The decision of the High Court in Mann v Paterson [2019] HCA 32 came out today. It makes depressing reading for anybody interested in fair play in the construction industry in Australia.

The basic point can be explained fairly simply. If, during the course of a building contract, an owner is in severe breach of the terms of the contract, then the builder is entitled to terminate the contract at common law. The builder does not have to terminate, of course, but has an election; he can either leave the contract in place, or he can accept the owner’s conduct as repudiatory such that the contract is then at an end.

Then, according to the law as it has existed in common law jurisdictions for well over a hundred years, the builder has another choice. He can either elect to recover the amount of the contract price that he has earned up to the time of the termination, and also recover damages for breach of contract. Or, if he wants, he can instead take the much simpler course of claiming a quantum meruit for the whole of the work that he has done on the contract which has been repudiated.

The effect of this latest decision is to remove this second election, at any rate in large measure. The builder cannot now recover a quantum meruit for the whole of the work that he has done. In large measure (I get back to this in a moment) he has to be satisfied with whatever the contract permitted by way of recovery for the work done prior to the determination.

The effect of the decision is that the courts have shown common cause with owners who are in serious breach of their contracts, and the decision will cause further pain for innocent builders.

For the benefit of readers of this post who are not lawyers, it might be helpful to unpack the principles just a little. First, the notion of repudiation itself.

It has long been the case, and remains the case following this decision, that a breach of contract of sufficient seriousness may entitle the innocent party to treat the contract as having been repudiated by the guilty party. Often, an owner might fail to pay what she owes to the builder, or to indicate that she has no intention in the future of paying what she owes to the builder. Sometimes the owner, for one reason or another, simply locks the builder out of the site, preventing the builder from continuing with the work. In this case, what the owner did was to wrongly accuse the builder of repudiatory conduct and to herself wrongly terminate the contract (I adopt my usual practice here of characterising builders as male and owners as female, so as to share the pronouns around. In fact, the first-named appellant in this case was a chap).

Next, quantum meruit. There are two sorts of quantum meruit to which a builder might be entitled. One sort (the more common sort) is where there is no enforceable contract at all. In those circumstances, the law used to imply a promise to pay at common law. These days, the jurisprudential basis is regarded as being in restitution, or unjust enrichment, the principle being that a builder can recover a restitutionary quantum meruit where the owner would be unjustly enriched by retaining the benefit of the work without paying for it.

The other sort of quantum meruit is a contractual quantum meruit, also sometimes known as a “reasonable sum”. It arises, for example, where there is an enforceable contract, but the enforceable contract does not identify how much is to be paid for some or all of the work. This commonly arises where the parties have agreed a building contract for some work for an agreed lump sum, and agreed that the owner may order variations, but have not agreed how much she has to pay for those variations.

In either case, the Latin expression “quantum meruit” simply means “what is deserved”. Traditionally, that has meant the reasonable cost to the builder of doing the work, thus a reasonable profit margin. However, since the first sort of quantum meruit was re-categorised in terms of restitution, the touchstone has necessarily been, not the cost of the work to the builder, but the benefit of the work to the owner. Sometimes, of course, that work may have much more benefit to the owner then it cost the builder. Sometimes it is the other way around. In practice, the difficulty and indeed the absurdity of trying to value building work by reference to the benefit to the owner has meant that the courts have often been predisposed to treat the value of the work to the owner is equivalent to whatever it would have cost her to get the work done by someone else on the open market. Which is a lousy and expensive way of getting, roughly, to the more sensible valuation – the cost of the work the builder plus a reasonable margin.

Finally, it is necessary to say something about other mechanisms for termination. Apart from the common law rules with regard to repudiation, construction contracts of any size almost always have express termination clauses.  These clauses usually provide a detailed regime as to when a termination takes place. The termination is not of the contract as a whole, but of the builder’s engagement to do work under the contract. Unsurprisingly, the clauses usually load the dice in favour of the innocent party.

