Corrs High Vis: Episode 40 – Quantum Meruit in the wake of Mann v Paterson

David Hastie – Senior Associate – Corrs Chambers Westgarth

Wayne Jocic – Consultant – Corrs Chambers Westgarth

Jey Nandacumaran - Senior Associate – Corrs Chambers Westgarth

David - Hello and welcome to our first High Vis Podcast for 2020. My name is David Hastie, Senior Associate in Corrs’ Projects Practice Group and I’m joined by Corrs consultant, Wayne Jocic and Corrs Senior Associate, Jey Nandacumaran.

At the back of 2019 one of the most anticipated construction law decisions for some time was handed down by the High Court. Mann v Paterson was without doubt one of the most important decisions in recent years given its guidance on the availability of quantum meruit as a restitutionary remedy in construction disputes.

The question everyone wants to know is whether the High Court has killed off quantum meruit or whether there remains some scope for electing QM for relief in restitution for unjust enrichment. Yes, the door is likely been slammed shut on QM in a domestic building context but in a commercial construction contract context Mann v Paterson shouldn’t be considered QM’s swansong just yet.

Wayne, Jey, thanks very much for joining me. Wayne, I might throw to you to begin.

Wayne - Sure, so today we are going to talk about a case called Mann v Paterson so it’s a recent High Court case. It was much anticipated and what we have in the end is three very complex judgments so what I am going to do, before I start to talk about the actual topic which is quantum meruit, is step back about 10 paces and start with some basics about contract law. I am going to do that because as you can probably tell those basic words “quantum meruit” aren’t even English and it’s probably useful for us to get ourselves oriented first.

So, the first thing I start off with is if we are dealing with contracts people can do the wrong thing of course and normally the way the law responds is just to ask that wrong doer to pay money. So you have to pay damages. Now there are other remedies: it might be you can get an injunction; or an order for specific performance; or rescission, but generally we are talking about damages.

Now, in other situations it might be that you have a contract but you haven’t specified a price for work that is to be done. Or it might be that you don’t have an enforceable contract. And in those situations the law allows you different routes for the party who has done some work to be able to claim for a reasonable sum. That’s what quantum meruit means.

So the topic we are dealing with today really combines those two ideas at that reasonable sum and the appropriate remedy for somebody who does something wrong under a contract. This is the more controversial idea.

So it’s an important issue – a vitally important issue in construction because it arises typically in this way. What you have is a contractor who has done some or maybe a large part of the work that they are required to do under the contract. The principal then perhaps thinks that the work hasn’t been done satisfactorily, attempts to bring the contract to an end, but they don’t have legal reasons for doing that. The contractor then accepts that repudiation. So where we are now is the contract is over in the sense that the parties don’t have to perform future obligations, the builder doesn’t have to come back on site, but the question is what happens to money for the work that the contractor has already done.

So I know it’s a really long-winded introduction but the way the law used to work, a bit controversially because of cases like Kane and Sopov and Renard, was that the contractor had a choice here. The contractor could choose damages for breach of contract or could alternatively elect to be paid on a quantum meruit; to be paid a reasonable sum at market rates for the work that they had done.

Now you can see those figures could be different and if you are the contractor you are going to have, you know, a good assessment of which one is more favourable and often where the contractor had done a lot of work perhaps where they had under-priced the work, the quantum meruit assessment might have been favourable. You can see, though, that is a bit of an odd situation in the common law because normally we are talking about damages for breach of contract.

So that’s really the central issue in Mann v Paterson: can a contractor still claim that quantum meruit, that reasonable sum for work they have done where the Principal has brought the contract to an end wrongfully.

Jey - Wayne, this is Jey here. I am just wondering why would a contractor bother claiming this alternative remedy? What are the advantages for it?

Wayne – Look I think I can answer that in a single word and that is money. Because you can see if you put in a bid at tender you are pricing on the basis of perhaps limited information – it might be that you propose to do work for let’s say $100,000. It turns out though that the work if you were to complete all the work it would actually cost you $150,000, you really under-priced it but along the way you end up with this little difficulty perhaps you have done a $120,000 worth of work.

Now on the contractual basis you wouldn’t be paid $120,000 but maybe you would be paid $120,000 on a quantum meruit assessment. So then we say well - and one of the questions I suppose we are going to deal with later, I am sure we are going to deal with later is whether that contract sum of $100,000 might be a cap on what the contractor could get in any situation.

David - Absolutely. Well Jey I might throw back to you. How about you just run us very quickly and succinctly through the facts of the Mann v Paterson High Court decision?

Jey – Thanks Dave. I will keep it short. Simple case – it was about the construction of two townhouses in Blackburn in Victoria. It was a fixed price contract for $971,000. It was a contract under the Domestic Building Contracts Act and it was, as is common for contracts of this nature, split into five separate stages. And there was a fixed cost for each of the five stages, the sort of things that would be very familiar to builders and owners, things like base stage, frame stage, lock-up stage.

