Quantum Meruit: No longer a Panacea for a Bad Bargain

What you need know

• The High Court has clarified the circumstances in which a claim for quantum meruit will be available to an innocent party to a contract terminated for repudiation or breach.
• The High Court held that contractual rights which have accrued under the contract up to the point of termination, including the right to be paid for work carried out, remain enforceable (unless the contract says otherwise) and restitutionary relief under quantum meruit will not be available in respect of that work.
• However, the majority of the High Court found that restitutionary relief on a quantum meruit will be available where work has been carried out under a contract but the right to be paid for that work has not yet accrued. In such circumstances, the amount which may be recovered by an innocent party will generally be determined by reference to the agreed contract price.
• Specific to the operation of the Domestic Building Contracts Act 1995 (Vic) (Act), the High Court has found that a builder will not be entitled to restitutionary relief on a quantum meruit in respect of variations carried out otherwise than in accordance with section 38 of the Act. That is, a builder is not entitled to recover any money in respect of a variation asked for by a building owner, unless the builder has complied with section 38 of the Act.

What you need do

• Owners and builders in Victoria (and in other States) should familiarise themselves, and ensure they comply with, their obligations under the Act (and its interstate equivalents).
• When drafting building contracts, parties may wish to avoid entire obligations where the right to payment under the contract only accrues once all work is complete.
• Parties may also wish to include express wording which confers upon the builder a right to payment of the contract price (or portion thereof), for work completed in the event of termination of the contract for repudiation or breach.

Background

The High Court's decision in Mann & Anor v Paterson Constructions Pty Ltd [2019] HCA 32 is timely as quantum meruit claims by builders have become more common in an industry which is highly competitive, and which unfortunately encourages builders to under-bid or buy jobs to win work on the expectation they will be able to recover any shortfall through claims.

The case involved a claim by a builder for the value of work performed under a contract in circumstances where the builder alleged that the underlying contract had been repudiated by the owner. The builder had accepted the owner's repudiation, terminated the contract and elected to pursue a restitutionary claim against the owner on a quantum meruit basis. A quantum meruit claim literally means 'what the job is worth', and typically involves the valuation of work performed, by a builder on a "cost plus profit" or 'reasonable value" basis without regard to the contractually agreed price. As is common for these types of claims, the "reasonable value" claimed was far in excess of what had been agreed in the contract.

At first instance the builder had been successful, with the Victorian Civil and Administrative Tribunal (VCAT), Supreme Court of Victoria and the Court of Appeal all upholding the builder's claim. The owner appealed to the High Court on three grounds:

1. that the Court of Appeal erred in holding that the builder, having terminated the domestic building contract upon the owner's repudiation, was entitled to sue on a quantum meruit basis for the works carried out by it (Ground 1);
2. that alternatively, if the builder was entitled to sue on a quantum meruit basis, the Court of Appeal erred in finding that the price of the contract did not operate as a ceiling on the amount claimable (Ground 2); and
3. that the Court of Appeal erred in allowing the builder to recover on a quantum meruit basis for variations to the works carried out by it because it incorrectly found that s 38 of the Act did not apply to a quantum meruit claim for variations to works under a domestic building contract (Ground 3).

In determining the owner's appeal, the High Court was required to consider the precise nature of the work carried out by the builder in respect of which it claimed quantum meruit relief. This work fell into three categories:

1. work carried out by the builder in respect of variations requested by the owner (Category 1);
2. work carried out by the builder in respect of which the builder had accrued a contractual right to payment at the time the contract was terminated (Category 2); and
3. work carried out by the builder in respect of which it had not yet accrued a right to payment under the contract at the time of termination (Category 3).

The decision at a glance

While the High Court unanimously ordered that the owner's appeal be allowed with costs and that the matter be remitted back to VCAT for further determination according to law, the judges were not unanimous in their reasoning.

In particular, the Court was divided in respect of Ground 1 of the appeal, as it related to Category 3 works, with Kiefel CJ, Bell and Keane JJ excluding restitutionary relief on the basis that the builder had an enforceable contractual right to sue for damages for loss of bargain. The effect of this finding was that they did not need to consider Ground 2 of the appeal.

In contrast, rejecting Ground 1 of the appeal, Nettle, Gordon and Edelman JJ together found that the builder did not have an enforceable contractual right to damages for loss of a bargain in respect of Category 3 works, as such a right only arises upon termination of the contract. Instead, their Honours found that the termination of the contract had brought about a total failure of consideration in respect of these Category 3 works, giving rise to a right to restitutionary relief on a quantum meruit basis in respect of same.

Gageler J also upheld the builder's right to quantum meruit relief in respect of Category 3 work, though he arrived at his position by taking what he described as "a narrower path of reasoning" than Nettle, Gordon and Edelman JJ.

The members of the Court were agreed in upholding Ground 3 of the appeal, finding that s 38 of the Act does apply to regulate a quantum meruit claim for variations to works, and remitting it back to VCAT for further determination including as to what, if any, amounts are payable by the owner in respect of variations.

Section 38 of the Act applies to any claim for variations to works under a domestic building contract

The Court found that the availability of quantum meruit claims is conditioned by section s 38 of the Act, which regulates how notices must be given by a builder and what remuneration is recoverable in respect of variations to the work. In this case, the builder's non-compliance with the Act meant that the builder was prevented from recovering any money, including on a quantum meruit basis, for those variations.

