Mann v Paterson Constructions Pty Ltd  HCA 32
- A builder who accepts the repudiation of a building contract is no longer able to elect to set aside the whole contract and be remunerated on a quantum meruit for work carried out to the extent that there is an accrued right to payment under the contract for that work.
- A builder who accepts the repudiation of a building contract can still elect to claim on a quantum meruit in relation to work for which there is no contractual accrued right to payment.
- In normal circumstances the agreed contract amount will form the upper limit to the amount the builder can claim under a quantum meruit.
- The effect of this decision is likely to be that builders will rarely, if ever, feel that it is in their interests to elect to claim in a quantum meruit where they have accepted the repudiation of their contract.
- The appellants (the owners) entered into a contract with the respondent builder to carry out work under a domestic building contract, being the construction of two double-storey townhouses for a fixed price. The contract made provision for payment at certain identified stages. Variations were required to be in writing.
- The contract was regulated by the Domestic Building Contracts Act 1995 (Vic) (the DBC) which said, amongst other things, that in accordance with s 38, variations had to be in notified in writing in accordance with the procedure contained in the Act, and that if that procedure was not complied with, the builder could not recover money in respect of the variation unless the Victorian Civil & Administrative Tribunal (VCAT) was satisfied that there were exceptional circumstances.
- Before the works were complete, the owners purported to accept the repudiation of the builder. The repudiation was said to consist of threatening to refuse to continue to carry out works unless claims for variations were paid and certain other identified breaches. Eventually the builder wrote back asserting that the purported determination by the owner was itself repudiatory and accepting that repudiation.
- The builder commenced proceedings claiming damages for breach of contract or restitution on a quantum meruit basis.
The history of the litigation
- The claim was first heard in VCAT.
- VCAT determined that the owners had wrongfully repudiated the contract and that the repudiation was accepted by the builder as bringing the contract to an end. Following the decision of the Victorian Court of Appeal in Sopov v Kane (2009) 24 VR 510 it held that the builder was entitled to claim recovery on a quantum meruit basis of an amount that reflected the fair and reasonable value of its work.
- On appeal to the Supreme Court of Victoria the owners raised two issues.
- The first was whether VCAT had erred in determining that the repudiation of the contract led to the contract being void ab initio or alternatively erred because Sopov v Kane was wrongly decided.
- The second, and consequential issue, was whether VCAT had erred in deciding that because the contract was void ab initio s 38 of the DBC did not apply.
- The primary judge dismissed the appeal on the basis that Sopov v Kane was authority for the proposition that working out the amount which the builder is entitled to claim as restitution as opposed to breach of contract and that s 38 was not applicable to a claim on a quantum meruit.
- The owners appealed to the Court of Appeal which dismissed the appeal on the basis that only the High Court could determine that Sopov v Kane was wrongly decided. It also found that s 38 did not apply to quantum meruit claims.
- Special leave was granted to appeal to the High Court on three grounds, being in substance:
- The Court of Appeal erred in holding that the respondent builder was entitled, after accepting the appellants’ repudiation of the contract, to recover restitution upon a quantum meruit rather than being confined to a claim in damages for breach of contract (ground 1);
- Alternatively, if the respondent builder was entitled to claim in restitution as upon a quantum meruit, the Court of Appeal erred in failing to hold that the contract price operated as a ceiling on the sum recoverable as such (ground 2);
- The Court of Appeal erred in holding that s 38 of the DBC Act does not apply to a claim for restitution as upon a quantum meruit in respect of variations (ground 3).
Kiefel CJ, Bell and Keane JJ
- Kiefel CJ, Bell and Keane JJ agreed that the Court of Appeal erred in holding that the respondent was entitled, after accepting the appellants’ repudiation of the contract, to recover restitution upon a quantum meruit rather than being confined to a claim in damages for breach of contract.
- Having thus determined ground 1 they said that this disposed of ground 2, and in relation to ground 3 they deferred to and adopted the joint reasons of Nettle, Gordon and Edelman JJ.
- The reasons for their decision can be summarised as follows.
- First, the notion that termination of a contract for repudiation for breach has the effect of rescinding the contract ab ignition is fallacious and was unequivocally rejected by the High Court in McDonald v Dennys Lascelles Ltd  HCA 25. Where a contract is terminated by repudiation for breach the terms of the terminated contract inform the quantum of damages available.
- Second, restitutionary remedies must respect contractual regimes and the allocations of risk made under those regimes.
- There was some discussion of the distinction between rights to payment that had accrued under the contract, and rights that had not accrued. In relation to rights that had not accrued their Honours rejected the argument that a right to payment on a quantum meruit could exist in relation to work done to which a right to payment had not yet accrued. Although not expressly stated, it seems that their Honours were saying that in relation to such works, the builder would be entitled to damages to put them in the position they would have been in if the contract had been properly performed. This would presumably equate to reimbursement of the costs of carrying out the work plus loss of profit.
- Their Honours concluded by finding that the decision of the Privy Council in Lodder v Slowey  AC 442 should no longer be applied because it was inconsistent with the rejection of the rescission fallacy in McDonald v Dennys Lascelles.
