High Court clarifies availability of quantum meruit following repudiation of a building contract

The High Court’s recent decision in Mann v Paterson Constructions Pty Ltd [2019] HCA 32 (Mann v Paterson) has brought clarity to an area that has often been described as controversial: the ability to elect to seek a quantum meruit for repudiation of a building contract. 

Clarity from the High Court comes in two ways:

• clarification of the limited circumstances in which a builder may now pursue a claim of quantum meruit; and
• clarification around quantification.

In the case, the High Court also found that the Domestic Building Contracts Act 1995 (Vic) (DBC Act) applied and provided for the full scope of variation works performed, thereby negating the recovery of a quantum meruit for that work.

The decision means that builders and construction contractors must pay close attention to their contracts (both in terms of negotiation and contract administration) as it will now be more difficult for them to avoid onerous contractual mechanisms (such as time bars and caps) by seeking a quantum meruit.

What is quantum meruit? 

Quantum meruit is a legal doctrine which allows a contractor to claim restitution of a reasonable sum for work and/or services provided. The term quantum meruit translates to ‘what one has earned’ or, in practical terms, ‘what the job is worth’.  

A restitutionary claim for quantum meruit can generally arise in the following circumstances:

• there is no contract specifying a sum to be paid;
• there is an express agreement between the parties to pay a ‘reasonable sum’;
• work is undertaken outside of the contract, at the request of the principal; or
• work is undertaken under a contract which is later found to be void or unenforceable.

The facts of the case

In March 2014, Mr and Mrs Mann (Owners) entered into a major domestic building contract with Paterson Constructions Pty Ltd (Builder) for the construction of two double storey town houses.

In April 2015, with one of the two townhouses completed, a dispute emerged regarding payment for variations that had been orally instructed by the Owners and implemented by the Builder. Following the Builder issuing an invoice for the outstanding variation costs, the Owners repudiated the contract and the Builder accepted that repudiation, thus terminating the contract.

Procedural background

The Builder brought a claim against the Owners in the Victorian Civil and Administrative Tribunal (VCAT), for damages for breach of contract or restitution for the work, labour and materials involved.

VCAT found the Builder was entitled to restitution on a quantum meruit basis for an amount reflecting the reasonable value of the work performed and the materials used. This amount was substantially more than the Builder would have been entitled to under the contract.

The Owners appealed to the High Court, after having earlier appeals to the Supreme Court of Victoria and Victorian Court of Appeal substantively dismissed.

The appeal grounds

Relevantly, the Owners raised three grounds:

1. That the lower courts had erred in holding that the Builder was allowed to elect to recover a reasonable value of the works carried out by it on a quantum meruit basis following the termination of the contract based on the Owners’ repudiation.
2. Alternatively, if the Builder was entitled to such a restitutionary remedy, the contract should have operated as a ceiling or cap on the calculation of the quantum meruit.
3. That the lower courts had erred in finding that section 38 of the DBC Act did not apply, so as to preclude the Builder from claiming a quantum meruit in relation to variations under a domestic building contract (there was no dispute that the DBC Act applied, only whether the legislation permitted restitutionary recovery by the Builder for variations).

The High Court’s decision 

Gageler J identified that the Court essentially had to determine the Builder’s remedial entitlement, following the termination of the contract by acceptance of the Owners’ repudiation, in relation to three categories of work performed:

• work in respect of variations to the contractual scope that the Owners had requested;
• work under the contract for which the Builder had accrued a contractual right to payment prior to termination; and
• work under the contract for which the Builder had not yet accrued a contractual right to payment at the time of termination.

Gageler J’s categorisation provides a convenient structure to consider the practical implications of the High Court’s decision.

Accrued contractual rights to payment

The High Court unanimously held that the Builder’s remedy for stages of work completed prior to termination of the contract (i.e. where a right to payment had already accrued) was for the payment of the contractually agreed amounts due for completion of the relevant stages. Accordingly, the Builder could not elect to pursue a quantum meruit for completed portions of work.

How this reasoning will be applied in more complex contractual contexts is unclear, particularly where progress payments are assessed and paid on a provisional basis (i.e. when it is unclear whether a right to payment of a set amount has properly accrued).

Divisible obligations and uncompleted work

The majority of the Court, comprised of Gageler J and Nettle, Gordon and Edelman JJ, held that the Builder was entitled to choose between damages or restitution for work that had not been completed prior to termination (i.e. where a right to payment of a specified amount had not accrued under the contract). However, any such amount calculated on a quantum meruit basis in relation to uncompleted stages of work should generally not exceed the contract price or the relevant portion of it.

Accordingly, where a contract does not specify stages of the work and corresponding amounts to be paid upon completion of those stages, a builder may be entitled to claim on a quantum meruit basis for the entirety of the works performed, albeit that the eventual assessment is likely to be constrained by the total contract price. The application of the High Court’s reasoning in Mann v Paterson to such circumstances is likely to provide fertile ground for further consideration by courts in the future.

The minority on this relatively narrow point, Kiefel CJ, Bell and Keane JJ, would have allowed the first ground of appeal and limited the Builder’s remedial rights in the present case to damages in contract. This made it unnecessary for the minority to specifically address the issue of whether the contract price acted as a cap on any recovery in restitution.

Ultimately, the majority chose not to directly address the controversy surrounding a party’s election between damages or restitution by closing off the ability to choose entirely. Rather, the Court’s decision significantly limits both the availability and scope of any quantum meruit following termination as a result of repudiation by:

• confining the availability of a quantum meruit to work performed but for which no contractual right to payment has accrued prior to termination; and
• making the calculation of any quantum meruit in that regard effectively subject to a cap by reference to the price(s) attached to the work or parts thereof within the terminated contract.

The Court reasoned that this approach represents a more coherent application of remedies following termination of a contract and places due weight on the contract price(s) negotiated between the parties and the contractual allocation of risk that such consideration represents.

Variations – domestic building

The Court unanimously held that s 38 of the DBC Act precluded the Builder from obtaining restitution for variations on a quantum meruit basis. The only right of recovery for that work was under s 38(6)(b) of the DBC Act as per the amounts prescribed by s 38(7).

The High Court’s construction of the DBC Act in Mann v Paterson significantly narrows the scope for recovery of variations to contractual works covered by that (and, likely, similar) legislation.

However, any application of the majority’s broader reasoning to variation work not covered by the DBC Act will likely need to be considered further in future cases.

Key takeaways

Ultimately, the High Court remitted the matter back to VCAT to reconsider the quantum of the Builder’s entitlement by reference to:

• its contractually accrued rights to payment;
• the residual contract price amounts; and
• the application of s 38 of the DBC Act.

While the election to pursue a claim in restitution may still be available in limited circumstances, a claim for quantum meruit will likely now be less appealing in the average case, as it is now significantly less likely to permit a party to recover an amount that is materially different from the amount(s) payable under the contract.

The reasoning of the Court in Mann v Paterson represents a significant step forward in providing greater certainty and coherence in the costs that may flow from the termination of a contract.