Andrew Kelly and Tom McKillop

High Court all but removes quantum meruit from the arsenals of contractors who terminate for repudiation

Andrew Kelly and Tom McKillop

14 October, 2019

Building and construction contracts Dispute resolution

Although it has been the subject of some judicial debate, the long-standing position in Australia is that Courts have generally permitted contractors to elect to claim on a quantum meruit basis following a principal’s repudiation of a construction contract (as opposed to a claim for contractual damages).  A claim for quantum meruit is calculated by reference to the reasonable value of work performed rather than under the contract itself.  For that reason, a quantum meruit claim is often more attractive for contractors because it can potentially lead to a remedy in excess of the agreed contract price – which effectively means a windfall for contractors seeking to recover on losing contracts.

However, on 9 October 2019, the High Court refined the Australian position in relation to quantum meruit claims in Mann v Paterson Constructions Pty Ltd [2019] HCA 32.  The High Court made the following important clarifications in relation to repudiated contracts:

  1. quantum meruit is not available to a contractor who has already accrued a right to payment under the contract at the time of termination; and
  2. quantum meruit may be available to a contractor who has completed work but has not yet accrued a right to payment under the contract at the time of termination.

The matter came before the High Court on appeal from the Court of Appeal of the Supreme Court of Victoria.  Peter and Angela Mann (Appellants) entered into a contract with Paterson Constructions Pty Ltd (Respondent) for the construction of two townhouses on their property.  The construction contract was a written domestic building contract made under the Domestic Building Contracts Act 1995 (Vic) (DBCA).  During construction, the parties fell into dispute in relation to the works.  The Respondent claimed that the Appellants had repudiated the contract, and purported to terminate by accepting that repudiation.  Consistently with the practice of builders who terminate a contract for the repudiation of a principal or owner, the Respondent claimed that it was entitled to recover payment for its work, including variations, upon a quantum meruit basis.  The Court of Appeal upheld the Respondent’s claim.

Grounds for appeal

The Appellants were granted special leave to appeal the decision of the Court of Appeal to the High Court on the following grounds:

  1. the Court of Appeal erred in holding that the Respondent was entitled to sue on a quantum meruit basis for the works carried out;
  2. in the alternative, 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 constrain the amount claimable under a quantum meruit claim for the works carried out;
  3. 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 DBCA did not apply to a quantum meruit claim for variations to work under a domestic building contract.

The decision

The High Court was unanimous in deciding in favour of the Appellants, upholding the appeal.

A majority of the High Court held that the Respondent had no right to claim on the grounds of quantum meruit because a right to payment had already accrued under the construction contract.  This means that a contractor who has accrued a right to payment by, for example, a payment assessment made under the contract falling due for payment or completing a stage under a milestone payment regime, will only be able to claim on the basis of that contractual right.

The High Court clarified that a contractor would be entitled to claim on the grounds of quantum meruit if work had been completed but no right to payment had accrued at the point of termination.  For example, this would be the case where a contractual right to a lump sum payment did not accrue until completion of the entire works.  However, the High Court determined that where the contract is terminated for repudiation, the amount claimable by a builder on the basis of a quantum meruit claim is constrained by the contract price for that portion of the works.

In respect of the third ground of appeal, the High Court found that variation claims made under section 38 of the DBCA cannot be remedied in restitution or on a quantum meruit basis.

Key takeaways

The High Court’s decision has significantly altered the landscape in terms of recovery options for a contractor who accepts a repudiation and terminates a construction contract.  At least the following noteworthy comments flow out of the decision:

  • contractors must be particularly conscious of whether a payment right has accrued under the contract before terminating a contract for repudiation;
  • contractors are no longer able to seek restitution or quantum meruit based claims following termination if work has been completed and payment rights have accrued under the contract;
  • the Court is of the view that restitutionary remedies are “gap-filling and auxiliary” to claims under the contract;
  • even where a quantum meruit claim is actionable, contractors are restricted from recovering amounts in excess of the contract price where the contract has been terminated for repudiation; and
  • the ability for contractors to rely on quantum meruit in the case of loss making contracts is simply no longer an option.

Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au

Tom McKillop | Senior Associate | +61 7 3338 7530 | tmckillop@tglaw.com.au