Corrs High Vis: Episode 34 - How should a court assess a claim for payment following termination for repudiation?

Matthew Muir (Partner), Lachlan Tassell (Associate) & Hayley Grossberg (Graduate Lawyer)

HAYLEY: Today I’m joined by Partner Matthew Muir and Associate Lachlan Tassell, both from the Brisbane Projects Team, to discuss the High Court Case of Mann & Paterson and the reasons why it will be an important decision for quantum meruit in Australia.

Matthew, before we get into a discussion on the case of Mann & Paterson can you briefly explain what quantum meruit is?

MATTHEW: Sure, Hayley. Quantum meruit is a phrase which basically means the amount a person deserves or what the job is worth, so it is based on the law of restitution which flows from the law of unjust enrichment and those concepts and the source of quantum meruit is probably what gives rise to most of the controversy which comes out of Mann & Paterson.

HAYLEY: And so in what situations does quantum meruit arise?

MATTHEW: There’s a number of situations where quantum meruit arises. I’ll mention three – so where work is done in expectation of a contract that doesn’t arise, that’s the classic quantum meruit situation, so there is no contract ultimately which governs the payment for the work that was performed. Also you might have a situation where there’s work done outside the contract, so there might be a particular form of work that is not covered by the contract and therefore there is no way of measuring or valuing the work to be done. And then there is also the situation where you might have a contract that has an express agreement to pay a reasonable sum for work in question. If there is no proper valuation mechanism then the only valuation that can be undertaken is quantum meruit.

HAYLEY: How does the Court assess a quantum meruit claim?

MATTHEW: Now this is where the controversy arises. Ordinarily, unjust enrichment, what you are trying to do is disgorge the unjust enrichment the person has obtained. Now in the situation of a construction contract you would think that the contract would govern that – the contract would govern how you assess the amount that you pay. But if there is no contract how can you do that? But if you are in a situation where you do have a contract and the contract has been repudiated, in that situation a contractor can if they are the innocent party elect to accept repudiation, terminate and sue for a quantum meruit as opposed to their rights under the contract and damages under the contract. The assessment of quantum meruit in those situations has, through a series of decisions which we will talk about now, led to the situation where and it will be valued based upon the reasonable costs of the contractor of the work he had done and the money he has expended. Now that comes from a case of Renard that we shall discuss in a minute and that’s where the controversy really arises, because what can arise is that in that situation or the quantum meruit is assessed on that basis, you will have a situation where the person can get paid more than the contract price for the work that they have performed. It is difficult to see why in that situation where a breach saves the contractor from further loss in performing the contract but they shouldn’t cover a greater sum than the contract price.

HAYLEY: So you mentioned a couple of cases that discussed quantum meruit and reflect the current position of the law. What did those cases say?

