26 September, 2018
Mann v Paterson Constructions Pty Ltd [2018] VSCA 231
What you need to know
The Victorian Court of Appeal has confirmed that the remedy of "quantum meruit" is available to a builder when an owner wrongly terminates a building contract.
The Court held that a claim for quantum meruit is assessed by reference to the fair value of the builder's work to the owner, although the costs incurred by the builder and/or the contract price may be relevant.
The Court also held that a failure to comply with the formal requirements for a variation to a domestic building contract under s 38 of the Domestic Building Contracts Act 1995 (Vic) does not defeat a builder's quantum meruit claim for variation work.
What you need to do
Builders need to carefully consider whether their most advantageous claim for an owner's wrongful termination is in contract or quantum meruit.
Owners should be mindful of their potential exposure to a builder's claim for wrongful termination, which could be in excess of the agreed contract price.
The quantum meruit quandry
The expression "quantum meruit" refers to a claim for a reasonable sum of money for services rendered or work done when the amount due is not set by a legally enforceable contract.
The availability of quantum meruit as an alternative to contractual damages when a builder accepts the wrongful termination of a building contract by an owner has been recognised by appeal courts in several Australian jurisdictions.
However, this has been a matter of some controversy over the last 20 years for a number of reasons, including the perception that relief on a quantum meruit basis could potentially lead to a windfall gain for the builder, in excess of the agreed contract price.
In Mann v Paterson Constructions Pty Ltd [2018] VSCA 231, the Victorian Court of Appeal was asked to address this controversy and reconsider the availability of quantum meruit in such circumstances.
Mann v Paterson Constructions Pty Ltd [2018] VSCA 231
This dispute arose out of a domestic building contract for the construction of two double-story townhouses between the owners, Peter and Angela Mann, and their builder, Paterson Constructions Pty Ltd.
The townhouses were due to be completed under the contract by 17 December 2014. However, by 16 April 2015, only one of the townhouses was completed, and the Manns wrote to Paterson asserting that it had repudiated the contract. The Manns purported to terminate the contract and refused to allow Paterson to return to the building site.
Paterson denied that it had repudiated the contract, and asserted that the Manns' conduct itself constituted a repudiation. Paterson purported to accept the Manns' repudiation and applied to the Victorian Civil and Administrative Tribunal (VCAT) seeking relief on a quantum meruit basis or alternatively contractual damages. Both forms of relief included amounts for variations to the contract works.
VCAT found that the Manns had requested the variations claimed by Paterson, that the Manns had wrongfully repudiated the contract by their purported termination, and that Paterson had lawfully terminated the contract when it accepted the Manns' repudiation. VCAT ordered the Manns to pay Paterson the quantum meruit sum of $660,526.41.
The Manns brought an appeal to the Supreme Court of Victoria, where they were largely unsuccessful. The Manns then sought to appeal to the Victorian Court of Appeal, on grounds that:
- quantum meruit ought not be available as a remedy in circumstances where the building contract had been repudiated, and Paterson had accepted that repudiation;
- if quantum meruit was available, VCAT applied incorrect legal principles to assess the value of the quantum meruit claim; and
- VCAT erred in failing to find that Paterson's non-compliance with the formalities for variations under section 38 of the Domestic Building Contracts Act 1995 (Vic) prevented any recovery for work in respect of those variations.
Court of Appeal confirms availability of quantum meruit
As noted above, the established (although controversial) position under Australian law is that quantum meruit is available in circumstances where a building contract has been repudiated and that repudiation is accepted: see Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510.
The Manns submitted before the Court of Appeal that the established position has been criticised on the basis that the availability of quantum meruit in these circumstances rests on "the rescission fallacy", that is, the notion that the acceptance of a repudiation had the effect of rescinding the contract from the beginning. That notion had long since been dispelled by the High Court, and the Manns accordingly argued that this case presented the Court of Appeal with a particularly good opportunity for the fallacy to be corrected.
