High Court changes the position on Quantum Meruit in Mann v Paterson Constructions Pty Ltd [2019] HCA 32

Written by Juliana Jorissen, Scott Budd, Minoshi De Silva and Holly Gretton.

Introduction

On 9 October 2019, the High Court of Australia published their reasons in the much awaited decision in Mann v Paterson Constructions Pty Ltd [2019] HCA 32, a case concerning a dispute over the construction of two townhouses being built for Peter and Angela Mann (Appellants) by Paterson Constructions Pty Ltd (Respondent). The High Court decision is significant as it departs from the current position on quantum meruit as set out in Renard Constructions (ME) Pty Ltd v Minister for Public Works[1] and Sopov v Kane Constructions Pty Ltd [No 2].[2]

The High Court has held that:

• the right to seek compensation on a quantum meruit basis is no longer available where the contract provides for an accrued right of payment at the date of the repudiation[3]; and
• any quantum meruit claim cannot exceed that portion of the contract price referrable to the relevant services.[4]

This landmark decision reduces the uncertainty and risk previously associated with recovery in building contracts on a quantum meruit basis. It will inevitably promote honesty between contracting parties by minimising any incentive to rely on repudiation to escape a bad bargain or otherwise obtain a windfall.  

Background to the dispute

In June 2015, the Respondent made an application to VCAT seeking relief on a quantum meruit basis or in the alternative, sums allegedly due under the contract.[5] VCAT held that the Appellants' conduct, in orally requesting variations, amounted to a repudiation and ordered the Appellants to pay the Respondent a sum of $660,526.41 assessed on a quantum meruit basis.[6]

The Appellants sought leave to appeal to the Supreme Court of Victoria[7] against the VCAT Order on the basis that VCAT had misapplied the quantum meruit principles.[8] The appeal was dismissed, save that the Appellants were granted leave to appeal only for the purposes of correcting a minor mathematical error by VCAT.[9]  A further appeal to the Court of Appeal of the Supreme Court of Victoria was dismissed,[10] before the Appellants found favour in the High Court.

High Court decision

The High Court considered three grounds of appeal being:

(a) whether the Court of Appeal erred in finding that the Respondent, having terminated a domestic building contract upon the repudiation of the contract by the Appellants was entitled to sue on a quantum meruit basis for the works carried out by it;
(b) alternatively, if the Respondent 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 under a quantum meruit claim; and
(c) whether the Court of Appeal erred in allowing the Respondent to recover on a quantum meruit basis for variations to the works carried out by the Respondent, because it incorrectly found that section 38 of the Domestic Building Contracts Act 1995 (Vic) did not apply to a quantum meruit claim for works under a domestic building contract.

Key takeaways

• quantum meruit claims have wrongly been founded in what is termed "the rescission fallacy" and that should come to an end[12];
• a builder is entitled to recover as a debt any amounts to which a right to payment has accrued under the terms of the contract, prior to the contract being terminated for repudiation[13];
• quantum meruit is only available in respect of work done by a builder, for which it had no accrued rights to payment under the contract at the time of termination[14];
• the meaning of quantum meruit is 'as much as he deserved'[15] but a claim for quantum meruit should not exceed the contract price or 'ceiling';[16]
• section 38 of the Domestic Building Contracts Act 1995 (Vic) did not envisage a claim in restitution for work performed under a domestic building contract.[17]

The rescission fallacy is 'indeed fallacious' as a contract is not rescinded ab initio upon repudiation[18]

All three judgments of the High Court held that the Court of Appeal erred in relying on the 'rescission fallacy'[19] in deciding that the Respondent was entitled to a quantum meruit assessment of its claim.[20] The 'rescission fallacy' contemplates that upon the acceptance of a repudiatory act a contract is rescinded ab initio,[21] permitting a quantum meruit claim for the recovery of a "fair and reasonable value" [22] of the work performed, to be brought as an alternative to a claim for damages.[23] The risk being that the amount assessed might substantially exceed the agreed contract price.

Their Honours held that the concept of the contract becoming entirely irrelevant was 'indeed fallacious'[24] and re-affirmed Mason CJ's position in Baltic Shipping Co v Dillon,[25] that a repudiation 'operates only prospectively' and is 'not equivalent to rescission ab initio'.[26] The High Court has confirmed that the 'rescission fallacy' can no longer be maintained in the pursuit of a claim for quantum meruit.[27]

Accrued rights cannot be unwound[28]

Their Honours Kiefel CJ, Bell and Keane JJ held that as the Respondent's rights to payment accrued before the contract was terminated, the Respondent was entitled to be paid for the accrued amounts.[29] The reasoning being that the Appellant's repudiation did not prevent the Respondent from performing the totality of its obligations under the contract and there was no failure of consideration in respect of the work which was the subject of those accrued rights. [30]

