In the recent decision of Mann & Anor v. Paterson Constructions Pty Ltd  HCA 329 on 9 October 2019, the High Court clarified the circumstances in which a restitutionary claim on quantum meruit will be available to a contractor who has elected to terminate the contract for the other party's repudiation, in relation to entire contracts and separable portion contracts.
A party repudiates a contract when it demonstrates an intention to not carry out the contract. In response, the other party can 'accept' the repudiation and terminate the contract.
Previously, if a contract was terminated, a builder could generally recover payment from the principal for unpaid work performed before the contract was terminated on a quantum meruit basis.
This decision has clarified that where a contractor terminates a building contract for repudiation, recovery of a sum by measure of a fair and reasonable value of the works performed on a quantum meruit is now determined by the contract terms, and whether a contractual right to a payment sum has accrued by the termination date.
- If a contractor terminates a contract for the principal's repudiation, the contractor can no longer seek quantum meruit (or the amount deserved) for work performed when it has already accrued a contractual right to payment by the date of termination;
- Quantum meruit may be available to a contractor who has completed work (where a lump sum is payable at the completion) but has not yet accrued the right to payment under the contract by the date of termination; and
- Such a claim cannot exceed the contract price applicable to the completed services.
What is quantum meruit?
- The expression quantum meruit is a Latin phrase for "the amount deserved", or "what the job is worth".
- Quantum meruit is an order to pay a reasonable sum of money or a reasonable remuneration for the services performed. This is a form of restitution requiring the defendant to pay money as restitution for a benefit conferred upon the defendant by the plaintiff. Restitution is based on the concept of unjust enrichment - that is, an order for restitution will be made in favour of a plaintiff in relation to a benefit if the retention of that benefit by the defendant is unjust in all the circumstances.
Mr and Mrs Mann ('Owners') engaged Paterson Constructions Pty Ltd ('Builder') to build two townhouses on their land under a domestic building contract.
The Owners purported to terminate the contract for repudiation as the Builders had allegedly refused to return to site until the bill for the additional work was paid. The Owners also claimed that the work was defective.
The Builder alleged that the Owners repudiated the contract by purporting to terminate and refusing to allow the Builder entry onto the site, and that as a result the Builder had accepted the repudiation and terminated the contract.
The Builder commenced proceedings against the Owners in the Victorian Civil and Administrative Tribunal (VCAT) seeking relief on a quantum meruit basis, or alternatively, contractual damages for the unpaid work performed. Further, section 38 of the Domestic Building Contracts Act 1995 (Vic) prevents a builder from recovering any money for oral variations asked for by an owner unless the formality requirements are met under section 38, or if there are exceptional circumstances and it would be unfair to the owner for the builder to recover the money.
The relief claimed by the Builder included amounts for oral variations to the contract works. The Owners responded with a counterclaim for contractual damages on the basis the Builders had repudiated the contract.
The VCAT found that the Owners had repudiated the contract and that the Builder was entitled to recover upon a quantum meruit for work performed prior to the termination including the oral variations.
The Owners appealed to the Supreme Court of Victoria and then the Court of Appeal, both of which upheld the Builder's entitlement to sue on a quantum meruit for work performed prior to termination.
The Owners subsequently appealed to the High Court of Australia on the following grounds:
- The Court of Appeal erred in holding that the Builder, having terminated a major building contract upon the repudiation of the contract by the Owners, was entitled to sue on a quantum meruit for the works carried out by it.
- Alternatively, if the Builder was entitled to sue on a quantum meruit, the Court of Appeal erred in finding that the price of the contract did not operate as a ceiling on the amount claimable under such a claim.
- The Court of Appeal erred in allowing the Builder to recover on a quantum meruit basis for variations to the works carried out by the Builder, as it incorrectly found that section 38 of the Domestic Building Contracts Act 1995 (Vic) did not apply to a quantum meruit claim for variations to works under a domestic building contract.
In three separate judgments, although upholding the appeal with costs, the members of the Court were divided in relation to the availability of a quantum meruit.
The following principles were established:
- Entire contract scenario - A lump sum is payable at completion
If the parties are subject to a contract where the contractor is only entitled to remuneration once the contract is wholly carried into effect, and the contractor terminates for the principal's repudiation prior to completion, the contractor can elect between a claim in damages for loss of bargain damages or a restitutionary claim on a quantum meruit for the value of services performed by the contractor on the date of termination.
