Construction and Infrastructure case note: The High Court of Australia rules no more open ended quantum meruit claims following termination of contract

Oct 9, 2019

Earlier today, in Peter Mann & Anor v Paterson Constructions Pty Ltd [2019] HCA 32 the High Court of Australia unanimously allowed an appeal from a judgement of the Victorian Supreme Court of Appeal concerning remuneration for work and labour done under a contract to which the Domestic Building Contracts Act applies.

Background

In March 2014, Peter Mann and Angela Mann (Manns) entered into a domestic building contract with Paterson Constructions Pty Ltd (Paterson) for the construction of two townhouses on a property in Blackburn, Victoria.

As both townhouses were not completed and handed over by the due date, the Manns asserted that Paterson had repudiated the contract and purported to terminate the contract by accepting that alleged repudiation. In response, Paterson asserted that the Manns’ conduct constituted a repudiation of the contract and purported to accept the Manns repudiation.

Paterson commenced VCAT proceedings against the Manns seeking relief on a quantum meruit basis or, in the alternative, sums allegedly due to Paterson under the contract. The Manns were ordered to pay Paterson the quantum meruit sum of $660,526.41, being the value of the work performed by Paterson, less the sums already paid by the Manns and the cost of rectification of defects.

The Manns appealed the VCAT decision to the Supreme Court of Victoria (VSC) where Justice Cavanough dismissed the appeal. The Manns then unsuccessfully appealed the decision of the VSC in the Victorian Supreme Court of Appeal (VSCA).

In their unsuccessful appeal, the Manns submitted, among other things, that the VSCA should reconsider the common law in Australia which allows a builder to sue on a quantum meruit basis following a repudiation of the contract. The reason being that the current common law 'encourages' builders to accept breaches which give rise to repudiation and therefore termination of the contract. This allows builders to low-ball their initial offer during the tender stage of a project in order to be awarded the project, only to later accept a breach which amounts to a repudiation and therefore a termination of the contract. On this basis, the builder may be able to recover on a quantum merit basis an amount far greater than the amount of the contract sum.

This creates a situation where builders may seek to search out and seize upon conduct able to be characterised as a repudiation with a view to making more out of engaging in the ensuring litigation than is available to be made out of completing the contract.

Manns’ grounds of appeal to the High Court of Australia

The Manns challenged the decision of the VSCA on the followings grounds (amongst others):

  • The VSCA erred in holding that Paterson, having terminated a major domestic building contract upon the repudiation of the contract by the Manns, was entitled to sue on a quantum meruit for the works carried out by it; and
  • Alternatively, if Paterson was entitled to sue on a quantum meruit, the VSCA erred in finding that the price of the contract did not operate as a ceiling on the amount claimable under such a quantum meruit claim.

Quantum meruit

The Manns grounds of appeal raised for the High Court’s consideration the correctness of the long held proposition that a claim for quantum meruit — that is, for the reasonable value of work performed — may be made at the election of the innocent party to a contract as an alternative to a claim for damages in the wake of the termination of the contract for repudiation or breach.

That proposition was accepted by the Judicial Committee of the Privy Council in Lodder v Slowery [1904] AC 442 and has since been applied in intermediate appellate court decisions in Victoria, New South Wales, Queensland and South Australia.

The High Court’s decision

The High Court unanimously held that Paterson’s only right to recovery in respect of any stage of the contract completed by the time of termination was for the amount due under the contract on completion of that stage and any damages for breach of contract. In respect of any uncompleted stage of the contract, Paterson was entitled to claim damages for breach of contract.

A majority of the High Court held that the builder was entitled, in the alternative, to recover restitution for work and labour done and materials supplied in respect of uncompleted stages (other than for variations) but that the amount so recoverable should not in this case exceed a fair value calculated in accordance with the contract price or the appropriate part of the contract price.

In short, the High Court held that there will generally be no need to have recourse to a remedy in restitution (i.e. quantum meruit) where a claim in contract is available.

Accordingly, the High Court ordered, among other things, that the initial decision of the VCAT be set aside and the matter be remitted to the VCAT for further determination according to law.

Effect of the High Court’s decision

As a result of today's High Court decision, the Australian construction law landscape is set to change as builders will inevitably diverge from the long-held proposition that quantum meruit is an available remedy, in the alternative to damages for breach of contract, which entitles builders to relief in excess of what otherwise would be available for breach of contract.

Builders will now have to carefully consider whether the relief sought for stages of work (completed or uncompleted) exceeds a fair value calculated in accordance with the contract price or the appropriate part of the contract price.

More information

To learn more about the decision, or for advice, please contact Dominic Brown, Lawyer, on (03) 8600 8851 or djbrown@kcllaw.com.au.

Author

More information on the author, Dominic Brown.

KCL Law is a leading firm in the area of construction and infrastructure.

Note: This update is a guide only and is not intended to constitute legal advice.

BACK