This finding is consistent with the earlier High Court decision of McDonald v Dennys Lascelles Ltd[31], which held that accrued causes of action and rights to payment under the contract continue unaffected and are not displaced by any repudiation.[32] Sensibly, the Court concluded that to allow a restitutionary claim in circumstances where rights had accrued would be to subvert the contractual allocation of risk[33] to which the parties' submitted and undermine the values of individual autonomy and freedom of contract.[34]

The consequence of this decision is that a quantum meruit claim is now only available in respect of work conducted by a builder in respect of which there are no accrued rights under the building contract at the time of termination. The basis upon which a payment will have accrued will be dependent on the terms of the contract. This may include situations where a builder only undertook the work after the date of the termination, the builder may have commenced work but did not issue a payment claim in respect of that work or the payment claim was not assessed and certified prior to termination. In circumstances where a right has not accrued, a party remains entitled to pursue a quantum meruit claim for the reasonable value of the work performed subject to recovery being limited by the overall contract price.

The inherent risk underlying the 'rescission fallacy' was the possibility for a quantum meruit award to substantially exceed the agreed contract price[35], giving rise to significant uncertainty as to the value of recovery of any quantum meruit claim.[36]   Prior to this decision, the recovery on a quantum meruit claim was unfettered by the contract value[37] as it was considered inherently contradictory for recovery to be limited to an amount stipulated in a contract, which was rendered unenforceable by virtue of a repudiatory act.[38]

The High Court [39] has held that the contract price should be a ceiling to recovery of a quantum meruit claim by reason that:

• there is nothing anomalous in a defaulting party enjoying the protection of the contract's ceiling on amounts recoverable by way of damages because as a matter of public policy a defaulting party is not to be punished for its breach and neither should the innocent party be entitled to a remedy exceeding the expectations embodied in the contract despite being freed from further performance of the contractual obligations[40]; and
• the contract price reflects the parties' agreed 'allocation of risk'. Fundamentally, restitutionary claims must respect the allocation of risks within contractual regimes[41] and 'termination of the contract provides no reason to disrespect that allocation'.[42] Therefore, the Respondent was not entitled to claim greater payments by way of a restitutionary claim for quantum meruit.[43]

Their honours Nettle, Gordon and Edelman go further to limit any assessment of a quantum meruit by reference to rates in the contract.[44] Their honours further opine that there may be certain circumstances which arise where it is necessary or appropriate that the benefit of the work be determined without reference to the contract price,[45] this will now become the exception, rather than the rule.[46]

Section 38 of the Domestic Building Contracts Act 1995 (Vic) does not apply to a quantum meruit claim

Their Honours unanimously held that section 38 of the Domestic Building Contracts Act 1995 (VIC) excluded restitutionary relief for variations implemented otherwise than in accordance with s38.[47] Pursuant to s.38 the Respondent is limited to recovery of the cost of carrying out the variation plus a reasonable profit pursuant to s.38(7), only if the pre-conditions in s.38(6) are met.[48] The High Court found that VCAT did not undertake the exercise required by s 38(6)(b), to check that the Respondent complied with the pre-conditions in s.38(6) or assess if exceptional circumstances existed justifying recovery under s.38(7), and instead proceeded on the erroneous basis that the respondent was entitled to restitutionary relief. The High Court upheld this ground of appeal and remitted the matter to VCAT for further determination of the amounts, if any, payable to the Respondent in respect of the variations.[49]

Implications

The implications of Mann v Paterson are significant. In restricting the parties to their accrued rights under the contract and ensuring any recovery on a quantum meruit basis for work performed after termination is capped at the contract price, parties will likely need to think far more carefully before terminating for repudiation. The pursuit of a quantum meruit claim as a means of escaping a bad bargain,[50] extracting a windfall from a losing contract or inflicting a punishment on the defaulting party is largely at an end.[51] Consistent with the function of a common law remedy, the High Court's decision avoids a situation whereby a defaulting party is penalised and exposed to the uncertainty of a quantum meruit claim for amounts significantly exceeding the contract price.[52] The High Court's decision will inevitably promote honesty between contracting parties and certainty in the outcome by aligning the recovery pursuant to a restitutionary quantum meruit claim with a claim for contractual damages.

[1] (1992) 26 NSWLR 234 (Renard)

[2] (2009) 24 VR 510 (Sopov)

[3] Per Kiefel CJ, Bell and Keane JJ at [30] relying on the decision of McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, Gageler J at [83] and [101], Nettle, Gordon and Edelman JJ at [110]

[4] Per Gageler J at [91], Nettle, Gordon and Edelman JJ at [110] noting at [203] there may be some circumstances where it is necessary or appropriate that the benefit to the defendant be determined without reference to the contract price

[5] Paterson Constructions Pty Ltd v Mann (Building and Property) [2016] VCAT 2100

[6] Per Nettle, Gordon and Edelman JJ at [139]. A summary of the VCAT decision is set out at [135] to [141]

[7] Mann v Paterson Constructions Pty Ltd [2018] VSC 119. A summary of the Supreme Court decision is set out at [142] to [144]

[8] Per Nettle, Gordon and Edelman JJ at [145]

[9] Per Nettle, Gordon and Edelman JJ at [144]

[10] Mann v Paterson Constructions Pty Ltd [2018] VSCA 231. A summary of the Court of Appeal decision is set out at [145] to [148]

[11] The three judgments are comprised of the judgment of Kiefel CJ, Bell and Keane JJ, a judgment of Gageler J and a further majority judgment of Nettle, Gordon and Edelman JJ.

