Building and Construction law – clarity on when a building contract is repudiated, can the innocent party recover damages for breach of contract or upon a quantum meruit basis?
BUILDING AND CONSTRUCTION LAW – CLARITY ON WHEN A BUILDING CONTRACT IS REPUDIATED, CAN THE INNOCENT PARTY RECOVER DAMAGES FOR BREACH OF CONTRACT OR UPON A QUANTUM MERUIT BASIS?
For decades, lawyers have understood that when a contract – particularly a building contract – is repudiated, the innocent party can recover damages either in accordance with that contract or upon a quantum meruit basis. Put simply, a quantum meruit basis is to claim compensation for work and labour done based on reasonable rates for labour and materials. Innocent parties have always opted for the formula which gave the greatest measure of damages. In other words, there was a legal choice of compensation methods.
However, in October 2019, seven Justices of the High Court of Australia unanimously decided in Peter Mann & Anor v. Paterson Constructions Pty Ltd that whilst builders can sue for damages for breach of contract, builders can only use the remedy of quantum meruit if work is performed for which the builder had no right to payment prior to the date of termination (for instance, because a milestone had not been reached or because a claim certificate had not been served upon the owner). The High Court has now ruled that the quantum meruit claim for contract works cannot exceed the remedy of damages for breach of contract, which will normally be the amount prescribed by the contract for the stage of work for which the builder has not been paid.
The facts of the case were that Mr and Mrs Mann, as land owners, entered into a major domestic building contract under the Domestic Building Contracts Act 1995 (Vic) with Paterson Constructions for the construction of two townhouses for a fixed price. The contract provided for progress payments to be made at the completion of certain stages of the work as set out in the Act. During the course of construction, Mr and Mrs Mann orally requested 42 variations without giving written notice in accordance with the contract and as required by Section 38 of the Act. The builder carried out the requested variations, also without giving written notice as was also required by Section 38. Section 38 provided that a builder is not entitled to recover any money in respect of a variation unless the builder has complied with the notice requirements of that section. There is an exceptional circumstances/hardship provision to assist the builder. After the builder issued an invoice claiming the amount for variations, the owners repudiated the contract. The builder accepted the repudiation as bringing the contract to an end.
An alternative might have been for the owners, instead of repudiating the contract based upon the builder’s breach of Section 38, to have issued a notice requiring the builder to rectify the breach. If that did not occur, then the owners could have sued for breach of contract rather than repudiating the contract.
At VCAT, the builder sued in the alternative for damages for breach of contract and for work and labour done and materials supplied (the quantum meruit claim). VCAT upheld the builder’s claim to a restitutionary remedy for an amount reflecting the value of the benefit conferred upon the owners which was assessed as being the reasonable value of the work and materials requested and the benefit which the owners received thereby. By way of expert evidence, this was considerably more than the builder might have recovered had the claim been confined to one for simple breach of contract. VCAT held that Section 38 did not apply to a claim for restitution or for where the contract had been repudiated by an owner. The owners appealed to the Supreme Court where they lost. Their further appeal to the Court of Appeal of the Supreme Court of Victoria was also lost. The Court of Appeal effectively agreed with VCAT that Section 38 does not exclude a restitutionary remedy such as quantum meruit. In other words, a builder can still sue on a quantum meruit basis in circumstances where the owners had repudiated the contract because the builder was claiming non-approval variations.
The High Court took a very different view of Section 38. The Justices held that that section excluded the availability of restitutionary relief for variations implemented otherwise in accordance with that section. In order words, if a builder had not complied with Section 38, it could not rely upon an assessment of damages for the value of work and labour done and for materials supplied on the building project. This meant that the builder’s only right of recovery for the variations would be for the amounts prescribed under Section 38(7), which limits the builder’s recovery to the cost of carrying out the variation plus a reasonable profit – in other words, damages calculated in accordance with the building contract.
The Hight Court accepted that the builder’s right to payment for the variation work accrued before the contract was terminated by the owners’ acceptance of the builder’s repudiatory conduct of refusing to perform works until the invoice for the variation work was paid by the owners. Therefore, because the builder’s right to payment had accrued before the contract was terminated, the builder was entitled to be paid for the accrued variation amounts irrespective of the of the builder’s repudiatory conduct.
However, the High Court also held that the quantum meruit claim was only available in circumstances where the builder had no enforceable right to payment under the contract. This means that a quantum meruit claim will only be 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 such as where a claim has not been properly documented or a claim certificate not issued or a stage actually completed. The High Court concluded that the builder did have an enforceable right to recover under the contract but was not entitled to sue on a quantum meruit basis. The High Court went on to decide that if a builder elects to recover pursuant to a restitutionary claim like quantum meruit, the amount recoverable will be limited by the rates prescribed by the contract in order to reflect the bargain agreed between the parties and the risk allocated between the parties.
There are a number of consequences flowing from this decision. Prior to the High Court’s decision, builders (and other contractors) confined to unprofitable contracts had a powerful incentive to terminate for breach by the other party by claiming repudiatory conduct so that they would be able to re-price their work retrospectively with a quantum meruit claim in the subsequent litigation even if that meant a total damages sum considerably in excess to what would have been possible by way of damages specified by the contract itself. That “rat-route” has been slammed shut by the High Court.
The decision also means that builders will not be able to pursue inflated quantum meruit claims, where rights to payment have not yet been accrued, in the event a contract is terminated by an owner by reason of the builder’s own repudiatory contract.
Where the builder has accrued rights, the right of recovery, for example, for any stage of the contract completed by the time of termination, was for the amount due under the contract upon completion of that stage and any damages for breach of contract. Quantum meruit is not available at all. In respect of any uncompleted stage of the contract, where there are no accrued rights, the remedy of quantum meruit damages is available and the builder may recover restitution for work and labour done and materials supplied but the amount so recoverable will not be able to exceed a fair value calculated in accordance with the contract price or the appropriate part of the contract price. There can be no retrospective pricing of unprofitable building contracts by builders.
As usual, the golden rule arising from the High Court’s decision is that builders and owners need to seek qualified and experienced legal advice when considering terminating or repudiating building contracts.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
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