What is quantum meruit?
Quantum meruit relief is an aspect of construction law that has been the subject of extensive academic debate. For many years, the status quo has been that a builder will be entitled to recover the 'fair and reasonable value' for its work if it has validly terminated a building contract in response to the Principal's repudiatory conduct.1 A restitutionary claim will seek a fair and reasonable sum for the work performed and materials supplied by the builder. In simple terms, the sum payable on a quantum meruit basis will generally equate to the costs incurred plus a reasonable profit margin.
The essential elements to establishing quantum meruit relief are that:2
1. there has never been, or no longer is, a contract between the parties;
2. work has been performed by the builder at the request of the owner;
3. there was an agreement for the owner to pay the builder for the work performed; and
4. the benefit has been accepted by the owner at the expense of the claimant builder.
What is debate?
The issue which concerns academics about quantum meruit is that a builder making a quantum meruit claim may recover a significantly greater amount than it would have received if the contract had remained on foot, resulting in a windfall gain for the builder. For this reason owners will be concerned lest they repudiate a building contract. It has been argued that that the current approach to quantum meruit perversely 'encourages' and 'rewards' builders for purposely provoking the owner to take steps which the builder alleges constitute repudiation,3 entitling the builder to terminate the contract and claim quantum meruit relief.
A well known example of a court granting quantum meruit relief can be seen in the 2009 case of Sopov v. Kane Constructions Pty Ltd (No 2) (Sopov).4 In Sopov, a quantum meruit claim was made on behalf of the builder for an amount of $1.6 million, which substantially exceeded the originally agreed contract sum of $971,000. The Victorian Court of Appeal upheld the quantum meruit claim, leaving the controversial common law position unchanged.
Third time lucky?
The right of a builder to sue on a quantum meruit following a repudiation of the contract has been part of Australia's common law for more than a century.5 In recent decades, the High Court has been asked to grant special leave (permission) to hear an appeal to re-evaluate the legal basis for quantum meruit on two occasions. The first occasion was in the 1992 case of Renard Constructions (ME) Pty Ltd v. Minister for Public Works.6 The second was made in relation to the Sopov decision. The High Court refused to grant special leave on both occasions.
In 2018, special leave was sought for a third time. In contrast to both Renard and Sopov, this time the High Court approved special leave in its decision made on 14 December 2018.7
What is the significance of special leave being granted?
The special leave was granted in the 2018 case of Mann v. Paterson Constructions Pty Ltd (Mann). In Mann, the building owners (Mann) and the builder (Paterson Constructions) entered into a domestic building contract for the construction of two double-storey townhouses.8 The works specified in the contract were not completed by the due date, resulting in Mann terminating the contract for the builder's delay. Paterson Constructions contended that the termination was in fact repudiatory and itself terminated, but for different reasons (e.g., Mann's refusal to allow Paterson Constructions on to the site). Paterson Constructions also claimed payment on a quantum meruit basis for the work it had completed.
The Victorian Civil and Administrative Tribunal (VCAT) held that the respondent was not responsible for the delays in the works and that the purported termination of the contract by the applicants constituted repudiation that the respondent accepted.9 In relation to quantum meruit, VCAT held in favour of evidence presented by the respondent's quantity surveyor, who assessed the value of the work performed by the respondent to be greater than the (lower) price agreed under contract.10 Notably though, 'the applicants did not call a quantity surveyor to contradict the [quantity surveyor's] evidence of the value of the work performed and did not cross-examine…at any length'.11
Mann sought leave to appeal to the Court of Appeal for it to reconsider the principle that a builder, which accepts an owner's repudiation, is entitled to sue the owner in quantum meruit. The Court of Appeal ultimately refused leave on this ground and reaffirmed the decision made in Sopov, which confirmed this entitlement to payment on a quantum meruit basis for the benefit that the builder has conferred on the owner by performing work at the owner's request.12 The Mann decision reaffirmed the notion that the quantum meruit remedy is so entrenched in Australian common law that it was a matter that only the High Court could review and alter.
Senior lawyers, academics and commentators have welcomed the High Court's willingness to reconsider the law regarding quantum meruit, with many arguing that this review was inevitable, as 'to ignore the contract is to ignore the way that the parties have allocated risk'.13 Indeed, without any intervention, Australia's courts would remain bound by the controversial and possibly outdated legal position.14 The High Court is expected to consider three key issues:
1. whether quantum meruit should be available as a remedy where a builder validly terminates a building contract by acceptance of the owner's repudiation;
2. if so, how the quantum meruit should be calculated, with particular consideration of current valuation methods when the building contract is repudiated when part complete; and
3. whether section 38 of the Domestic Building Contracts Act 1995 (Vic) excludes a restitution claim in respect of variations to the original contractual scope of works in domestic building contracts.
Notably, if the owners are successful in their appeal to the High Court, this would result in a major change to existing law. If quantum meruit claims are excluded or restricted, this will increase the confidence of owners to assert their rights where they consider the builder is in breach of contract, free from the risk of the contractor being able to re-price its work.
Builders claiming payment following owner repudiation of a contract will more likely pursue claims for loss of profit on the unperformed work under the contract in order to recover the anticipated benefit of the final project (which they would have made had the contract continued to completion).
Regardless of whether the High Court reaffirms or changes the law in relation to quantum meruit, it is hoped that the Mann v. Paterson Constructions Pty Ltd appeal will provide clarity and certainty to the long-running debate surrounding this legal right. Builders and owners alike should 'watch this space' for guidance on the legal implications of repudiation, and the potential impact on costs and claimed amounts when drafting and entering into new contracts.