Introduction
The recent High Court decision in Mann v Paterson[1] will raise as many questions as the answers it provides.
Background
Mr & Mrs Mann (“Mann“) owned land in Blackburn, Melbourne. They entered into a contract with Paterson Constructions Pty Ltd (“Paterson“) to build two double storey apartments (“Units“). The contract sum was $971,000 and the Units were to reach practical completion within 290 days. After about 360 days, only Unit 1 had reached practical completion and Unit 2 remained partly complete. When handing over Unit 1, Paterson claimed variations totalling $48,403.07. Mann did not want to pay for the variations. Paterson said unless Mann paid for the variations, it would not finish Unit 2. Mann then said it was terminating the contract. Paterson said Mann had repudiated the contract by an illegal termination, accepted that repudiation as the end of the contract, and went to Court to get compensation.
Paterson claimed damages under the contract of $446k including $231k for variations and in the alternative a claim in quantum meruit for $944,898.
Mann counterclaimed $391k for defective works. Paterson was awarded about $660k, an amount greater than its entitlement under the contract. It would appear the contract sum agreed between Mann and Paterson was lower than the real value of the works.
Quantum meruit
Quantum meruit, literally translated, means “the amount deserved”. A builder claiming “the amount deserved” might well be entitled to more than their contract sum if the price agreed in the contract was lower than the real market value. In some cases, builders who have claimed in quantum meruit have been awarded much more than the contract sum.
Mann was not happy to be ordered by the Victorian Courts to pay considerably more than the contract price.
Mann goes to the High Court
Mann applied for special leave to appeal to the High Court on three grounds, which can be summarised as follows:
- It was an error to hold Paterson was entitled to sue on a quantum meruit for all the works carried out prior to termination.
- Alternatively, if Paterson was entitled to sue on a quantum meruit, the contract sum capped the amount available.
- It was an error to allow the variation claims.
The findings of the Court as to the first two of these appeal grounds have application across Australia. The third ground relates to the specific provisions of the Victorian legislation requiring variations to be approved in writing and is not discussed in this Update. In short, the High Court unanimously said Paterson’s failure to follow legislative requirements meant it should not be paid for any of the variations it had performed.
Unfortunately, the High Court was not united in its decision as to the other two grounds. Seven judges considered the appeal. Chief Justice Kiefel and Justices Bell and Keane (“Group 1“) wrote joint reasons as did Justices Nettle, Gordon and Edelman (“Group 2“). Justice Gageler was left to make the final call in a four to three split decision.
Group 1: The rescission fallacy
Group 1 named as the “rescission fallacy” a legal doctrine that was clearly set out in a case in New Zealand in 1901[2]. Group 1 said it is a fallacy to say that a contract once terminated by acceptance of a repudiation, is rescinded as from the beginning, such that it is to be treated as though it never existed in the first place. That fallacy, they said, if accepted, means there is no contract left to give guidance as to the contract price. That could lead to injustice because the amount assessed as payable under a quantum meruit might substantially exceed the contract price, as has happened in the past.
Respecting contract
Group 1 said that restitutionary claims, of which quantum meruit is one example, must respect contractual regimes and their allocation of risk.
Group 1 said where the builder has an enforceable contractual right to money that has become due under the contract, the builder cannot claim reasonable remuneration without reference to the contract sum.
Generally, where a contract is repudiated, the innocent party has a contractual right to damages for loss of bargain. Group 1 said that the contract terms should be primary in determining how much compensation accrues for that loss of bargain.
Group 1 felt that the award as given had allowed a windfall to Paterson that was “distinctly inconsistent with the respect due to the contract made by the parties as the charter whereby their commercial risks were allocated between them and their liabilities limited”. Their Honours stressed that restitutionary measures, such as quantum meruit, are gap filling remedies.
What about Mann’s disregard for the contract?
In response to Paterson’s claim that there had been a failure of the contract due to the withdrawal by Mann of the promise to pay and therefore a failure of consideration, Group 1 pointed to the divisible progress payments set out in the contract. They said: “Nothing in the contract was apt to suggest that these payments were only provisional, and subject to a final taking of accounts.”
This comment may serve to distinguish the Mann v Paterson decision from other construction contract disputes. In any event, for this reason, Group 1 said Paterson’s obligations to construct each stage were able to be considered as “severable rather than entire”.
Paterson said that due to the termination of the contract, it would not now be able to finish the next stage and could not bring a claim for payment for that work. On that basis, Paterson’s team said it should be entitled to a quantum meruit for at least the part completed portion of the next stage. Group 1 disagreed and said normal contractual principles should apply.
