High Court limits significant change in the law on quantum meruit claims following termination of a construction contract
In this case, the High Court held that a contractor who terminated a domestic building contract by accepting the principal's repudiation:
- was not entitled to recover a quantum meruit (being a claim for the reasonable value of work done) for work carried out before termination and for which a contractual right to payment had accrued at the time of termination. The contractor's rights in relation to that work were limited to damages for breach of contract or debt for recovery of the amounts accrued.
- was entitled to recover a quantum meruit for work carried out before termination but for which no contractual right to payment had accrued at the time of termination. However, in that event, the price stipulated in the contract limited the value of the claim in quantum meruit.
This was a significant change from the position before the decision.
This decision means that a contractor can no longer rely on quantum meruit to recover more than would have been recovered had the contract been performed.
Peter and Angela Mann contracted with Paterson Constructions Pty Ltd to build two townhouses under a major domestic building contract in Victoria.
Before the completion of the second townhouse, the Manns claimed the contractor repudiated the contract, based on the contractor's alleged delay in carrying out works. They purported to accept the repudiation and excluded the contractor from the site. The contractor, in turn, asserted that the Manns' conduct in excluding it from the site itself amounted to repudiation, which it accepted.
The contractor sought to recover, on a quantum meruit basis, the value of work done:
- regarding 42 variations that were directed verbally, but for which the process prescribed in the Domestic Building Contracts Act 1995 (Vic) was not followed;
- under the contract, for which a contractual right to payment had accrued; and
- under the contract, for which no contractual right to payment had accrued.
At the time of termination, the contractor had received $945,787 as progress payments against a contract price of $916,779 (that did not include the cost of the variations).
The contractor commenced VCAT proceedings. The Manns were ordered to pay the contractor a quantum meruit sum of $660,526.41, representing a recovery of considerably more than would have been awarded as damages for breach. The Manns unsuccessfully appealed to the Supreme Court of Victoria and the Victorian Supreme Court of Appeal.
The High Court was required to determine two critical questions (and a third question relating to section 38 of the Domestic Building Contracts Act). The two critical questions were:
- in what circumstances the contractor, having terminated for repudiation, could choose to recover on a quantum meruit basis, rather than seeking damages; and
- to the extent it could recover on a quantum meruit basis, whether the contract price operated as a ceiling on the amount recoverable.
The High Court:
- unanimously rejected the contractor's entitlement to sue on a quantum meruit basis when it had accrued a contractual right to be paid; and
- by majority (Justices Nettle, Gordon and Edelman, with Justice Gageler agreeing) held that the contractor could recover on a quantum meruit basis where no right to payment had accrued under the relevant contract, but that the amount recoverable was limited to the contract price for the relevant stage or part of the works.
The High Court also held that s38 of the Domestic Building Contracts Act prevented a contractor from recovering an amount in restitution for variations that were not approved according to that section.
The court did leave open the possibility of there being exceptional situations in which quantum meruit might still exceed the contract price. Their Honours explained that there might be circumstances that 'dictate that it would be unconscionable to confine the plaintiff to the contractual measure'. They mentioned an example of such a circumstance could be a defendant's continuing breaches of contract causing a cost overrun that rendered the contract unprofitable.