Australia: Quantum Meruit – Still A Valid Remedy For Contract Repudiation

When a contract is repudiated by a principal, the contractor has two remedies available to it at common law. The first is a claim for contractual damages. The alternative is a claim on quantum meruit.

It is often the case that a claim brought on quantum meruit (a remedy which provides for payment of the reasonable value of the services performed) will yield a higher monetary figure than one for contractual damages. In the case of Renard Constructions (ME) Pty Ltd v Minister for Public Works¹ the Court noted that there did not appear anything anomalous in the fact that either remedy may yield a higher monetary figure than the other. Nor was it anomalous that a claim on quantum meruit may exceed or, in some cases, be far in excess of any profit that would have been made on the contract, should it have been brought to completion.

For this reason, and the fact that a quantum meruit claim has no nexus to the contractual rights and obligations of the parties, there has been much criticism of claims brought on a quantum meruit basis when contractual damages were an available alternative remedy.

The recent case of Sopov v Kane Constructions Pty Ltd (No. 2) [2009] VSCA 141 provides a relevant and interesting summary of the law to date regarding the availability of quantum meruit and confirms that, despite the criticism, the authority that quantum meruit is a valid remedy following acceptance of another party's repudiation, is too well entrenched to be changed by any court other than the High Court of Australia.

The Facts

Kane Constructions Pty Ltd (Kane) and Sopov entered into a contract for building works at a former industrial building site at Collingwood in inner Melbourne, Victoria. Following repeated delays and disputes in relation to Sopov's right to deduct liquidated damages, Kane suspended the works and Sopov subsequently called upon the bank guarantees. Kane asserted that the notice to call on the bank guarantee amounted to a repudiation of the contract, which it accepted and hence terminated the contract.

At first instance, it was found that Sopov had repudiated the contract and that Kane had the right to terminate. On appeal the critical issue was whether or not Kane, having accepted Sopov's repudiation of the contract, had a right to claim quantum meruit or whether its only remedy was contractual damages.

The appeal was brought on the following basis:

• Kane's only remedy was contractual damages.
• If Kane was entitled to a claim on a quantum meruit, it is limited by the contract price.
• If the amount recoverable is not limited to the contract price, the contract price is nevertheless the best evidence of the value of the benefit received by Sopov as a result of the works being carried out under the contract.

Among other things, the Court had to consider the following three issues:

• Is a quantum meruit claim still valid following repudiation by the principal?
• Does the contract continue to have influence on the determination of the value of the quantum meruit, or is it one piece of evidence as to the benefit of the work undertaken?
• Should the contract price act as a cap on the amount of quantum meruit recovered?

The Right To Claim Quantum Meruit Damages

The Court considered the various authorities in relation to the right to claim quantum meruit damages following repudiation of a contract.² In particular, the Court referred to the long standing High Court authority that:

The Court recognised that since 1992 and the decision of the High Court not to grant special leave to appeal from the decision of the NSW Court of Appeal in Renard, there has been increasing criticism, both judicial and academic, regarding the availability of quantum meruit as an alternative to contract damages in the event of repudiation of the contract.

Specifically, the Court noted that the basis of this criticism is that:

• When a contract is terminated at common law by acceptance of the principal's repudiation, while both parties are discharged from further performance, rights which have already been unconditionally acquired are not divested or discharged unless the contract provides otherwise;
• If there is a valid and enforceable right to payment, there is no need or legal justification for the law to superimpose an obligation or promise to pay; and
• There is no room for a restitutionary remedy since the builder's claim to payment is governed by the contract.

Despite what the Court considered to be powerful criticisms of the jurisprudence applied to date, the Court found itself constrained by a principle which it concurred was 'too well settled by authority to be shaken'⁴.

The Court found that:

The Influence Of The Contract

Having determined that Kane was entitled to bring its claim on quantum meruit, the Court then had to consider whether or not the claim should be constrained by the contractual provisions.