As explained by Nettle, Gordon and Edelman JJ (with whom the other members of the Court agreed), the provisions set out in s 38 of the Act are protective in nature and "designed to prevent the kinds of problems likely to arise where domestic building contract variations are dealt with informally…". It follows that to permit recovery by the builder on a quantum meruit basis in respect of variations, where the builder had not otherwise complied with its obligations under s 38 of the Act, would undermine the objectives of the legislation which include, inter alia, to enable domestic building disputes "to be resolved as quickly, efficiently and as cheaply as is possible having regard to fairness" (see s 4).

Can a builder sue on a quantum meruit for works carried out under a domestic building contract terminated upon the owner's repudiation?

The disparate positions adopted by the Court relate to the third category of work. That is, work carried out by the builder in respect of which it had not yet accrued a right to payment under the contract prior to its termination. It is the majority's treatment of this category which led to them to reject Ground 1 of the owner's appeal where the minority saw fit to uphold it.

Central to the Court's consideration of this ground was whether or not a contract terminated for breach or repudiation was rescinded ab initio or from the beginning.

Despite the long line of judicial authority to the contrary, including the often cited Sopov v Kane Constructions Pty Ltd [No 2] (2009) 24 VR 510, the High Court confirmed that the law in Australia is as set out in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; HCA 25. That is, a contract terminated for breach or repudiation is not rescinded ab initio.

Accordingly, rights which have accrued under the contract up to the point of termination, including any right to be paid for work carried out, remain enforceable, and it will not be open to a builder to elect to pursue a quantum meruit claim with a view to recovering amounts over and above the contractual price. Indeed, to permit this would be to trespass on the contractual bargain and allocation of risk agreed by the parties under the contract and, in many cases, would allow the builder to receive a windfall gain which is wholly disproportionate to the bargain struck between the parties. As the case was here.

The situation will be different where a right to payment in respect of work carried out has not accrued under the contract prior to termination (eg where the contract contains an entire obligation or divisible stages which remain incomplete). In such circumstances, Nettle, Gordon, Edelman JJ held that there will be a "total failure of consideration" or a "failure of basis" giving rise to a right to restitution on a quantum meruit. Relevantly, their Honours identified that such right will not cut across the parties' contractual bargain as liability for damages for loss of such bargain arises as a matter of law and only upon termination of the contract.

This proposition was considered and rejected by Kiefel CJ, Bell and Keane JJ on the basis that "it treats the contract as if it were unenforceable as having been avoided ab initio". The appropriate remedy, in their view, remains contractual damages for loss of bargain, which their Honours reasoned, was precisely what was contemplated by Dixon J in McDonald when he referred to the contract being "determined so far as it is executory only and the party in default is liable for damages for its breach".

While his Honour ultimately arrived at the same position as Nettle, Gordon, Edelman JJ, Gageler J preferred to adopt "a narrower path of reasoning" addressing the issue by limiting the measure of restitution rather than by denying it altogether.

Does the price of the contract operate as a ceiling on the quantum meruit claimable?

Although there was no uniform view expressed by members the High Court, the answer appears to be yes.

Having found that restitutionary relief on a quantum meruit was not available in this case, it was not necessary for Kiefel CJ, Bell and Keane JJ to consider whether the contract price operated as a ceiling on the amount claimable under a quantum meruit claim. Nevertheless, their Honours provided a strong indication of their views remarking that "honesty and efficiency in trade and commerce are not promoted by a rule that allows the recovery of a windfall by a party who has extracted itself from a losing contract, from which, acting rationally, it would pay to be released".

This view was echoed by Gageler J who identified that "with the potential to recover more from termination than from completion comes the incentive to terminate: to search out and seize upon conduct able to be characterised as repudiation with a view to making more out of engaging in the ensuing litigation than is available to be made out of completing the contract".

His Honour went on to point out that "the function of a common law remedy is to remediate an innocent party, not to penalise a defaulting party, and not to distort the incentive of either party to perform the contract". Unsurprisingly, and in line with his reasoning, Gageler J opined that the often cited Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd [1995] 2 Qd R 530 and Sopov v Kane Constructions [No 2] were wrongly decided insofar as they permitted recovery in excess of the contract price.

Although they also upheld the second ground of appeal, Nettle, Gordon and Edelman JJ were more circumspect as they left the door open to the possibility of cases where circumstances may dictate that it would be unconscionable to confine the plaintiff to the contractual price. However their Honours' reasoning suggests that such circumstances would be an exception rather than the rule.

Implications for owners and builders

The implications of the High Court's decision in this case are significant as it will be more difficult for builders who have entered in to binding contracts, to advance quantum meruit claims to recover shortfalls or to remediate a bad bargain.

Owners should nevertheless be mindful that this decision does not close the door on quantum meruit claims entirely. Where a builder has not yet accrued a right to payment for work carried out under the contract prior to termination, a quantum meruit claim will ordinarily be available. Owners should also be mindful of the possibility that circumstances may merit a departure from the prima facie position that the amount of restitution recoverable on a quantum meruit should not exceed the contract price (for example, where material additional costs are incurred by a builder as a result of the owner's wrongful conduct).

To further limit the possibility of quantum meruit claims in connection with building contracts, owners may therefore wish to include express provisions in their contracts which confer a right to payment of the contract price (or part thereof) on a builder, for work completed, in the event of termination of the contract for repudiation or breach.

See Ashurst's previous publication 'What can a builder recover for wrongful termination of a building contract?' regarding Mann v Paterson Constructions Pty Ltd [2018] VSCA 231, for a summary on the findings of the Court of Appeal that ultimately led to the matter being heard in the High Court.

Authors: Jeremy Chenoweth, Partner; James Clarke, Partner; Melissa Yeo, Senior Associate; and Emma Restall, Lawyer.