Unfortunately for building owners, the Court of Appeal refused to do so, noting that in the absence of an express submission by the Manns that "[earlier decisions of this issue] are plainly wrong, no occasion arises for us to consider the correctness of those decisions". The Court of Appeal added that it endorsed the observations of the Court of Appeal in Sopov v Kane (No 2) to the effect that, while there were "very powerful" criticisms of the availability of quantum meruit in cases of repudiation, the Court of Appeal is effectively bound by existing authorities until the issue is reconsidered by the High Court.
Quantifying quantum meruit
There was no dispute between the parties that the proper approach to assessing a quantum meruit claim is to ascertain the fair and reasonable value of the work to the party that received it (in this case, the Manns).
However, the Manns argued that when determining the value of the quantum meruit claim, VCAT failed to have appropriate regard to the actual costs incurred by Paterson and the contract price agreed between the parties. VCAT had accepted a quantity surveyor's evidence regarding the value of the work performed by Paterson, which exceeded the actual costs incurred and the contract price. This led the Manns to contend that Paterson had undeservedly received a windfall gain from VCAT's decision.
The Court of Appeal held that it was clear from the authorities that neither the actual costs incurred by a builder nor the contract price impose a ceiling on the amount that can be recovered on a quantum meruit basis. It was open to VCAT to assess the quantum meruit amount on the basis of the quantity surveyor's evidence, particularly where the evidence of Paterson's actual costs was incomplete and variations to the contract works requested by the Manns meant that the contract price was of limited relevance.
Is a builder precluded from claiming quantum meruit for variations?
The Manns' final grounds of appeal were to the effect that section 38 of the Domestic Building Contracts Act 1995 (Vic) prevented Paterson's claim for work conducted in relation to variations. Broadly speaking, the Act applies to work valued at more than $5,000 that relates to the construction of a home, including renovations or alterations, landscaping, demolition, or work associated with the construction or erection of a building on land zoned for residential purposes.
Relevantly, s 38(6) provides that a builder is not entitled to recover any money in respect of a variation asked for by a building owner unless (a) various formalities under s 38 are met or (b) VCAT is satisfied that there are exceptional circumstances and it would not be unfair to the building owner.
The Court of Appeal acknowledged that whether or not s 38 applies to claims in quantum meruit is a "difficult question because s 38 is not clearly drafted". Nevertheless, the Court found that on balance the better interpretation is that the section does not apply to a claim in quantum meruit. Therefore a builder does not have to comply with the formalities of s 38 in order to recover for variations on a quantum meruit basis.
In reaching this conclusion, the Court had particular regard to the principle of legality, and the need to adopt an interpretation consistent with the right of a builder to recover for works completed, absent clear words evincing an intention to the contrary.
Implications for owners and builders
The Court of Appeal's decision is generally a welcome development for builders, as it reinforces that:
- quantum meruit is available to a builder when an owner wrongly terminates a building contract;
- in some circumstances, it will be in a builder's interest to pursue a claim in quantum meruit rather than in contract, as the amount recoverable on a quantum meruit basis may exceed the agreed contract price; and
- a building owner cannot rely on s 38 of the Domestic Building Contracts Act 1995 (Vic) to avoid an obligation to make payment in restitution for variations requested by the owner.
This decision may also have implications in other States and Territories, where comparable legislation typically requires that any variation to a domestic building contract is made in writing. However, given that the Court of Appeal's decision turned on the specific language of the Victorian Act, care should be taken in having regard to the particular legislative scheme in the relevant jurisdiction.
Finally, in light of the Court of Appeal reiterating that there are "very powerful" criticisms of the availability of quantum meruit in cases of repudiation, owners and builders should be mindful of the possibility that this issue may be revisited by the High Court of Australia in the future.
For further information, please contact:
Jeremy Chenoweth, Partner, Ashurst
jeremy.chenoweth@ashurst.com
