Manning up

6 LangtreeThe submissions are now in before the High Court in the appeal in Mann v Paterson Constructions. It is all about the right of a contractor to elect for a quantum meruit in the event of a repudiation of a building contract by the owner.

The established law is well known. If an owner commits a repudiatory breach of a building contract, the contractor has two elections. The first election is as to whether or not to accept that repudiation. If the contractor does so elect, the contract is at an end. The contractor then has a second election. He can either recover the portion of the contract price that he has earned, together with damages for loss of profit on the balance of the work. Or, if he prefers, he can recover a quantum meruit for the whole of the work.

The facts in the case are depressingly familiar. The owners purported to terminate the contract, on the ground, into alia, of the contractor’s delay in completing the contract, and refused to allow the contractor back onto site. It was found that the owners were not entitled to do this, and that their conduct was repudiatory. The contractor accepted that repudiation, and elected to recover on a quantum meruit basis.

The contractor succeeded in VCAT Proceedings, and on appeal before a single judge, and in the Court of Appeal of the Supreme Court of Victoria. The owners have obtained special leave to take the matter to the High Court.

Leaving aside some matters peculiar to Victoria, there are essentially two issues before the High Court:

  • Should it depart from the well-settled authority that a contractor is entitled to elect for a quantum meruit in these circumstances?
  • If not, it should nevertheless impose the contract price as a ceiling on that quantum meruit?

The submissions are available on the High Court website. In short, the owners are inviting the High Court to overturn the well-established authority – most recently confirmed in Sopov v Kane Constructions (No 2) (2009) 24 VR 510. Their essential argument is that contracting parties have a legitimate interest in being able to form, at the outset, an estimate of their liability in the event of default[1], and that a restitutionary remedy may only be available where there is no applicable genuine agreement or where such agreement is frustrated, avoided or unenforceable[2] .

In reply, the contractors point to the seriousness of a breach sufficiently serious to lead to a repudiation, saying:

That breach has a dual significance, because it made a complete performance by the builder impossible; and because it signalled the owner’s intention not to be bound by the contract and the renunciation of it. In both these fundamental senses, the basis of the contractual transaction had failed by reason of the repudiatory breach. How, in those circumstances, could the owners in good conscience refused to pay the fair and reasonable value of the work they themselves requested and benefited from, when their own conduct was the reason for the failure of the contractual bargain?

It is a debate that has been running in England for some considerable time, there being some criticism in the textbooks of the well-established rule.

The typical case in which this matters but is a case in which the contract price is, from the contractor’s point of view, unfortunately low or – more commonly – where there are Queen of Hearts clauses in the contract which prevent the contractor from making claims under or for breach of the contract. The essential question is whether an owner, who has repudiated a contract, can nevertheless obtain the benefit of that bargain? It is a somewhat strange proposition that an owner should be entitled to retain that benefit. It is tantamount to the owner having her cake and eating it: on the one hand refusing to perform the contract, but on the other hand demanding the benefit of the bargain in that contract.[3]

Perhaps remarkably, the submissions on both sides take for granted that if there is a quantum meruit, it is a quantum meruit of the restitutionary type, and not a contractual quantum meruit. That also was the presumption in Kane v Sopov. But there are two reasons why it would be more logical to treat the quantum meruit here as a contractual quantum meruit.

The first reason is the point made by the owners in their submissions. A restitutionary quantum meruit should be confined to cases where there is a lacuna of any contractual entitlement. A contractual quantum meruit, on the other hand, arises in the context of a contractual arrangement, arising, for example, where there is a binding contract between the parties but where there is no mechanism fixing the contractual price, or where such mechanism has failed. The concept of a contractual quantum meruit accordingly fits much more happily into the circumstances which arise following the acceptance of a repudiation by an owner.

The second reason is to do with the different starting points for the assessment of the quantum meruit. A restitutionary quantum meruit measures the benefit obtained by the owner, rather than the cost incurred by the contractor. True it is that the courts will sometimes measure the benefit obtained by the owner by reference to the cost incurred by the contractor, but there will be many circumstances where the benefit of the work obtained by the owner is affected by other factors, so as to bear little relation to the cost incurred by the contractor. Conversely, a contractual quantum meruit is founded at the other end of the equation; the cost incurred by the contractor is the touchstone, regardless of what benefit the work has had to the owner, if any.

Which of these measures is more appropriate in the circumstances? I was asked recently to chair the presentation of my friend Philip AdamsConstruction Law Update for the Law Society of South Australia recently, in which he helpfully drew attention to this appeal. Following the presentation, I asked the audience which measure they thought was more appropriate. A show of hands indicated more or less unanimously that the contractual quantum meruit was regarded as more appropriate.

Watch this space.

Meanwhile, it is hard not to have some sympathy for the contractor.  The proceedings before VCAT took 19 days.  It has had three outings before the Supreme Court.  Now they have the dubious pleasure of being a test case in the High Court.   The costs of all of this are surely disproportionate to  the sums in dispute .



[1] Appellants Submission  paragraph 22

[2] AppellantsSubmission paragraph 23

[3] Respondent’s Submission  paragraph 23

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