
The Owners sought to appeal the VCAT decision, on the following basis:
- that VCAT wrongly treated Sopov in establishing that the Contract was "void ab initio" without having regard to the discrepancy between the amount awarded and the Contract price
- that VCAT erred in holding that section 38 of the DBC Act did not apply, which would only entitle the Builder to damages for breach of contract in accordance with that section. This would result in a much lesser amount.
The Supreme Court held that the VCAT did not err in its interpretation of Sopov. The Supreme Court also found that the Contract price did not operate as a ceiling in assessing a quantum meruit claim, as the remedy confers on the Builder the "fair and reasonable value" for its work.
The Owners further appealed to the Court of Appeal of the Supreme Court of Victoria. This appeal was dismissed. The Court of Appeal also found that section 38 of the DBC Act does not exclude a restitutionary remedy such as quantum meruit.
The Owners were ultimately successful in the High Court.
The High Court decision
The High Court considered:
- whether the Builder was entitled to sue on a quantum meruit basis for the variation work, having terminated the Contract
- alternatively, if the Builder was entitled to sue on a quantum meruit basis, whether the Contract price operated as a ceiling on the amount claimable under a quantum meruit claim
- whether the Builder was allowed to recover the variation work on a quantum meruit basis, having regard to the application of section 38 of the DBC Act.
At the outset, the High Court unanimously rejected the lower courts' treatment of this claim as a "rescission fallacy", which effectively entitled the Builder to a quantum meruit claim for the recovery of a "fair and reasonable value" of the variation work substantially assessed at $660,526.41.
The High Court found as follows:
Entitlement to quantum meruit depends on when the right to payment accrued
It was held that the Builder's right to payment of the variation work accrued before the Contract was terminated, and therefore the Builder was entitled to be paid for the accrued variation amounts, irrespective of repudiatory conduct.
However, the High Court held that a restitutionary claim such as quantum meruit ought to only be available in circumstances where there is no enforceable right to payment under the contract, as this would subvert the allocation of risk under a contract. The consequence of this decision is that a quantum meruit claim is only available in respect of work conducted by a builder in respect of which there are no accrued rights under the building contract at the time of termination, such as an incomplete stage or milestone.
In such circumstances, the High Court concluded that the Builder had an enforceable right to recover under the Contract, therefore the Builder was not entitled to sue on a quantum meruit basis.
The High Court further held that if a builder elects to recover by way of a restitutionary claim, the amount recoverable should be limited by the rates prescribed by the contract, in order to reflect the agreed bargain and risk allocation between the parties.
Section 38 of the DBC Act does not apply to a quantum meruit claim
Also of significance, the High Court unanimously held that section 38 of the DBC Act precludes a contractor from recovering payments for variation work in restitution. Section 38(6)(b) of the DBC Act relevantly limited the Builder's recovery to cost of carrying out the variation plus a reasonable profit (pursuant to section 38(7) of the DBC Act). The matter has been remitted to the VCAT to determine the extent of the works performed by the Builder for which a right to payment did not accrue prior to termination.
What are the implications?
This decision reduces the risk of a contractor pursuing a grossly inflated quantum meruit claim, where rights to payment have not been accrued, in the event a contract is terminated by reason of repudiatory conduct.
Parties nevertheless need to consider carefully the impact of this decision when terminating a contract and whether it will increase the prospect of a claim in quantum meruit.
Notwithstanding that the underlying Contract was for work carried out in Victoria and the DBC Act applies, there would appear to be relevant implications for work carried out in NSW, namely around the availability of quantum meruit and the operation of contractual rates as a cap.
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