APPROACH TO QUANTUM “There has been significant debate as to whether and how the terms of a MERUIT FOLLOWING REPUDIATION should form the outline or cap for any award OF A CONSTRUCTION CONTRACT: in in circumstances where one party had demonstrated its unwillingness to be bound AUSTRALIA VS. THE UNITED by those terms so as to lead to the agreement’s KINGDOM termination.”

Introduction Previous Position in Australia

In this article, we will examine the Australian High Court’s decision in Mann v Paterson In Australia, prior to the Mann v Paterson Constructions Pty Ltd ¹ (Mann v Paterson) relating to the use of quantum meruit following decision, a contractor could, following the repudiation of a construction contract. We will also briefly discuss how that decision its acceptance of an owner’s repudiation compares to the current status of quantum meruit in the United Kingdom. of a contract, broadly elect to pursue its remedial rights through either contractual In its recent decision, the High Court of Australia has provided some clarity to an area of damages or a restitutionary claim for Australian that has often been described as controversial: the ability to elect to seek a quantum meruit. quantum meruit for repudiation of a building contract. Clarity from the High Court comes in two principle ways: In some instances this produced seemingly The Facts of the Case odd results whereby a contractor could In March 2014, Mr and Mrs Mann (Owners) • clarification of the limited circumstances in which a contractor may now pursue a claim claim for, and receive amounts, on a entered into a major domestic building of quantum meruit; and quantum meruit basis for work performed contract with Paterson Constructions Pty that were significantly greater than the Ltd (Contractor) for the construction of two • clarification regarding the quantification of such a claim. amounts it would have received had the double storey townhouses. contract remained on foot and been Relevantly, the case was in respect of domestic building works (construction of two performed. This was due to the position townhouses) and was governed by relevant domestic building legislation.² The High Court In April 2015, with one of the two The Owners appealed to the High Court, that there was no ‘cap’ on the amount townhouses completed, a dispute arose after having earlier appeals to the Supreme held that the DBC Act applied to the facts at hand and, in particular, to the process which that the innocent party could claim for By Simon Hughes QC was legislatively required to be applied to variation works. Therefore, variation works were regarding payment for variations that Court of Victoria and Victorian Court of the works completed. This, in turn, raised had been orally instructed by the Owners Appeal substantively dismissed. (Keating Chambers, London) to be assessed in accordance with that legislation and recovery on a quantum meruit basis important considerations for courts and for the variations was prohibited. There may still be future work for Australian courts to do and implemented by the Contractor. commentators regarding the proper weight Following the Contractor issuing an invoice in order to reconcile the High Court’s decision with variation works that are not covered by that should be given to negotiated and The Appeal Grounds that or similar legislation. for the outstanding variation costs, the agreed contractual prices in assessing a Owners repudiated the contract and the Relevantly, the Owners raised three Elena Stojcevski quantum meruit claim. The decision means that Australian construction contractors must pay close attention to Contractor accepted that repudiation, thus grounds: (Special Counsel, Corrs their (both in terms of negotiation and contract administration) as it will now be terminating the contract. In particular, there has been significant 1. That the lower courts had erred in Chambers Westgarth, more difficult for them to avoid onerous contractual mechanisms (such as time bars and debate as to whether and how the terms caps) by seeking a quantum meruit. The Contractor brought a claim against holding that the Contractor was allowed Melbourne) and of a contract should form the outline the Owners in the Victorian Civil and to elect to recover a reasonable value of or cap for any award in restitution in What is Quantum Meruit? Administrative Tribunal (Tribunal), for the works carried out by it on a quantum Nick Laurie circumstances where one party had damages for (in the meruit basis following the termination demonstrated its unwillingness to be (Senior Associate, Corrs Quantum meruit is a legal doctrine which allows a contractor to claim restitution of a amount of $446,000) or restitution for the of the contract based on the Owners’ bound by those terms so as to lead to work, labour and materials involved (in the repudiation. Chambers Westgarth, reasonable sum for work and/or services provided. The term quantum meruit translates to the agreement’s termination. In this ‘what one has earned’ or, in practical terms, ‘what the job is worth’. amount of $945,000). respect, the Victorian Court of Appeal in 2. Alternatively, if the Contractor was Melbourne) Sopov v Kane Constructions Pty Ltd (No A restitutionary claim for quantum meruit can generally arise in the following The Tribunal found the Contractor was entitled to such a restitutionary remedy, 2)³ noted the “growing chorus of judicial circumstances: entitled, at the Contractor’s election, to the contract should have operated as a and academic criticism of the availability restitution on a quantum meruit basis for ceiling or cap on the calculation of the of Quantum Meruit as an alternative to • there is no contract specifying a sum to be paid; an amount reflecting the reasonable value quantum meruit. contract damages where repudiation is of the work performed and the materials • there is an express agreement between the parties to pay a ‘reasonable sum’; accepted”. It further said that, had it not used. The Tribunal awarded the Contractor 3. That the lower courts had erred in finding been constrained by authority, it may have $660,000, which it said was the fair and that relevant legislative provisions • work is undertaken outside of the contract, at the request of the principal; or accepted the claimant’s argument that the reasonable value of the work and was did not apply, so as to preclude the respondent’s only remedy was to sue on substantially more than the Contractor Contractor from claiming a quantum • work is undertaken under a contract which is later found to be void or unenforceable. the contract. would have been entitled to under the meruit in relation to variations under a contract. domestic building contract (there was

