BUILDER'S RECOVERY ON QUANTUM MERUIT BASIS WHERE OWNERS WRONGLY REPUDIATE BUILDING CONTRACTS
Burgeoning Melbourne property prices have led to a plethora of amateur building tycoons coming into the Melbourne property market to develop units, townhouses and flats. Many of these developers have little understanding of the technicalities of building contracts and, in particular, of the Domestic Building Contracts Act 1995 (Vic.) (“Act”).
These developers are often poorly advised and purport to terminate building contracts in circumstances where the termination amounts to a wrongful repudiation of the building contract. In those circumstances, builders have a choice: the builder can either sue for breach of contract and assess damages on the basis of the actual costs incurred in carrying out unpaid work or, alternatively, the builders can accept the repudiation of contract and proceed to establish their loss on a quantum meruit claim basis. The difficulty with this alternative of proceeding on a quantum meruit claim is that, traditionally, courts have been reluctant to accept evidence from a quantity surveyor in calculating the builder’s loss and damage. Courts and VCAT have normally required builders to provide details of the actual cost of variations and delays pursuant to Section 38 of the Act.
However, in Mann v. Patterson Constructions Pty Ltd  VSC 119, his Honour Justice Cavanough allowed the builder to quantify a quantum meruit claim based exclusively on a quantity surveyor’s expert evidence as to the reasonable value of building work performed in circumstances where the owner had wrongly repudiated the building contract. Justice Cavanough also decided that when a builder succeeds on a quantum meruit claim following wrongly termination of a building contract by the developer, the builder need not comply with Section 38 of the Act.
The builder, Patterson Constructions, agreed to build two units for owners of a property in Blackburn for $1,000,000. As is normally the case with inadequately advised developers, the builder carried out a significant number of variations as the works proceeded which were not properly documented and agreed before on the parties. A dispute subsequently arose in relation to payment for the variations.
The developers had paid the builder nearly $950,000 when the dispute arose. The deveoperspurported to terminate the contract. Patterson Constructions denied it was in breach. The builder accepted the purported termination of the developers as repudiation of the building contract and sued the owners for the value of the unpaid variations on a quantum meruit basis. In quantifying its claim, the builder relied exclusively on the evidence of a quantity surveyor as to the reasonable value of the unpaid variation works.
At VCAT, the Tribunal decided that the developers’ contract termination was unlawful. VCAT then assessed the builder’s claim on a quantum meruit basis and accepted the expert evidence of a quantity surveyor as to the reasonable value of the completed works including the variation works rather than the actual costs incurred in carrying out those works. The developers were ordered to pay over $660,000.
The damages award was much greater than could have been expected for a claim based on breach of contract which is traditionally assessed by determining the actual cost incurred in carrying out the works which is a difficult and time consuming process for builders under a continuing contract.
The developers appealed to the Supreme Court of Victoria. Justice Cavanough dismissed the appeal.
His Honour decided that the proper approach of a quantum meruit claim is to determine the fair and reasonable value of the work performed and held that the measure of the remedy to which the builder is entitled is the value of the benefit of the unpaid constrcution works conferred on the developers who received that benefit. The developers’ argument was that a Court or Tribunal should not simply rely on the evidence given by a quantity surveyor as to the value of building work and must take into account other factors including the contract price and the actual costs incurred by the builder in carrying out the work which may be less than the opinion of the quantity surveyor as to the value of the work. In coming to his Honour’s conclusion, Justice Cavanough preferred NSW over previous Victorian Supreme Court authorities. His Honour concluded that whilst the contract price or costs actually incurred will often be a relevant consideration, they were not matters which a Court or Tribunal was compelled to take into account. It was permissible for the Court or Tribunal to assess the value of the benefit conferred on the developers by relying solely on the evidence given by the quantity surveyor in relation to the reasonable value of the works.
In relation to the developer’s argument under Section 38 of the Act, the developers maintained that the section requires a builder to give the owner a notice advising of the effect on the work and the increased costs of any variation requested by an owner which adds more than two percent to the original contract price. If the builder does not provide this notice, any work done on account of the variation by the builder cannot be recovered unless VCAT is satisfied there are exceptional circumstances. At first instance, VCAT had not found there were exceptional circumstances but had simply decided the reasonable value of the variation works based on the expert evidence and ignored Section 38.
Justice Cavanough decided that Section 38 had no application to the present case. The Section only deals with contractual recovery of variations. The claim made by the builder was based upon quantum meruit after the contract had been repudiated by the developers. The quantum meruit claim was made outside of the building contract and thereby avoided the operation of Section 38. That Section did not limit the right to make a quantum meruit claim because the Section only refers to changes in the terms of the contract rather than changes in the actual construction work. Accordingly, the fact that VCAT did not apply Section 38 where the contract had been wrongly terminated by the owners and the claim prosecuted on a non-contractual, quantum meruit, basis by the builder meant that there had been no legal error by the Tribunal.
Justice Cavanough’s decision is far-reaching for both builders and developer/ owners. Once again, the risks to a developer/owner in terminating a building contract without having proper legal grounds to do so have been dramatically shown. Such unwise actions hand a powerful weapon to builders to accept the wrongful termination as repudiation of the building contract and to proceed to sue outside of the contract and thereby avoid a number of important protections provided by the Act for the benefit of owners.
Again, the importance of receiving competent and experienced building and construction legal advice is emphasised.
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