In the recent case of Mann & Anor v Paterson Constructions Pty Ltd [2019] HCA 32 the High Court has changed the law in a subtle, but important way in relation to building contracts.
For the last decade, Courts have found that where an owner or principal acts in a way which repudiates a contract—that is, acts in a way that shows they no longer intend to follow the contract—the builder can claim a fair value of work done, and can do so without being limited by the pricing terms of the contract. In essence, if the principal has stepped away from the contract, then the builder could choose whichever valuation of its work was more favourable.
That is no longer the case. The High Court has clarified that the ability of a builder to make a ‘restitution’ claim for a fair value of work done (under the legal principle of quantum meruit) is very limited wherever it would also be possible to sue for a breach of contract.
The contract and the work
On 4 March 2014, Peter and Angela Mann ('the Owners') entered into a major domestic building contract with Paterson Constructions Pty Ltd ('the Builder') to construct two double storey townhouses on the Owners' land in Victoria for a fixed price of $971,000.
Relevantly, the contract entitled the Builder to progress payments upon the work reaching certain milestone stages, and the Domestic Building Contracts Act 1995 (Vic) ('the DBCA') provided a mechanism for agreeing variations to the work.
In March 2015, one of the houses had been completed. The other house remained incomplete. By this time, the Owners had requested, and the Builder had carried out, a total of 42 variations to the work, but none of these were in compliance with the DBCA. Nevertheless, the Builder sought payment from the Owners for the variations carried out to the completed Unit, and raised an invoice for these variations, which the Owners refused to pay.
Lawyers for the Owners wrote to the lawyers for the Builder in April 2015 asserting that the Builder had repudiated the contract, that the Owners accepted this repudiation, and that the contract was terminated. The Owners relied on delays in carrying out the works and an alleged statement by the Builder that works would not continue unless the variations were paid. In response, the Builder argued that the Owners' purported termination of the contract was itself repudiatory conduct, which the Builder accepted.
Victorian Courts
On 25 June 2015, the Builder commenced proceedings in the Victorian Civil and Administrative Tribunal (VCAT) seeking restitution on a quantum meruit basis. VCAT decided that the Owners had repudiated the contract (and the Builder had accepted that repudiation). Accordingly, VCAT held that the Builder was entitled to commence a claim in restitution (quantum meruit) for all of the work that had been performed, as an alternative to a breach of contract claim. This meant that the Builder was entitled to payment for the variation work actually performed, even though the Builder ordinarily would not have been entitled to payment under the contract as variations were not agreed with the requirements of the DBCA.
Crucially, the restitution claim was not limited by the agreed contract price, and had the effect of putting the Builder in a considerably better financial position than it would have been in if seeking payment under the contract, or traditional damages for breach of contract.
VCAT's decision was based on the Victorian Court of Appeal's decision in Sopov v Kane Constructions Pty Ltd (No.2) (2009) 24 VR 510, [2009] VSCA 141 which had confirmed the availability of a restitution claim as an alternative to a claim for breach of contract in the case of a repudiation of a building contract.
The Owners appealed to the Supreme Court of Victoria but were unsuccessful. The Owners then appealed to the Victorian Court of Appeal and were unsuccessful again .
Showing remarkable persistence (having lost three times in a row, and the last time unanimously), the Owners applied for, and were granted, special leave to appeal to the High Court on the following grounds:
the Builder should not have been entitled to recover in restitution on a quantum meruit basis in circumstances where a claim for breach of contract was available to it;
alternatively, if the Builder was entitled to make a restitution claim in those circumstances, any recovery should be limited to the contract price; and
the DBCA should also apply to a restitution claim, thereby preventing the Builder from recovering for variations that did not comply with the DBCA.
The High Court’s changes
The High Court unanimously held that where the Owners repudiated the contract (and that repudiation has been accepted by the Builder) the parties are released from future obligations, but not ones that have already accrued. (In legal terms, the contract is neither void, nor voidable ab initio.)
In the context of this case, this meant that where the Builder had already reached contractually defined milestone stages such that it had already earned a right to payment under the contract for those stages, it could only claim payment for that work under the terms of the contract (or as damages for breach of contract), and not on a restitutionary basis.
However, the majority of the High Court (Justices Gageler, Nettle, Gordon and Edelman) held that where the Builder did not yet have a contractual right to payment at the time the contract was repudiated, then an action in restitution was available as the alternative to an action for breach of contract. In this case, this meant that where the Builder was claiming for work done as part of incomplete stages, then the Builder could choose whether to seek damages for a breach of contract, or on a restitutionary basis.
Crucially, the High Court held that even where a restitution claim was available, the contract was a cap defining the upper limit of what could be claimed. The Builder would be limited to the contract price for that particular stage or portion of the work, and work would be priced at any applicable rates prescribed by the contract.[1] The Court formed this view because it recognised that at the time of contracting, the parties determined for themselves how they wished to allocate price and risk between them, and that this should be given due weight in a restitution claim.[2]
Justices Nettle, Gordon and Edelman also suggested that there may be circumstances where a restitutionary claim could properly exceed the contract price in exceptional cases,[3] but the other Justices were not convinced.[4]
The Court also considered the DBCA and found that as drafted, the Act did not apply to quantum meruit claims.
Key takeaways
In this case, the Builder was held to the contract, and denied payment for the value of work it actually performed, even though all of the Courts accepted that the Owner was in the wrong in terminating the contract. This scenario was not a common one, but this Builder’s argument has been used in a number of cases to obtain payments denied by an intransigent principal. The High Court has largely cut off the value of this legal argument as a potential windfall for builders.
As a result, the High Court has emphasised that the extent to which parties are bound to their promises in their contracts, and the law gives builders less ‘loopholes’ to escape those promises. While it may seem harsh in this case to deny a builder payment for variations performed, the policy of giving great weight to contract terms is consistent with a number of decisions affecting the construction industry over recent years.
In summary:
Where a builder accepts repudiation of a contract by the principal, and terminates the contract, the contract is not void ab initio, and the rights and obligations already accruing to the parties remain (including in relation to payment).
If a restitution claim based on a quantum meruit is available, any compensation will still be limited to the contract price for that particular stage or portion of the work, or to any applicable rates prescribed by the contract.
In carrying out variations, builders must comply with any contractual provisions or applicable statutory requirements that may apply.
Extreme care needs to be taken before asserting, and seeking to accept, the other contracting party's possible repudiatory conduct. Wrongfully purporting to accept another party's repudiatory conduct (where the other party has not actually repudiated), is itself repudiatory conduct, entitling the other party to terminate and to seek damages.
This article provides general comments only and does not constitute legal advice. You should always seek specific advice on your particular circumstances
[1] See [2019] HCA 32 [101]-[102] (Gageler J); [205] and [217] (Nettle, Gordon and Edelman JJ).
[2] See [2019] HCA 32 [14] and [19]-[20] (Keifel CJ, Bell and Keane JJ); [205], [211] and [214] (Nettle, Gordon and Edelman JJ).
[3] See [2019] HCA 32 [216]-[217] (Nettle, Gordon and Edelman JJ).
[4] See [2019] HCA 32 [52] (Keifel CJ, Bell and Keane JJ); [103] (Gageler J).