MATTHEW: Well the main case is Renard Constructions v Minister for Public Works. That’s a 1992 decision in the New South Wales Court of Appeal, and it arose from a long running dispute between the Minister for Public Works and Renard Constructions that was an arbitral award which found that the Minister for Public Works had repudiated the contract and determined that Renard were entitled to recover quantum meruit for the sum much larger than the contract would have allowed if the claim was assessed pursuant to the schedule of rates which applied to that contract. It was a long running dispute that went to the Supreme Court of Appeal, and the Court of Appeal effectively affirmed the arbitrator’s decision even though it was set aside in the first instance. So that case has been the source of criticism all the way through, but this Court of Appeal decision which has bound subsequent courts. One case I will mention and we will come to another case in a minute but one case I will mention before coming to the next major Court of Appeal decision which considered this question. It was a case that I was involved in some years ago now which was decided by Justice Finn in the Federal Court. It was the case of GC Marconi v BHPIT. It is a very small judgment, if you want to have a read of it it is only 471 pages long, and one of the many issues that Justice Finn grappled with was the question of liability for quantum meruit. In that particular case the contract was a milestone contract so there was five milestones that would be payable over the course of the development of a basically a software project and four of those milestone payments accrued before and one party purported to terminate pursuant to a repudiation of my client. Now it was ultimately determined that there was no repudiation and GC Marconi’s termination was in fact repudiatory but the claim by GC Marconi did include a claim for quantum meruit for all their costs for the whole of the project which were extraordinary and way beyond the contract price and way beyond the milestones. But the question there was – well if you’ve got a contract that assesses the payment that you are to receive for each milestone why on earth should you be able to disregard that completely and claim all of your costs? So Justice Finn had to deal with that particular question. Ultimately he didn’t have to decide it because of the finding in relation to repudiation but he did consider it and he did set out some of the key principles of why this is such a fraught area. Now one of the cases that he does refer to is a decision of President Mason in the New South Wales Court of Appeal in 1999. So after the decision in Renard and in that particular case Mason said this and I think it really highlights the point and the difficulty with the restitution and remedy where there is a repudiation. So he said “the starting point is a fundamental one in relation to restitution of claims especially claims for work done or goods supplied. No action can be brought for restitution while inconsistent contractual promise subsists between the parties in relation to the subject matter of the claim. This is not a remnant of the now discarded implied contract theory of restitution. The proposition is not based on the inability to imply a contract but on the fact that the benefit provided by the plaintiff to the defendant was rendered in the performance of a valid legal duty. Restitution respects the sanctity of the transaction and the subsisting contractual regime chosen by the parties is the framework for settling disputes. This ensures that the law does not countenance two conflicting sets of legal obligations subsisting concurrently as Justice Deane explained in the context of quantum meruit in Pavey v Matthews – if there is a valid and enforceable agreement governing the claim its right to payment. There is neither occasion nor legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration, so that I think really highlights it and highlights the problem and the problem that Finn grappled with did note – he did note that it is long recognised that in cases of quantum meruit can result in recovery that far exceeds what the innocent party would have derived from the contract and that is the law unfortunately. He did recognise that there was a lot of criticism there and around this particular proposition he did quote from Mason & Carter Restitution Law in Australia which is a very good book, and those authors they say there is little to be said in principle or policy for a rule that provides a clear incentive to manufacture or snatch at repudiation as a means of escaping a bad bargain and what that is referring to there is where an innocent party in the subject of a repudiation has a right to elect to claiming damages or quantum meruit – if they are in a loss making contract i.e. if they are spending more money than they would be paid under the contract – they will elect to go for quantum meruit ,because if you go for damages under the contract then insofar as you claim expectation loss i.e. what money you would have been paid and what profit you would have paid under the contract there’s nothing to claim, so it really does as a matter of practicality it does drive bad behaviour and snatching at repudiation as Mason & Carter refer to.

The other area of criticism that is identified in the BHPIT case is the proposition derived from Renard of how you value the quantum meruit itself and in Renard as it said what the court did there was they assessed the quantum meruit based on the reasonable cost to the contractor of the work he had done and the money he had expended and that’s the fair value of the fair remuneration. So that’s looking at it from the effort that has been expended under the contract, but it doesn’t look at the benefit that the person has derived and come back to where we started – this is a restitutionary remedy under the law of unjust enrichment which seeks to disgorge the benefit that the person has derived and how you assess that based upon costs the person spent, which may have been spent in such an extravagant way that has nothing to do with repudiation and means that the party that is the innocent party may be greatly benefitted by their own inefficiencies, and that was the case in the GC Marconi v BHPIT case because it was identified that the work performed by GC Marconi was done in an inefficient and ineffective way and that was - they were the authors of their problems in that particular case.

So it is the lack of coherence, it is when the principle and the execution of that principle is led to more controversy and in that particular case Finn did say was he not constrained by authority he would have rejected the application of Renard Constructions.

