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Residential Focus

23 October 2019

#Property & Real Estate

Christine Jones

Published by Christine Jones, Divya Chaddha

Residential Focus

High Court provides clarity on a builder’s entitlement to a quantum meruit claim

The High Court of Australia recently provided clarity with respect to the remedies available to contractors following termination of the contract as a consequence of repudiation.

In the decision of Mann v Paterson Constructions Pty Ltd [2019] HCA 32, the High Court held that in addition to damages for breach of contract, the remedy of quantum meruit is available to contractors in circumstances where work is performed work for which the right to payment had not accrued prior to the date of termination. For instance, in circumstances of milestone payments, where the milestone had not been achieved before termination.

Notwithstanding, a quantum meruit claim for contract works cannot exceed the portion of the contract price prescribed by the contract for that stage of work.   

The dispute

The Owners had entered into a major domestic building contract with the Builder in accordance with the Domestic Building Contracts Act 1995 (VIC) (DBC Act) for the construction of two double-storey town houses for a fixed price of $971,000 (Contract). 

About half way through the construction works, a dispute arose between the parties with regard to alleged variations of $50,000. 

The Owners alleged that the Builder refused to carry out further works until the invoice for the variation work was paid, and by doing this together with other alleged breaches, the Builder’s conduct amounted to repudiation, which the Owners accepted. The Builder, in return, purported that the Owners conduct was itself repudiatory, which the Builder subsequently accepted. 

The Builder commenced proceedings seeking damages and in the alternative, a balance of moneys for work and labour done and materials provided up to the date of termination.

The decisions of the Tribunal and initial appeals

By applying the principles set out in Sopov v Kane Constructions Pty Ltd (No 2)[1] (Sopov), the Victorian Civil and Administrative Tribunal (VCAT) held that the Owners wrongfully repudiated the Contract. In such circumstances, the VCAT held that the Contract was "void ab initio" (or “invalid” in simple terms) and section 38 of the DBC Act, which provides builders with the ability to progress low value and low impact variations and a regime for notifying other variations and has no equivalent in NSW, did not apply to limit the amount recoverable by the Builder for variations, meaning the Builder was entitled to recover payment for the variation work on a quantum meruit basis. This was assessed at $660,526.41.

The Owners sought to appeal the VCAT decision, on the following basis:

  • that VCAT wrongly treated Sopov in establishing that the Contract was “void ab initio” without having regard to the discrepancy between the amount awarded and the Contract price
  • that VCAT erred in holding that section 38 of the DBC Act did not apply, which would only entitle the Builder to damages for breach of contract in accordance with that section. This would result in a much lesser amount.  

The Supreme Court held that the VCAT did not err in its interpretation of Sopov. The Supreme Court also found that the Contract price did not operate as a ceiling in assessing a quantum meruit claim, as the remedy confers on the Builder the “fair and reasonable value” for its work.

The Owners further appealed to the Court of Appeal of the Supreme Court of Victoria. This appeal was dismissed. The Court of Appeal also found that section 38 of the DBC Act does not exclude a restitutionary remedy such as quantum meruit.

The Owners were ultimately successful in the High Court.

The High Court decision

The High Court considered:

  • whether the Builder was entitled to sue on a quantum meruit basis for the variation work, having terminated the Contract
  • alternatively, if the Builder was entitled to sue on a quantum meruit basis, whether the Contract price operated as a ceiling on the amount claimable under a quantum meruit claim
  • whether the Builder was allowed to recover the variation work on a quantum meruit basis, having regard to the application of section 38 of the DBC Act.

At the outset, the High Court unanimously rejected the lower courts’ treatment of this claim as a “rescission fallacy”, which effectively entitled the Builder to a quantum meruit claim for the recovery of a “fair and reasonable value” of the variation work substantially assessed at $660,526.41.

The High Court found as follows: 

Entitlement to quantum meruit depends on when the right to payment accrued

It was held that the Builder’s right to payment of the variation work accrued before the Contract was terminated, and therefore the Builder was entitled to be paid for the accrued variation amounts, irrespective of repudiatory conduct.

However, the High Court held that a restitutionary claim such as quantum meruit ought to only be available in circumstances where there is no enforceable right to payment under the contract, as this would subvert the allocation of risk under a contract. The consequence of this decision is that a quantum meruit claim is only available in respect of work conducted by a builder in respect of which there are no accrued rights under the building contract at the time of termination, such as an incomplete stage or milestone.

In such circumstances, the High Court concluded that the Builder had an enforceable right to recover under the Contract, therefore the Builder was not entitled to sue on a quantum meruit basis.