At first instance, the Court found that in determining the quantum meruit claim, the 'influence of the contract cannot disappear entirely, even if the contract no longer exists.'⁵

On appeal, the Court found that this view could not be sustained. The Court, in overturning the first instance decision, reasoned that the basis of the quantum meruit remedy was the fiction that the contract is void from the beginning, and therefore the contract can have no continuing influence when the value of the work is being assessed on a quantum meruit.

The Court recognised that it appeared anomalous that quantum meruit ignores the bargain that was struck between the parties and the rights that have accrued prior to termination. However, it was observed by the Court that such 'incongruities are as entrenched as the remedy itself'.

Therefore while the contract price was relevant to determining quantum meruit, it was not because it was a continuing influence but rather it was treated as evidence of the value that the parties attributed, at a particular time, to the works.

Should The Contract Price Be A Ceiling On The Amount Recovered?

For the same reason that the contract was considered not to be a 'continuing influence' in the determination of the sum of quantum meruit, the contract price was held not to impose a ceiling on the amount recoverable. The Court noted that the proper approach to the assessment of the quantum meruit claim was to ascertain the fair and reasonable value of the work performed. The Court relied on the statement in Renard⁶ that it would be 'extremely anomalous' if the defaulting party could invoke the contract, which it had repudiated, to impose a ceiling on the amounts recoverable.

Is The Contract Price The Best Evidence Of Value?

The Court rejected the argument that the contract price was the best evidence of the value conferred on the principal. The contract price, it was argued, was struck prospectively based on the expectations of the future events. In contrast, quantum meruit is assessed with the benefit of hindsight, on the basis of events that actually occurred.

Therefore the relevant considerations in determining the amount recoverable under the quantum meruit claim were:

• The total costs incurred and payments made by Kane in carrying out the works; and
• That the amounts in question were fair and reasonable in the circumstances.

Profit And Overhead – Can It Be Recovered?

At first instance, it was found that Kane was not entitled to claim a 10% margin which it had argued represented profit and overhead. The first instance Court stated that a profit margin claim was more relevant to a claim for contractual damages rather than one based on quantum meruit. Kane argued that there was a legal entitlement to claim a profit margin.⁷ The Appeal Court agreed with Kane's submission stating that the 'existence of an entitlement to a profit margin seemed entirely consistent with the resitutionary objective of measuring the value of the benefit incurred.'

Inclusion Of Variation Claims

Kane had submitted, and Sopov had rejected, a number of variation claims during the life of the contract. At first instance, the Court deducted the amount of those rejected variation claims from the quantum meruit entitlement. The Appeal Court found that if the work, the subject of the variation claims, had been carried out, the only question was the fair and reasonable value of the work. It was irrelevant whether or not that work was outside the scope of works. The only relevant factor was the extent to which those works conferred a benefit on Sopov, and the value that should be paid to Kane for that work.

The Appeal Court therefore increased the quantum meruit entitlement to include the amount of the rejected variation claims.

Conclusion

While recognizing the criticism and issues regarding the availability of quantum meruit as a resitutionary remedy following contract repudiation, this case further entrenches quantum meruit as a valid remedy for repudiation and subsequent contract termination.

Further, it provides some practical guidance on the factors that should be considered when bringing a quantum meruit claim and reinforces that, based on precedent, the primary consideration will be to calculate the benefit and value that the work has conferred on the principal.

Footnotes

1. (1992) 26 NSWLR 234

2. Planche v Colburn (1831) 8 Bing 14; 131 ER 305; Segur v Franklin (1934) 34 SR (NSW) 67; Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd [1995] 2 Qd R 350 at 361.

3. Ibid. [1] .

4. See for example Abigroup Contractors Pty Ltd v ABB Service Pty Ltd (2005) 21 BCL 12; [2004] NSWCA 181.

5. Kane Constructions Pty Ltd v Sopov (No 2) [2005] VSC 492

6. Ibid at [3]

7. Walter Construction Ltd v Walker Corporation Ltd (2001) 47 ATR 48, [412] - [414]; ibid at [3]

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com