So, against that background, let us consider the lot of a builder who has exercised his right to terminate a contract following a repudiation by the owner. It is not a happy lot. He has suddenly lost his workload and his cash flow. His whole business plan in respect of the contract work – that he would get paid so much money for doing so much work – is shattered. He is likely to face years of litigation if he is obliged to bring a claim for damages to recover the loss that he has suffered. It is hardly surprising that, in days when the law was more concerned with fairness than it is today, the law would entitle the builder in those circumstances to an option – to recover fair and reasonable amount for all the work that he had done. The builder did not get a windfall if he took this option – he only got what was fair and reasonable – but at least the rule recognised that the essential bargain between the owner and the builder had been shattered, and that it was fair that the builder should get paid something reasonable without having to face years of litigation proving his damage.

True it is, sometimes, that the effect of this rule was that the builder was relieved from a bad bargain. The builder might have entered into the contract for a contract price that was too low. But principles of fairness used, until this morning, to say that if the owner has committed so serious breach of the contract is to lead to a repudiation, she could no longer expect the benefit of the bargain to her.

It is hard to know where to start addressing the paucity of the reasoning by which the High Court has now reversed this rule.

First, perhaps, is the presumption that the traditional quantum meruit allowed by the law in the circumstances arises as a matter of restitution. A far more straightforward and historically accurate characterisation would be that the quantum meruit was a contractual quantum meruit. In other words, that whilst there was a contract in place, the circumstances were such that the owner is no longer entitled to her bargain as regards the contract price, such that the law stepped in to imply a reasonable entitlement to a contract price.

Secondly, Kiefel CJ, Bell J and Keane J spent several pages attacking the straw man of what they call “the rescission fallacy”. The supposed fallacy is that the traditional rule was based on the proposition that the contract was rescinded ab initio. But in reality, the traditional rule was never really so based. It was simply a rule that, following a repudiation, the builder became entitled to the option of claiming a quantum meruit for all of the work done,  in the round and ab initio.

Those judges then acknowledged at [53] that in some cases justice would not be done without an entitlement to quantum meruit, but said that it was necessary only to consider the position on the facts of this case. In reality, of course, this case will have far-reaching application.

Nettle J Gordon J and Edelman J said at [205] there were “no reasons of practicality and few in principle to eschew the contract price”. Well, there is a very obvious reason of practicality: it enables the innocent builder who is already in a difficult position through no fault of his own to obtain a reasonable outcome with relatively little legal difficulty. As to the principle, these judges said that there was nothing inconsistent in referring to the contract price as “the parties’ agreed allocation of risk”. My guess is that something approaching 100% of builders would say that the “agreed allocation of risk” is inevitably out of the window in circumstances where the owner has repudiated the contract.

All of the judges were afraid that the existing rule might operate as an encouragement to builders who have entered into bad bargains to claim repudiation. Having dealt with construction disputes for several decades, I have to say that I have never once come across a case where a builder has encouraged an owner to commit a repudiatory breach simply to set up litigation about this topic. And if there were an unhelpful encouragement in this regard, it lies not so much in the area of the common law of repudiation, but in the territory of express contractual termination clauses.

The order as made at [222] was for yet further pain for the innocent builder. He now has to pay a considerable amount of legal cost and worse still, the case has been sent back to VCAT for “further determination according to law”. The seven judges of the High Court were by no means agreed what the law is among themselves (let alone, of course, with the many judges, including the previous judges in this case, who reached an opposite conclusion). The majority rule appears to lead to these conclusions:

• that the innocent builder is not entitled to a quantum meruit for the whole of the work (all of the judges)
• that insofar as the right to progress payments payable as at the time of termination had not accrued, then the innocent builder may claim quantum meruit (Nettle J Gordon J and Edelman J at [179])
• that although the amount of the quantum meruit should not normally exceed the equivalent part of the contract price, it might do (Nettle J Gordon J and Edelman J at [215]).

The above is the unfair and untidy picture which appears to me from a single reading of the judgment. I’m sure I will have to read it again. I have an uncomfortable feeling that the judgment will not improve on further acquaintance.

The High Court is the highest court in Australia, so that the only practical way this decision is likely to be corrected soon is by legislation. I’m not holding my breath on that one.