The High Court further held that if a builder elects to recover by way of a restitutionary claim, the amount recoverable should be limited by the rates prescribed by the contract, in order to reflect the agreed bargain and risk allocation between the parties.

Section 38 of the DBC Act does not apply to a quantum meruit claim

Also of significance, the High Court unanimously held that section 38 of the DBC Act precludes a contractor from recovering payments for variation work in restitution. Section 38(6)(b) of the DBC Act relevantly limited the Builder’s recovery to cost of carrying out the variation plus a reasonable profit (pursuant to  section 38(7) of the DBC Act). The matter has been remitted to the VCAT to determine the extent of the works performed by the Builder for which a right to payment did not accrue prior to termination.

What are the implications?

This decision reduces the risk of a contractor pursuing a grossly inflated quantum meruit claim, where rights to payment have not been accrued, in the event a contract is terminated by reason of repudiatory conduct.

Parties nevertheless need to consider carefully the impact of this decision when terminating a contract and whether it will increase the prospect of a claim in quantum meruit. 

Notwithstanding that the underlying Contract was for work carried out in Victoria and the DBC Act applies, there would appear to be relevant implications for work carried out in NSW, namely around the availability of quantum meruit and the operation of contractual rates as a cap.  

Author: Divya Chaddha

[1]    (2009) 24 VR 510.

In the media

EA: Formal response to draft building reform legislation
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Why we need to improve on our cities’ dysfunctional buildings
Architect and broadcaster Peter Maddison calls out the “nonsense” of 6 Star Energy Rated homes with solar panels if the design is all wrong (17 October 2019).  More...

Housing shortfall will kick-start price growth: RBA
The residential construction downturn is larger than the Reserve Bank expected, and with building approvals 40 per cent lower than their 2017 peak, a shortfall in housing supply looks “quite likely” (17 October 2019).  More...

Housing downturn will be a larger-than-expected drag on economy, RBA warns
Not only is the property downturn hitting household consumption, it's also a big drag on economic growth and likely to last for another year, the RBA's deputy governor warns (17 October 2019).  More...

Construction needs to avoid social value smokescreens
Social value can be up to 15 per cent of non-price assessments in construction tenders, but are the metrics genuine. If not, it’s a huge missed opportunity for this sector with so many multiplier effects in the economy. (17 October 2019).  More...

Absolutely devastating': Mascot Towers cracks getting bigger, report finds
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Pressure growing on governments for cladding action
Pressure is growing on state governments to help fund building defect rectification as problems such as the Mascot Towers evacuation in Sydney add urgency to the issue, a Sedgwick executive says (14 October 2019).  More...

HIA supports next steps for First Home Loan Deposit Scheme
Graham Wolfe, HIA Managing Director said the Bill’s passage means that the National Housing Finance and Investment Corporation (NHFIC) will be able to offer the deposit guarantees that underpin the First Home Loan Deposit Scheme (14 October 2019).  More...

BDAV: Building designer insurance update
The Grenfell Tower tragedy in 2017 showed that there is a real risk with buildings that are clad with flammable panels. Building Designers need to ensure they remain vigilant when selecting their partners in the building profession. Working with experienced and knowledgeable people as well as staying up to date with information from their Association, will ensure that their exposure is reduced )(09 October 2019).  More...

MBA: First home buyers near 8-year high as housing recovery strengthens again
“The First Home Buyer share of the home loan market has increased to its highest since early 2012 while investor lending has risen for the second consecutive month,” Master Builders Australia’s Chief Economist Shane Garrett said (10 October 2019).  More...

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Australian Bureau of Statistics
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In practice and courts

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Have access to all our videos from one central location (09 October 2019).  More...

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ABCB: NCC 2019 will be amended out-of-cycle
The ABCB is undertaking an out-of-cycle amendment for the 2019 edition of the National Construction Code. It will be known as NCC 2019 Amendment 1. The amendment is intended to introduce enhanced fire safety measures for early childhood centres in high-rise buildings and address recommendations identified in the Shergold Weir Building Confidence Report. Consultation closes on 10 October 2019.  More...

Draft Regulations for Building Certifiers
The NSW Government is seeking feedback on a draft regulation for building and development certifiers. The proposed Building and Development Certifiers Regulation 2019 is open for comment until 28 October 2019. A new Building and Development Certifiers Regulation 2019 must be introduced in order to bring the Building and Development Certifiers Act 2018 into force. For more information and to view the documents go to the More....