During the course of the project, towards the end in fact, when most but not all of the work had been done the owner requested a number of variations which the builder carried out. The formal process in the contract and under the Act weren’t followed but then when we got towards the end of the projects the builder has submitted a claim for all of those variations.

The owners became unhappy. There was the usual angry exchange of correspondence between the parties’ lawyers and the owners ended up alleging that the builder had repudiated the contract by claiming these variations. The builder’s solicitors responded and said by claiming that the builder had repudiated the contract the owner had in fact repudiated the contract and the builder accepted that repudiation and brought the contract to an end by terminating it.

David – Jey, thanks very much for that summary of facts. Jey, Wayne, I guess the question that everyone wants to know coming out of the High Court’s decision in Mann v Paterson is: “Is quantum meruit still alive as a remedy?” Very, very broad sweeping question that one but Wayne, your thoughts? I have got my own opinions.

Wayne – Look before I answer the question properly I am going to say it’s a good idea to take a deep breath. So a lot of people I think have said in response to this case that quantum meruit claims in this context are dead and I actually think the truth is more complex than that. So what I might do if you don’t mind is just step through situations where we know quantum meruit claims are not going to be available and then where they might be available.

So I think we can say fairly confidently that where the contractor has an accrued right to payment, for example because they have done all of the work for a specified stage where there was a dollar amount attached to that, then they will be entitled to payment in accordance with the contract. It’s a debt claim. They won’t be able to claim in quantum meruit even if the owner hasn’t paid them for that particular piece of work. So that is fairly clear from all of the judgments in the High Court.

Now, I just want to say that is different from the position in some of those older cases that people might have come across like Renard, like Kane and Sopov, like Yetzi, plenty of cases.

David - So the opportunity to elect is gone, that’s dead. In this context.

Wayne - Well it is dead in this particular circumstance where the contractor has an accrued right to payment. But the really tricky thing is that it might be that contractors will still have a more limited right to claim on the quantum meruit basis if they choose to do that where there is no accrued contractual right. And this can happen in the situation where work, perhaps for some stage of construction, has been partly performed but not fully performed.

So they haven’t actually done all of the work that would trigger the entitlement to be paid enforceable in debt and so that’s a situation that is really quite interesting. So this is fairly clear on these facts because of the domestic building context because the relevant Act requires the contract to set out particular dollar amounts for particular stages of work.

So I am just going to run through quickly the judgments here and I know this is a little bit painful but it is very important for us to see the detail of the case. So the first thing I would say is that, you know, what I would loosely call the minority, the Chief Justice and others, say there is just no right to the quantum meruit claim here. So three out of the seven judges say no quantum meruit in this situation at all. But what we have for different reasons is the remaining four holding that a quantum meruit might be available.

So what I’m going to call the majority, judgment of three, say that in this situation where there is no accrued contractual right to payment, there is what they call a failure of consideration and that’s language that people might know from money had and received claims. It is an idea that is well entrenched in scholarship and unjust enrichment but they say that this sort of failure of consideration founds a quantum meruit claim. So it’s still available for that work that has been partly performed.

So I know that was quite a detailed comment but I think it just shows that there is a real division here because the remaining judge who thought that quantum meruit was available in these limited circumstances, Justice Gageler just didn’t buy into that language of a failure of consideration and said, said on the basis some quite old and memorable decisions, that it is really another sort of debt claim albeit for that sort of reasonable sum.

So that was a bit long-winded so let me try to give a quick summary. So where we are today after Mann v Paterson is that where you have an accrued right to payment with the contractor, you can’t elect quantum meruit. You are stuck with the contractual portion of the price but for different reasons, highly contested reasons, four out of the seven judgments leave us in the situation that where you don’t have an accrued right to payment you might be able to elect between damages of breach of contract or a quantum meruit assessment.

So this might sound like an incredibly abstruse discussion but I am just going to raise a question which I think is very hard and which I don’t think anyone really has a firm answer to and that is: “Well what happens if you are dealing with an ordinary commercial construction contract where you have headline contract sum and you have provisional monthly payment but that payment is on account only?” You know that’s consistent with security of payment legislation. That is a very different situation from the fixed price, fixed stage approach in domestic building and so there is a live question about whether quantum meruit claims might be available more broadly in that situation and the High Court judgments, because of that split, just don’t really answer that question which is, I think, the most pressing one.

David – That’s great Wayne. Thank you – that’s very detailed. I guess one of the big issues also coming out of the decision was the question of whether the contract price can act as a cap on QM and there was significant discussion around contract price acting as reflecting the relevant risk allocation between the parties. Jey, what are your thoughts on this?

Jey – Well I guess the first thing to say is the minority judgment of the Chief Justice and co didn’t need to deal with this question because their conclusion was that irrespective of whether there is an accrued right to payment or not, a builder in these circumstances is only entitled to claim damages for the repudiation – they didn’t turn their minds to this question.

The other four judges split between the judgments of Justice Edelman and co and Justice Gageler came to different, slightly different conclusions. Justice Gageler said that notwithstanding that there was this availability of an alternative remedy of restitutionary quantum meruit, any agreed contract price or prices would act as an absolute cap on the amount that a builder would be able to recover. Now Justice Edelman and co weren’t quite so definitive. Their conclusion was that the contract price or prices would ordinarily act as a cap on the amount that a builder would be able to recover, but this wouldn’t always be the case. They left open the door for claims that would exceed any amounts agreed between parties.

