High Court confirms (and limits) the scope of quantum meruit for builders following repudiation

The High Court of Australia has today handed down its decision in Mann & Anor v Paterson Constructions Pty Ltd [2019] HCA 32, unanimously confirming that where a builder accepts a repudiation by a principal and terminates the contract:

1. quantum meruit is not available for the builder in respect of work it has completed if it has an accrued right to payment for those works under the contract;
2. in those circumstances, the builder’s claim will be limited to its entitlement under the contract or damages for breach of contract; and
3. where quantum meruit is available, the amount recoverable should ordinarily not exceed the fair value calculated in accordance with the contract price or relevant part of the contract price (i.e. the contract operates as a ceiling on the amount recoverable by quantum meruit).

Quantum meruit means a fair and reasonable value of the work performed, the calculation of which has, in the past, often resulted in a builder being awarded a significantly higher amount than they would otherwise be entitled to under the contract.

Background

On 16 April 2015, Mann purported to terminate a building contract for the construction of two townhouses with Paterson Constructions (Paterson) for an alleged repudiation by Paterson for delayed completion of the works and a statement by Paterson that it would not complete unit 2 until it was paid variations on unit 1.

On 28 April 2015, Paterson asserted that Mann’s purported termination was itself a repudiation of the contract, and Paterson purported to accept Mann’s repudiation and terminate the contract. Paterson applied to the Victorian Civil and Administrative Tribunal (VCAT), which found that:

1. Mann had repudiated the contract by the purported termination and Paterson had validly terminated the contract when it accepted that repudiation.
2. Paterson was entitled to a quantum meruit in the amount of $660,526.41.

VCAT’s decision was affirmed by the Supreme Court of Victoria and Mann appealed to the Victorian Court of Appeal. The Victorian Court of Appeal held that it could not depart from the long-standing common law position that quantum meruit:

1. was available as a remedy for a builder where the builder validly terminates a building contract by acceptance of the owner’s repudiation; and
2. is to be calculated by determining the fair and reasonable value of the work performed and that value is not limited by the contract price.

Decision of the High Court

The High Court held that where a builder accepts a repudiation by the principal and terminates the contract, quantum meruit will only be available where there is a total failure of consideration, meaning that:

1. Where a contract entitles a builder to payment for completion of any part of the work (described by the Court as an “infinitely divisible” contract) and expressly fixes a price for services, quantum meruit will be unavailable as the builder has an accrued right to payment for the completed work. The builder will generally be restricted to a claim for what has accrued under the contract or damages for breach of contract.
2. Where the contract is divisible into several stages of works:
   1. quantum meruit is unavailable for completed stages of the work (as the builder has an accrued right to payment and its claim will be limited to its entitlement under the contract or damages for breach of contract);
   2. the builder may recover in quantum meruit for the reasonable value of the work and labour done for any incomplete stages of the work.
3. Where the contract is an entire contract (i.e. nothing is payable until all of the work has been completed), the builder will be entitled to a quantum meruit for all work and labour done up to termination.

In respect of calculating the amount of a quantum meruit:

1. Nettle, Gordon and Edelman JJ held that:
   1. the value should ordinarily be limited to a fair value calculated in accordance with the contract price or the portion of the contract price attributable to the relevant works.
   2. however, the value may be higher in some circumstances if it would be equitable to permit the builder to depart from the pricing structure agreed with the principal (for example, it was observed that this would arguably be appropriate where the principal’s breaches have resulted in a cost overrun that rendered the contract unprofitable).
2. Gageler J held that the amount should be capped by reference to the contractually agreed remuneration for those services.

Implications and Takeaway

The implications of this decision are significant for the construction industry not only in Victoria but Australia-wide.

It is now settled Australian law that, where a builder accepts a repudiation by the principal and terminates the contract:

1. quantum meruit is not available to a builder in respect of work it has completed if it has an accrued right to payment for those works under the contract;
2. if the contract is an entire contract, quantum meruit will be available for all works done up to termination;
3. if the contract is not an entire contract but is divisible into several stages of works, quantum meruit will be available in respect of any stages of the work that are incomplete at the time of termination, and the builder will be limited to a claim under the contract for any completed stages; and
4. quantum meruit shall be calculated in accordance with the contract and (but for some limited circumstances) that amount should be restricted to the contract price or appropriate part of the contract price.

Parties to a construction contract should always be mindful of the significant consequences of terminating a contract without having a proper contractual basis for doing so. We recommend that principals and contactors always seek advice before purporting to terminate.