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Construction Law Update on Contract Termination
“as much as he deserved”: Limits to Quantum Meruit claims in construction contract termination
The Case: Mann v Paterson Constructions Pty Ltd [2019] HCA 32
At the High Court of Australia, the limits to quantum meruit claims for contractual termination have been noticeably altered.
Key points
- A contractor is not entitled to recover quantum meruit (a claim for the reasonable value of the work completed) for work done before the termination and for which there is a contractual right to payment at the time of termination. The contractor is limited to damages for breach or debt for recovery.
- A contractor may claim quantum meruit for work completed before termination and which they do not have a contractual right to payment accrued at the time of the breach. This quantum meruit claim is limited to the price stipulated in the contract.
- Failure to comply with s38 of the Domestic Building Act (regarding variations of plans by the owner) may result in a builder being unable to claim the value of those variations at a later date.
Background
The Manns contracted with Paterson Constructions Pty Ltd under a major domestic building contract to construct two townhouses.
Prior to the completion of the second townhouse, the Manns claimed the builder repudiated the agreement, based on an alleged delay in carrying out works. The Manns purported to affirm the repudiation and locked the contractor out of the site. The contractor, in turn, asserted that the Manns’ conduct in excluding it from the site was itself a repudiation, which the contractor then also accepted.
Paterson Constructions sought to recover the value of work done on a quantum meruit basis, including 42 contract variations which the proper process had not been followed. When the contract had been terminated, Patersons had received $945,787 in progress payments for a contract price of $916,779 (excluding the variations).
At VCAT in the first instance, Patersons was a quantum meruit sum of $660,526.41, which was significantly higher than what could have been awarded for breach of contract. The Manns appealed first to the Supreme Court of Victoria and then the Victorian Supreme Court of Appeal unsuccessfully.
The decision
The High Court looked at three grounds of appeal. The matters under review were:
- can a contractor, having terminated for repudiation, choose to recover on a quantum meruit basis, rather than seeking damages;
- to the extent it could recover on a quantum meruit basis, whether the contract price operated as a ceiling on the amount recoverable; and
- does s38 of the Domestic Building Act apply to quantum meruit claims regarding variations, especially if they were undertaken outside of the requirements of that section.
The High Court decided that where a contractual right to be paid has already accrued, the contractor is unable to make a claim on a quantum meruit basis. The majority (Nettle, Gordon and Edelman with Gagler separately) held that the contractor could recover on a quantum meruit basis where no right to payment had accrued under the relevant contract, but that the amount recoverable was limited to the contract price for the relevant stage or part of the works. One of the key elements in this matter was that the builder had been paid in staged payments and therefore the quantum meruit claim could be made for the final incomplete stage and not for the total value of the contract.
Finally, the Court found that s38 of the Domestic Building Contracts Act prevented a contractor from recovering an amount in restitution for variations that were not approved according to that section.
The High Court has overturned Lodder v Slowey and determined that where there is a claim in contract, there will “generally be no need to have recourse to a remedy in restitution.”
Takeaways
A contractor may no longer rely on quantum meruit to recover more than would have been recovered had the contract been performed.
Consideration must be given to stage payments and they should accurately reflect the value of the work undertaken to that point as claims for restitution may not be able to be sought outside each stage. Construction law and construction contract drafting will need to take this in to account.
Any variations to the plans or specifications in a building contract should be agreed in compliance with s38 of the Domestic Building Act and documented appropriately.
Contact Cogent Legal for construction law enquiries.
See the full case here:
The Case: Mann v Paterson Constructions Pty Ltd [2019] HCA 32