Similarly – we come to Sopov v Kane which is a 2009 decision of the Victorian Court of Appeal. Again a long running dispute – a domestic building dispute as well where emotions were highly charged. It went to the Court of Appeal on the question of whether quantum meruit was an available remedy in the event of a repudiation of the contract. Again the Court of Appeal (feeling constrained by authority and saying that it was up to the High Court to change the principle which had been enunciated in Renard) did identify that there was growing criticism of the principle, and identified the criticism resting on a number of propositions which the judgment identifies. The first being that when a contract is terminated in common law by acceptance of repudiation, both parties are discharged from the further performance of the contract but rights which had been unconditionally acquired prior to the termination are not divested or discharged. So in the situation you have got a valid contract, why should you have the restitution remedy? And as we say in the next point, there is a valid and enforceable agreement governing the right to payment and identified the case from President Mason where it is said neither occasion nor legal justification for the law to superimpose or impute an obligation to promise or to pay a reasonable remuneration. But notwithstanding those criticisms, the Court of Appeal felt constrained by authority and upheld the decision of Justice Warren in the first instance which not only awarded a quantum meruit but also awarded quantum meruit assessed based upon the costs incurred by the contractor themselves. That was again subject to significant criticism by the Appellant in that case but the Court of Appeal determined that there was no demonstrated error because it was an available way of assessing the benefit.

HAYLEY: Fast forward another ten years and we are seeing similar issues arise in the case of Mann v Paterson. Lachlan are you able to tell us a little about what this case is about?

LACHLAN: Sure, so Mann v Patterson concerned a domestic building contract for the construction of two townhouses. The contract price there was $970,000. Now there were delays during the construction process and the owners tried to terminate the contract. The builder turned around and said that that was a repudiation of the contract and elected itself to terminate the contract. The builder then went to VCAT to try and recover its damages. It claimed firstly damages under the contract, and secondly and alternatively damages on a quantum meruit. VCAT followed Sopov v Kane and it held that the Manns had in fact repudiated the contract, thus entitling the builder to damages. The VCAT assessed those damages on a quantum meruit being the costs incurred by the builder, plus an allowance for profit and overheads.

HAYLEY: And the Manns have been unsuccessful in their appeals to the Victorian Supreme Court and the Court of Appeal. The High Court has now granted special leave to appeal but what is the substance of the Manns’ appeal before the High Court?

LACHLAN: Yes it is interesting – if you look at the transcript from the special leave application you can see that the High Court is clearly conscious that their previous refusal to grant special leave back in 1992 in the case of Renard was being treated effectively as if the High Court had reinforced the principles applied in the Court of Appeal. So it is obviously a motivating factor of the High Court to actually consider this issue and make a decision. Having looked at the Appellant’s submissions we can see that the Manns are arguing two main arguments for the quantum meruit point.

Their first position is that quantum meruit should not be available as an alternative remedy to the contract damages following termination for repudiation. They say that in circumstances where the relevant building works are governed by a contract and that contract is not frustrated, avoided or unenforceable the claim for payment for the works should be confined to a claim in contractual damages. In support of this proposition the Manns say a contract is not rendered void ab initio upon termination for repudiation. This is known as the rescission fallacy. Upon termination for repudiation both parties are as Matt previously said discharged from the further performance of the contract but the contract terms remain effective in relation to the rights accrued up until the date of termination. So therefore as was said in the previous cases, there can be no legal justification to superimpose an obligation to pay this reasonable remuneration. There is a valid contract which provides the way in which works are to be assessed. A restitutionary remedy should really only be available when there is no genuine agreement or the agreement is frustrated, avoided or unenforceable. Finally they say that allowing quantum meruit in these circumstances would undermine the parties’ contractual risk allocation.

Now the second position that the Manns argue is that if the High Court does find that quantum meruit should be available upon termination for repudiation the assessment should be subject to a contractual price ceiling. They say that the valuation of quantum meruit should reflect the bargain struck by the parties, that is the contract price. The contract price reflects the parties’ allocation of risk and in fact a quantum meruit claim can lead to an amount greater than what the contract would provide and in those circumstances would actually unjustly enrich the builder.

HAYLEY: And so in light of what we have discussed today and in particular the history of this case Mann & Patterson why do you think it is so important?

LACHLAN: Well as Matt previously showed, the cases show this current discord between the two available remedies following termination for repudiation. That is, a claim in damages for breach of contract versus damages assessed on a quantum meruit. As can be seen from the previous decisions, both lead to different results for builders and builders can, in certain circumstances favour the quantum meruit claim because it leads to much larger award. Now the High Court here has a unique opportunity to address this discord and meet some of the judicial and academic criticism directed to the previous decisions in Renard Constructions and Sopov v Kane. Ultimately though both parties have presented very solid arguments before the High Court so it will be very interesting to see how the High Court decides.