The rationale is that by repudiating the contract, the repudiating party has deprived the innocent party of any contractual entitlement to payment (which would otherwise become available had the parties not been discharged from their duties under the contract), resulting in a total failure to consider the work done by reason of termination. That total failure of consideration is cause for an obligation to make restitution for the fair value of the work performed.
- Divisible contract scenario - Fixed price payments for each stage
The plurality (Nettle, Gordon, Edelman JJ with whom Gageler agreed for different reasons) held that if the parties are subject to a contract for work divisible into several entire stages, and if the contractor terminates for the principal's repudiation then:
- in respect of a partially completed stage for which the contractor has not yet accrued a contractual right to payment, the contractor can elect between:
- a claim for loss of bargain damages for both the uncompleted separable portion and future separable portions pursuant to the contract; and
- a resitutionary claim on a quantum meruit (for value of work performed) for the incomplete stage to the date of termination of the contract.
- In respect of a wholly completed stage where the contractor has accrued the right to payment prior to the date of termination, the plurality found that the contractor may only claim under the contract for the amount payable by an action in debt.
Nettle, Gordon and Edelman JJ found the accrual of progress payments meant that there was no total failure of consideration. Kiefel CJ, Bell, and Keane JJ noted an amount due under the contract is a matter of debt and therefore leaves no room for restitution. Gageler J, similarly held that the existence of an accrued contractual right excludes a restitutionary claim.
As to the subsidiary issue of section 38 of the Domestic Building Contracts Act 1995 (Vic), their Honours unanimously overturned the Court of Appeal's decision and held that the Builder did not satisfy the conditions in section 38 in recovering an amount in restitution for variations to works orally implemented.
'Rescission fallacy' dispelled
The High Court rejected the Court of Appeal's finding that the Builder was entitled to a claim on quantum meruit holding that it was based upon a 'rescission fallacy'.
The "rescission fallacy" contemplates that the repudiation of a contract has the effect of rescinding the contract ab initio (or from the beginning), therefore allowing for a claim in quantum meruit as an alternative to a claim for damages. This was originally derived from the decision in Lodder v Slowey  AC 442 and is subsequently applied in Sopov v Kane Constructions Pty Ltd [No 2] (2009) 24 VR 510.
Their Honours held that the concept of a contract becoming completely irrelevant upon rescission is fallacious which legal fiction had been dispelled in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457. The High Court reaffirmed Mason CJ's finding in Baltic Shipping Co v Dillon (1993) Sopov 176 CLR 344 at 356 in that a discharge only operates prospectively and is not equivalent to rescission ab initio. The High Court confirmed that the rescission fallacy is no longer applicable.
A quantum meruit claim is capped at the contract price
The High Court considered that the rescission fallacy could give rise to serious mischief as some builders set prices on the expectation that they will be able to take advantage of an opportunity to elect a to receive a remuneration exceeding the contract price.
Their Honours held that a quantum meruit claim should not exceed the contract price. However the Court left open the possibility for exceptional circumstances where there is unconscionable conduct.
Restitution law as a gap-filling and supplementary role
The High Court referred to the long-standing decision of Pavey v Matthews (1987) 162 CLR 221, noting that where is a valid enforceable contract governing a party's right to compensation, there is neither occasion nor legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration. Their Honours concluded that to allow a resitutionary claim in these circumstances would be to subvert the contractual allocation of risk.
The Court found that to allow a resitutionary claim for quantum meruit to displace compensation measured by contractual expectations would contradict the "gap-filling and auxiliary role of restitutionary remedies".
This decision further reinforces the supremacy of the law of contract over the law of restitution.
What can we distil from this?
- When negotiating the contract price, contractors should be mindful that in the event that the contract is terminated for the principal's repudiation, they can no longer make a claim for completed works (or quantum meruit) that is higher than the contract price.
- Conversely, principals are relieved from the risk of a quantum meruit claim where the contractor has completed works entitling it to a progress payment prior to the termination of a contract.
- Prior to entering into building contracts, Parties should ensure that they are aware of the applicable legislative provisions regarding variations to the scope of works and the limitations that they might bring to any claim in restitution.
- The position is unclear for contracts which do not specify separately priced stages, such as one that provides for regular payment on account only.
If you have a query relating to any of the information in this piece, or you would like to speak with a member of Holman Webb's Dispute Resolution team with regard to a matter of your own, please don't hesitate to get in touch today.