- Justice Gageler identified three distinct categories of claims made by the Builder:
- work done by the Builder in respect of variations to the plans and specifications set out in the Contract which were asked for by the Owners;
- work done by the Builder in respect of the plans and specifications set out in the Contract for which the Builder had accrued a contractual right to payment under the Contract at the time of its termination;
- work done by the Builder in respect of plans and specifications set out in the Contract for which the Builder had not yet accrued any contractual right to payment under the Contract at the time of its termination.
- In relation to category (1), His Honour agreed with the joint reasons of Nettle, Gordon and Edelman JJ.
- In relation to category (2) His Honour held that a non-contractual quantum meruit was not available. He said that the continual existence of a contractual right to payment, enforceable by an action in debt, leaves no room to recover payment by another action in debt on a non-contractual quantum meruit.
- In relation to category (3) His Honour concluded that recovery on a quantum meruit was permissible, but that the amount recovered could not exceed the contract price.
- The steps in his reasoning were as follows.
- First, there was authority for the proposition that recovery on a quantum meruit was available where wrongful termination has the effect of a party becoming entitled to receive remuneration for services already rendered: Segur v Franklin (1934) 34 SR (NSW) 67 and Horton v Jones (No 2) (1939) 39 SR (NSW) 305 per Jordan CJ. That authority proceeded expressly on the modern understanding, settled in McDonald v Dennys Lascelle,s that termination of a contract on acceptance of repudiation operates only for the future.
- Second, the question of whether an innocent party should be entitled to maintain a non-contractual quantum meruit as an alternative to an action for liquidated damages for breach of contract needs to be informed by weighing of the practical consequences.
- One practical consequence is that non-contractual quantum meruit being in theory an action for debt has the procedural advantage of the capacity to obtain default judgment. A further advantage was said to be:
… that proof of the value of services rendered is almost invariably more straightforward than proof of contractual loss. Questions of causation and remoteness play no part. The availability of the action allows the innocent party to choose to adopt the course of quickly and cheaply obtaining judgment for an easily quantifiable liquidated amount instead of embarking on a long and more expensive and more uncertain pursuit of a potentially larger judgment for unliquidated damages.
- The problem that permitting recovery on an action for non-contractual quantum meruit may permit a party receiving more as a result of termination of the contract than would have been due to that party had the contract been performed is more appropriately addressed by limiting the measure of restitution than by denying the availability of the common law action for restitution.
- Gageler J’s view was that the common law rule should be that the amount recoverable on a non-contractual quantum meruit as remuneration for services rendered in performance of a contract prior to its termination by acceptance of a repudiation cannot exceed that portion of the contract price as is attributable to those services.
Nettle, Gordon and Edelman JJ
- Their Honours first considered the application of s 38 of the DBC to variations. They found that, as a matter of statutory construction, s 38 excluded the availability of restitutionary relief for variations implemented otherwise than in accordance with its terms (subject to the exception permitted in s 38 itself).
- Their Honours next considered the entitlement of a party to receive restitution upon the other party’s wrongful repudiation.
- Their Honours said that where a contractor is only entitled to receive remuneration if the contract is wholly carried into effect, and the other party’s wrongful repudiation of the contract has the effect of preventing the contractor from becoming entitled to receive remuneration for services already rendered, the contractor may, after having elected to treat the contract as at an end, maintain an action to recover restitution as upon a quantum meruit for those services, instead of suing for damages, because there has been a total failure of consideration in absence of an accrued right under the contract to payment.
- It followed that where under a contract for work and labour, a party is entitled to payment upon completion of any part of the work, where the contract expressly fixes a price for services, and where the contract is terminated by that party’s acceptance of the other party’s repudiation of it, the party so terminating the contact will have an accrued right to payment under the contract for that part of the work done. There will have been no failure of consideration. Accordingly, that party’s remedy in respect of that part of the work that has been done will generally be restricted to a claim for what has accrued due or damages for breach of contract assessed by reference to the contract price less the cost of completing the work.
- If the obligation to perform work and labour is entire, so that nothing is due until all of the work has been completed, there will have been a total failure of consideration upon termination of the contract by the contractor’s acceptance of the other party’s repudiation.
- If the obligation to perform work is divisible into several entire stages then, upon termination of the contract for repudiation:
- The contractor so terminating the contract will have accrued rights under the contract for those stages that have been completed;
- There will be a total failure of consideration in respect of stages that have not been completed;
- Restitution will lie as upon a quantum meruit in respect of work and labour done towards completion of the uncompleted stages as an alternative to damages for breach of contract.
- Their Honours addressed the submission that the decision in McDonald v Dennys Lascelles removed the basis for the right to recover on a quantum meruit. They said that although it was once thought that the innocent party’s right to recover reasonable remuneration for the work done up to the point of termination depended on the notion that termination avoided the contract ab initio, now it is recognised that there may be a total failure of consideration for the work done because, by reason of the termination, the basis upon which the work was done has failed to materialise or sustain itself, and that total failure is seen as the occasion and part of the circumstances giving rise to the other party’s obligation to make restitution to the extent of the fair value of the work.