[12] Per Kiefel CJ, Bell and Keane JJ at [50] noting that Lodder v Slowey [1904] AC 442 should no longer be applied; per Gageler J at [72]

[13] Per Kiefel CJ, Bell and Keane JJ at [10], per Gageler at at [64], [105], per Nettle, Gordon and Edelman JJ at [176] to [177], [179]

[14] Per Kiefel CJ, Bell and Keane JJ at [53]; per Gageler J at [64], [105], per Nettle, Gordon and Edelman JJ at [174], [177], [179]

[15] Per Nettle, Gordon and Edelman JJ at [150]

[16] Per Gageler J at [101]-[102]; Per Nettle, Gordon and Edelman JJ at [205], [215] to [217]. Kiefel CJ, Bell and Keanne JJ at [4] did not expressly consider this ground but maintain the recovery should not exceed a fair value calculated in accordance with the contract price at [31] and that it is difficult to see why a builder should recovery a greater sum than the contract price at [52]

[17] Per Nettle, Gordon and Edelman JJ at [158] to [160]

[18] Per Kiefel CJ, Bell and Keane JJ at [8]

[19] The rescission fallacy was a principle borne out of the Privy Council decision of Lodder v Slowey [1904] AC 442 and applied in Sopov v Kane Constructions Pty Ltd [No 2] (2009) 24 VR 510

[20] Per Kiefel CJ, Bell and Keane JJ at [8], [50] – [51]

[21] Ab initio means "from the beginning"

[22] Pavey & Matthews (1987) 162 CLR 221 at 228, "fair value of the benefit provided"; Nettle, Gordon and Edelman JJ at [148], [203]-[204]; Gageler J at [100], Kiefel CJ, Bell and Keane JJ at [5]

[23] Per Kiefel CJ, Bell and Keane JJ at [5]

[25] (1993) 176 CLR 344 at 356; [1993] HCA 4

[26] Per Kiefel CJ, Bell and Keane JJ at [8], Nettle, Gordon and Edelman JJ at [165], Gageler at [84]

[27] Per Kiefel CJ, Bell and Keane JJ at [51]

[28] This paragraph focuses on the majority judgment of Kiefel CJ, Bell and Keane JJ.  However, the judgment of Nettle, Gordon and Edelman JJ make similar findings in respect of accrued rights at [172] – [177]; Gageler J at [62]

[29] Per Kiefel CJ, Bell and Keane JJ at [27], the Respondent's arguments in support of its repudiation claim and entitlement to a restitution claim is set out at [25]

[30] Per Kiefel CJ, Bell and Keane JJ at [27], the Respondent's arguments in support of its repudiation claim and entitlement to a restitution claim is set out at [25]

[31] (1993) 48 CLR 457

[32] Per Kiefel CJ, Bell and Keane JJ at [9], [29]; McDonald v Denny Lascelles Ltd (1933) 48 CLR 457 at 476-477, per Dixon J

[33] Per Kiefel CJ, Bell and Keane JJ at [19]

[34] Per Kiefel CJ, Bell and Keane JJ at [20]

[35] Per Kiefel CJ, Bell and Keane JJ at [6]

[36] Per Kiefel CJ, Bell and Keane JJ at [5]

[37] Per Gageler J at [92]

[38] Per Nettle, Gordon and Edelman JJ at [204]

[39] Gageler J at [101]-[102]

[40] Per Kiefel CJ, Bell and Keane JJ at [37]

[41] Per Kiefel CJ, Bell and Keane JJ at [14]

[42] Per Nettle, Gordon and Edelman JJ at [205] citing Mason, Carter and Tolhurst, Mason & Carter's Restitution Law in Australia, 3^rd ed (2016) at 610 [1430]

[43] Per Kiefel CJ, Bell and Keane JJ at [27]

[44] Per Nettle, Gordon and Edelman JJ at [110]; Gageler J at [105]

[45] Per Nettle, Gordon and Edelman JJ at [213].  Further at [216], their honours noted that one possibility arises from the case of Boomer v Muir (1933) 24 P 2d 570 where the defendant's continuing breaches were responsible for a cost overrun that rendered the contract unprofitable

[46] Per Nettle, Gordon and Edelman JJ at [215]

[47] Per Nettle, Gordon and Edelman JJ at [160]

[48] Per Gageler J at [59]

[49] Per Nettle, Gordon and Edelman JJ at [161]

[50] Per Kiefel CJ, Bell and Keane JJ at [52], citing GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at 157-158 [662]

[51] Per Kiefel CJ, Bell and Keane JJ at [21], [39], [52]

[52] Per Gageler J at [90]