Wayne - Yes, and look if I could just leap in. I think this is one of those situations where it’s – I suppose moderately easy for the High Court judges to sit there and to make a broad statement of principle, in the case of the majority Justice Edelman and co to say there’s a prima facie position that the contract sum operates as a cap, or the relevant part of it does.

But as soon as you start to apply it this becomes really, really hard. So what is the contract sum? Like in a construction context, if we think about this, there are plenty of ways that the contract sum that is listed there in the contract might vary; it might be there are variations. It might be that you encounter some latent conditions, it might be that there are your prime cost items, that there are provisional sums, that there is a change in law, whatever else – it’s actually very difficult to work out, you know, what that cap might be.

There is plenty of room for argument, number one about what the law is but then number two, I think more importantly, about how that contract sum, it it’s a cap at all, is actually going to be determined. So I think this is a situation where there is much more in this case than a quick reading suggests.

David - Absolutely, and on the facts, especially as it has been touched on by Wayne yourself, and Jey, given the domestic building context of this dispute, these principles as put forward by the High Court – they make sense in the domestic building context; not necessarily in a mega project context.

Wayne - That is absolutely right and I think – I suppose I told you, this raises a really important more general question which is: “Well what do you do on those big projects in response to this case?” You are not just understanding or trying to understand ideas of a failure of consideration, all those things, what do you do in response. And, look, the first thing I would say is this is an area that is very important for people working at the front end, working in tenders, negotiations and those things. And the first thing I would say is it’s pretty clear now, from all of the judgments, that if you want very plainly in the contract to exclude a quantum meruit claim, you can do it.

If you want to do more elaborate things, if you want to set up something like a termination for convenience regime, have everything deemed to be a termination for convenience, if it happens to be a repudiation say, you can do that. You can couple that with a termination payments schedule. All those things will be effective.

I have spoken about that in some length and it sounds like it’s a really complex thing to do but if we just step back for a second, this was, I suspect, a high stakes project for the people who were involved but the case went from VCAT to the Supreme Court, to the Court of Appeal, to the High Court, back to VCAT and in a sense I think all of that could have been dealt with by well-informed, very careful front end drafting. So that’s one implication for major projects; that the time you invest early on really can avoid this sort of problem if you’re fully aware of it. So that’s a front end observation but then you have the question about what do you do in argument and how do you plead these things; what’s going on there? I don’t know, Jey, whether you have insights into what the case tells us about what we do in future in legal argument?

Jey - It is one of the difficulties, I think, of passing between the judgments of the purported majority of Edelman and co and then Gageler. The fact that their conclusions as to why it is that a builder is entitled to restitutionary quantum meruit means that I think it is complex trying to figure out how you would plead a cause of action, whether that cause of action is based on some free floating idea of unjust enrichment and there being vitiating factors in this case, as Justice Edelman and co would put it. It’s the failure of consideration or the failure of basis predicated upon a contract being terminated before all work is complete and before all payment has been made.

Wayne – Yes, look I think I’m going to have to say Jey I just find it very difficult to know how to respond to this case because there is this split in the judgment, exactly as you said. And I think to me what that points to is the idea that this is not the case that killed quantum meruit but in fact is the case that’s likely to trigger lots of further arguments about things like the precise formulation of the claim.

But the limits of the claim about what amounts to a failure of a distinct and severable part, about the effect of a cap, all of those things, so I think it’s really a complication rather than the solution to all these problems.

Look, we’ve been talking about quite a lot here so maybe what I might try to do, very ambitiously is try to draw this all together in a sentence or to with, perhaps, your help Jey. It seems to me Mann v Paterson is one of the most important private law cases and it is certainly the most important High Court construction case in a long time because it goes to the heart of contract law: what do you get when you’re wronged under a contract? I think now the short answer to that is you’ll normally be entitled to damages and it’s really on Mann v Paterson only in particularly limited circumstances we might be able to make a quantum meruit claim.

That’s where you haven’t actually accrued a contractual right to payment. Now the one big caveat to that as I mentioned earlier is it’s not clear how this decision works when you’re dealing with a standard commercial construction contract that has a single contract sum and then monthly payments on account only. Expressly not payable in debt; expressly not payable – yes, not indicating rather that the work’s been performed satisfactorily. So plenty of complications but in short the availability of quantum meruit has been narrowed but it still remains.

David – Thanks very much for that Wayne and Jey. So in summary, where have we landed? As a contractor it is now clear that where you have an accrued right to payment under the contract you will not be able to elect QM as a remedy as was previously arguable here. I guess the Sopov line of authority has been put to bed.

However, while far from settled, where an accrued rights payment does not exist you may be able to elect for damages for breach of contract or a QM assessment. But how this works in a commercial building context, I guess only time will tell.

Until next time, thanks very much for listening.

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