- Their Honours considered that there were essentially two arguments against the retention of this alternative restitutionary remedy.
- The first is that where a contract is terminated for breach after the innocent party has partially completed work, the proper characterisation of the basis or condition on which the work was performed is the other party’s promise to perform the contract (by paying). Because this is enforceable by damages there is no total failure of consideration.
- The second is that if it is correct to characterise the basis or condition on which the work was undertaken as being the other party’s performance of that party’s contractual obligations (as opposed to the promise to perform them), the other party’s failure to perform them yields a contractual remedy which is appropriate and adequate to put the innocent party in the position which he or she would have been if the contract had been performed, and therefore there is no need or justification for the imposition of an alternative restitutionary remedy.
- The first argument was dismissed on the basis that it was contrary to authority. When one is considering the law of failure of consideration and the right to recover on a quantum meruit it is not the promise to perform that is referred to as the consideration, but the performance of the promise: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd  AC 32.
- Moreover, the obligation to pay damages is not an obligation imposed by the contract but is an obligation arising by operation of law.
- In relation to the second argument, their Honours considered that the alternative remedy of recovery on a quantum meruit should be retained because of its considerable practical value, because it is a liquidated demand which, by contrast to an unliquidated claim for damages, may provide easier and quicker recovery including by way of summary judgment. In addition, it was too late now for the Court unilaterally to abrogate the coherent rule in relation to quantum meruit simply in order to bring about what is said to be a greater sense of theoretical order to the range of common law remedies.
- The next issue addressed was whether or not the contract price imposed a limit on the amount recoverable. It was found that it in most circumstances it did because the contract continues to apply to impose such a limit:
… a contract, although discharged, should inform the content of the defendant’s obligation in conscience to make restitution where the failed basis upon which the work and labour was performed was the contractor’s right to complete the performance and earn the price according to the terms of the contract. It is, therefore, appropriate to recognise that, where an entire obligation (or entire divisible stage of a contract) for work and labour (such as, for example, an entire obligation under, or an obligation under a divisible stage of a domestic building contract) is terminated by the plaintiff upon the plaintiff’s acceptance of the defendant’s repudiation of the contract, the amount of restitution recoverable as upon a quantum meruit by the plaintiff for work performed as part of the entire obligation (or as part of the entire divisible stage of the contract) should prima facie not exceed the fair value calculated in accordance with the contract price of appropriate part of the contract price.
- Whether or not the plaintiff could recover in excess of the contract price depends upon whether it is equitable to permit the plaintiff to depart from the agreed pricing structure.
Some issues arising
- When does a right to payment accrue in relation to work or labour provided under a building contract?
- This may require consideration of the doctrine of entire contracts. An entire contract is a contract in which complete performance is a condition precedent to payment: Phillips v Ellinson Brothers (1941) CLR 221.
- If a contract or obligation is to be found to entire notwithstanding that the contract or obligation provides for payment by instalments, the contract on its proper construction must indicate that the instalments are nonetheless conditional upon complete performance of the contract or obligation, ie that they are refundable if this does not occur because of the default of the party that is to render the performance, see: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd  FCA 50 at [706(v)].
- It is suggested that the presence of wording to indicate that interim progress payments are payments on account would not, without more, signify that there was no accrued contractual right to payment.
- Even if a contract for the carrying out of construction work did expressly stipulate that completion of the work was a condition precedent to payment, this may not be the end of the matter. Section 8 of the Building and Construction Industry Security of Payment Act 1989 says this:
(1) On and from each reference date under a construction contract, a person:
(a) who has undertaken to carry out construction work under the contract, or
(b) who has undertaken to supply related goods and services under the contract,
is entitled to a progress payment.
(2) In this section, reference date, in relation to a construction contract, means:
(a) a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out or undertaken to be carried out (or related goods and services supplied or undertaken to be supplied) under the contract, or
(b) if the contract makes no express provision with respect to the matter—the last day of the named month in which the construction work was first carried out (or the related goods and services were first supplied) under the contract and the last day of each subsequent named month.
- It remains to be seen whether an entitlement to a progress payment that is based on the Building and Construction Industry Security of Payment Act 1999 but not on an express term of the contract is an accrued right to payment sufficient to defeat a claim on a quantum meruit.
- It also remains to be seen whether an accrued right to payment can be said to exist when a certifier has certified that there is no amount due and owing, because, by way of example, the owner has an offsetting claim. This may give rise to some curious arguments, because the builder that wishes to claim on a quantum meruit will also have to argue that no amount is due and owing under the contract.
- The analysis of the effect of s 38 of the DBC is unlikely to be influential in New South Wales. Under ss 7 and 10 of the Home Building Act 1989 a variation which is not in writing will be unenforceable, but may be recoverable under a quantum meruit: Wright v Foresight Constructions Pty Ltd  NSWCA 327 (26 October 2011); Xu v Jinhong Design & Constructions Pty Ltd  NSWCA 277 (8 September 2011).