Quantum meruit and repudiation: not the bonanza it once was

The High Court's recent decision in Mann v Paterson Constructions Pty Ltd [2019] HCA 32 marks an important development in the common law concerning quantum meruit and repudiation of building contracts.

Until Mann v Paterson, if a builder chose to accept the owner's repudiation and terminate the building contract, the builder could elect between alternative remedies. Either, pursue damages for breach of contract, or sue on a quantum meruit for work done and materials supplied. Where a builder was engaged on a loss-making contract, the prospect of a quantum meruit remedy held considerable appeal - often resulting in an award of a sum above the contract price.

Now, following Mann v Paterson, the High Court has substantially narrowed the scope for a quantum meruit where a contract is terminated by a builder's acceptance of an owner's repudiation.

Issues facing the High Court

The appeal before the High Court arose out of residential building dispute involving the construction of two townhouses for the appellants, Peter and Angela Mann by the respondent Paterson Constructions Pty Ltd. In the course of construction, conflict escalated between the parties, ultimately resulting in each party alleging that the other party had repudiated the contract.

The Victorian Civil and Administrative Tribunal upheld the Respondent's entitlement to recover upon a quantum meruit for work performed. The Victorian Court of Appeal in Mann v Paterson Constructions Pty Ltd [2018] VSCA 231 upheld the Respondent's claim for quantum meruit, constrained by the existing authority. It was clear that without intervention by the High Court, this controversial but entrenched feature of construction law would remain undisturbed. Mann v Paterson provided the High Court with the chance to decide this issue once and for all.

Ultimately, the questions for the High Court were:

• whether, following the builder's acceptance of the principal's repudiation, the builder was entitled to sue on a quantum meruit for work performed;
• if quantum meruit entitlement existed, whether recovery on a quantum meruit claim should be subject to a contract price ceiling; and
• the application of section 38 of the Domestic Building Contracts Act 1995 (Vic) to quantum meruit claims.

Availability of quantum meruit

The High Court held that:

• a claim for quantum meruit is not available for work done before termination for which the builder has accrued a contractual right to payment as at the date of termination;
• a claim for quantum meruit is only available for work done before termination, for which the builder has not yet accrued a contractual right to payment as at the date of termination.

A construction contract which is divided into stages, and under which the total contract price is apportioned between the stages by means of specified progress payments payable at the completion of each stage, is viewed as containing divisible obligations of performance (by reference to those stages).

The High Court unanimously agreed that where a construction contract apportioned the contract price between entire stages, with staged payments upon completion of each such stage, a quantum meruit claim would be unavailable in respect of completed stages in respect of which the builder had a right to recover a progress payment under the contract.

When repudiation is accepted, and the contract terminated, the parties are discharged from any further obligations to perform the contract, but accrued rights and obligations remain. Where payment has become due, the builder's remedy is limited to debt for the amount due under the contract or damages for breach of contract.

More problematic was the scenario involving stages of work performed but incomplete at the date or termination, for which a progress payment had not yet accrued. The view of the majority (Justices Nettle, Gordon, Edelman and Gageler) was in sharp contrast to the view of the minority (Chief Justice Kiefel, Justices Bell and Keane) on the availability of restitution in this scenario.

The majority held that in the case of an incomplete stage where a right to payment has not yet accrued, a total failure of consideration (or a total failure of a severable part of the consideration) would exist in respect of that stage. In these circumstances, the builder may recover in restitution, as an alternative to damages for breach of contract in respect of that stage.

The majority referred to the scenario in which the obligation to perform the work is not divided into stages, but is "entire" so that payment under the contract only accrues once the contractor has completed all work. In this scenario, a quantum meruit claim remains open to a builder following acceptance of an owner's repudiation. In these circumstances, there would be a total failure of consideration.

Contract price as a cap on quantum meruit recovery

In the narrow circumstances in which a quantum meruit claim remains open to a builder following acceptance of an owner's repudiation, the amount recoverable in a quantum meruit claim is now unlikely to exceed the contract price.

The majority of the High Court acknowledged the tension created where restitutionary awards far outstripped the agreed contract price struck between the parties. The majority took the view that where a contract is enforceable, but terminated for repudiation, quantum meruit recovery should not exceed a fair value calculated in accordance with the contract price.

The majority acknowledged that special circumstances might exist where restitution is not limited by the contract price. However, in the present context this was not so.

...and how future cases might be affected

Allegations of contract repudiation tend to occur late in the progress of the contract. For owners, this decision removes the unwelcome prospect of the builder electing to pursue a quantum meruit for completed stages. However, the decision raises some interesting issues which might be played out in future cases:

• Mann v Paterson involved a domestic building contract with separately priced stages. The Domestic Building Contracts Act 1995 (Vic) regulates the stages of building and how much of the contract price is apportioned to each stage. However, it remains to be seen how a court would approach a commercial building contract where progress payments are expressly stated to be "on account" of a contract price, and whether a court may be inclined to entertain an "entire contract" argument in such a case.
• it is unclear what circumstances would warrant departure from the position that amounts payable in restitution should not exceed the agreed contract price.