Draft Legislation for Design and Building Practitioners
The NSW Government is seeking feedback on new draft legislation governing the design, building and construction sectors. The Design and Building Practitioners Bill 2019 has been released as part of the government’s response to recommendations in the Building Confidence Report (by Professor Peter Shergold and Bronwyn Weir). A regulation will be developed in 2020 to support the bill. Submissions close 16 October 2019.  More...

Note: The reforms in the act and the supporting regulation will apply to certain categories of designs and to multi-unit and multi-storey residential apartment buildings (as set out in the regulation).

NSW Fair Trading: Security of Payment laws start soon
The Building and Construction Industry Security of Payment Amendment Act 2018 (the Amendment Act) and the Building and Construction Industry Security of Payment Amendment Regulation 2019 (the amending Regulation) will commence on 21 October 2019.  More...

NSW Fair Trading: Part 6 of the EP&A Act postponed until 1 December 2019
The Part 6 provisions of the Environmental Planning and Assessment Act have been postponed and will now start on 1 December 2019. This delay will allow time for the sector to adjust to the regulatory changes that have been progressing around fire safety and the Building and Development Certifiers Act 2018.  More...

Planning Circular – Commencement of Part 6 (building and subdivision certification provisions)
FAQ – Occupation certificate
FAQ – New mandatory compliance powers for private principal certifiers
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Environmental Planning and Assessment Act 1979
Environmental Planning and Assessment Regulation 2000
If you have any queries, please contact the Department of Planning, Industry and Environment via legislativeupdates@planning.nsw.gov.au.  More...

Safework NSW: Have your say on the NSW draft formwork code of practice
The NSW Government is seeking feedback on a draft formwork code of practice, which aims to provide practical guidance for workers and businesses when working with formwork and falsework. For more information and to submit feedback visit open consultations on the SafeWork website or view the consultation the NSW Government's Have Your Say. Submissions close on 30 September 2019

Cases

Blue Haven Pools South Pty Ltd v Maloney [2019] NSWCATAP 259
APPEAL – whether permitted to raise new issue on appeal
CONTRACT – construction of contract – whether capricious, unreasonable, inconvenient or unjust
CONTRACT – repudiation – whether retracted by conduct

Collins and Turner Pty Ltd v Landini & Landini [2018] NSWLC 22
CONTRACTS – whether works were residential building work or supply of related services in relation to construction work - terms of contract – applicable legislation
CIVIL PROCEDURE – pleadings – striking out

Edwards v Commissioner for Fair Trading, Department of Customer Service (Costs) [2019] NSWCATAP 249
COSTS – costs of the appeal – whether special circumstances – failure by respondent to provide relevant documents to tribunal at first instance – injustice caused to the appellant

Mann v Paterson Constructions Pty Ltd [2019] HCA 32
Appeal allowed with costs.
Restitution – Unjust enrichment – Work and labour done – Where land owners and builder entered into contract to which Domestic Building Contracts Act 1995 (Vic) applied – Where contract provided for progress payments at completion of stages – Where owners requested, and builder carried out, variations to plans and specifications in contract without giving written notice as required by s 38 of Act – Where owners repudiated contract after builder raised invoice claiming for variations – Where contract terminated by builder's acceptance of owners' repudiation – Whether s 38 of Act applied to limit amount recoverable by builder for variations – Whether builder entitled to recover in restitution as alternative to claim in damages for breach of contract – Whether contract price operated as ceiling on amount recoverable by way of restitution.

Words and phrases – "accrued rights", "alternative restitutionary remedy", "common counts", "completed stage", "contract price ceiling", "contractual incentives", "domestic building contract", "failure of basis", "failure of consideration", "limit on recovery", "measure of restitution", "notice", "primary and secondary obligations", "principle of legality", "protective provisions", "qualifying or vitiating factor", "quantum meruit", "quasi-contractual obligation", "repudiation", "restitution", "subjective devaluation", "unjust enrichment", "variations", "work and labour done". Domestic Building Contracts Act 1995 (Vic), ss 1, 3, 4, 16, 27, 38, 39, 53, 132.

Natural Solar Pty Ltd v Lowe [2019] NSWCATAP 252
CONSUMER LAW – whether decision fair and equitable or against the weight of the evidence – new evidence reasonably available at time of hearing – no appellable error shown. Appeal from an order of the Tribunal in the Consumer and Commercial Division requiring the appellant to refund the purchase price of a solar system that it supplied to the respondent and which it installed on the roof of the respondent’s home in Sydney

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Christine Jones

Published by Christine Jones, Divya Chaddha

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