Paterson’s legal team then said that the repudiation of the contract by Mann was of such a nature that Mann should not be allowed to benefit by relying on one term of the contract as to the price while disregarding the rest of the contract terms.
Group 1 said there is nothing wrong with a defaulting party enjoying the protection of the contract’s ceiling on the amounts recoverable by way of damages.
However, Group 1 concluded by qualifying their decision with the following statement: “It may be that in some cases justice will not be done without a restitutionary claim.”
Group 2: The total failure of contract
The three Justices comprising Group 2 said that where a contract remains open, there is no room for quantum meruit. However, they disagreed with Group 1 and said where the contract is closed, such as this type of terminated contract, a claim in quantum meruit remains an option, although they agreed with Group 1 that the contract is not rescinded as from the beginning.
Group 2 said that it would be necessary for there to be a total failure of the contract to give rise to an obligation on the part of an enriched party to make restitution. They spoke of such a failure occurring by way of a total failure of consideration, in other words, a total failure to deliver the purpose of, or motivation for, the contract. A total failure of consideration had not occurred in relation to the divisible progress claim stages that had been completed before the termination. The contractor had rights to keep its payment for the stages completed and Mann had received some of the completed work.
However, they said there had been a total failure of consideration in respect of the progress claim stages that have not been completed. The contractor’s right to complete the performance and earn the rest of the contract price had failed. In relation to those uncompleted stages, the contractor had a claim for restitution in quantum meruit in respect of the work and labour done towards part completion of the uncompleted stages as an alternative to damages for breach of contract.
So how much can be claimed?
However, their Honours considered that the general rule should be that the amount that could be claimed by way of a restitutionary quantum meruit claim, should be calculated by reference to the contract sum. They felt that the parties had, by their contract, reached an agreement as to the price at which the services were to be provided.
They were not persuaded by the concept that the conduct of the Mann’s in repudiating the contract, should give rise to an immediate rejection of the price aspect of the bargain. They felt that the contract price remained important in evaluating the amount due in quantum meruit.
Gageler J. What rescission fallacy?
Gageler J agreed there was no entitlement to a quantum meruit for the completed stages of the contract. However, in relation to the partly completed work for which no milestone stage had been reached, His Honour found a quantum meruit is available. In effect he agreed with Group 2, although for different reasons.
His Honour referred to a 1934 judgment of Jordan CJ, in which His Honour had left open a claim in quantum meruit where a wrongful repudiation had the effect of preventing a party from becoming entitled to receive payment for services already rendered.
His Honour noted that Jordan CJ did not rely on the rescission fallacy and said, somewhat pointedly, “The [rescission fallacy] notion had been discarded then, as it remains discarded now.”
Gageler J pointed out that the repudiation by Mann and the acceptance of that repudiation resulting in the termination of the contract had deprived Paterson of the opportunity to take the work to the next stage, thereby entitling it under the contract to the further payment. Gageler J said allowing a claim in quantum meruit for this aspect of the work was necessary to avoid the otherwise unjust outcome.
However, His Honour was firmly of the view that the contract price should act as a cap on the amount recovered under a quantum meruit.
The amount recoverable is a liquidated amount representing reasonable remuneration for the work. That amount cannot exceed the portion of the overall price set by the contract that is attributable to the work.
Conclusion
It seems clear now that the contract price will provide a ceiling to claims in quantum meruit except in unusual cases, for example, where the conduct of the principal has contributed to the cost of construction.
The omission from the Mann contract of the common term that payments are “on account” until completion may lead to this case being distinguishable from others.
What is not clear is how the quantum of an award for the uncompleted portion of the contract would be calculated. Would there be a need to enquire as to whether the staged progress payments that have been made represent a fair percentage of the contract price?
Questions also arise as to how to deal with contracts where the staged progress payments specified do not match the value of the work performed to that stage. Many standard form domestic building contracts set fixed percentages of the contract sum, regardless of individual variations of specification. Generally, the payments are “on account” and the true value of the work completed at any stage can vary significantly from the amount stated in the contract as due to be paid for that stage. It is only when the final stage is completed, and the full contract sum paid, that the parties’ agreement as to price is fulfilled. The decision in Mann v Paterson does not consider this difficulty.
[1] Mann v Paterson Constructions Pty Ltd [2019] HCA 32
[2] Slowey v Lodder (1901) 20 NZLR 321