FOOTNOTES – 4 – FOOTNOTES – 5 – no dispute that the domestic building 4. where a right to payment has not yet Accrued Contractual Rights to Payment legislation in issue applied, only whether accrued, an innocent contractor can the legislation permitted restitutionary recover (at least) damages for breach of The High Court unanimously held that The reasoning of the Court in Mann v recovery by the Contractor for variations). contract. the Contractor’s remedy for stages of work completed prior to termination of Paterson represents a significant step The High Court’s Decision Gageler J identified that the Court the contract (i.e. where a right to payment essentially had to determine the had already accrued) was for the payment forward in providing greater certainty and The decision comprises three judgements Contractor’s remedial entitlement, of the contractually agreed amounts due – Kiefel CJ, Bell and Keane JJ; Nettle, following the termination of the contract for completion of the relevant stages. coherence in the costs that may flow from the by acceptance of the Owners’ repudiation, Accordingly, the Contractor could not elect Gordon and Edelman JJ; and Gageler J. domestic building disputes of the kind in relation to three categories of work to pursue a quantum meruit for completed in issue, as it appears – implies a need termination of a contract. In summary, all seven justices agreed that: performed: portions of work. for development of the law in a manner which better accords to the distribution of 1. termination for repudiation does not • work in respect of variations to the How this reasoning will be applied in more risks for which provision has been made render a contract void ab initio;⁴ contractual scope that the Owners had complex contractual contexts is unclear, requested; particularly where progress payments are by contract.” 2. upon termination, the parties are assessed and paid on a provisional basis Ultimately, the majority chose not Current Quantum Meruit And, said at [205]: excused from further performance of • work under the contract for which the (i.e. when it is unclear whether a right to to directly address the controversy Position in Australia the contract, but accrued rights remain Contractor had accrued a contractual surrounding a party’s election between payment of a set amount has properly “…where a contract is enforceable, but enforceable and the party in default is right to payment prior to termination; and damages or restitution by closing off accrued). terminated for repudiation, there are Following the Mann v Paterson decision, liable for damages for breach;⁵ the ability to choose entirely. Rather, the the position in Australia on the use of • work under the contract for which no reasons of practicality and few in Court’s decision limits both the availability Divisible Obligations and Uncompleted principle to eschew the contract price. quantum meruit as a restitionary remedy 3. where a right to payment under a the Contractor had not yet accrued a and scope of any quantum meruit following Work … There is, therefore, nothing about the is limited: construction contract has accrued, contractual right to payment at the time termination as a result of repudiation by: termination of the contract as such that an innocent contractor can recover of termination. The majority of the Court⁶ held that the • quantum meruit will not be available is inconsistent with the assessment of payment: Contractor was entitled to choose between • confining the availability of a quantum if the contractor has an accrued right restitution by reference to the contract Gageler J’s categorisation provides a damages or restitution for work that had meruit to work performed but for which to payment prior to termination of the price for acts done prior to termination. a. as a debt or damages for breach of convenient structure to consider the not been completed prior to termination no contractual right to payment had yet contract; contract; practical implications of the High Court’s (i.e. where a right to payment of a specified The contract price reflects the parties' accrued prior to termination; and agreed allocation of risk. Termination decision. amount had not accrued under the • there appears to be a limited right to of the contract provides no reason to b. but not on a quantum meruit; and contract). However, any such amount • making the calculation of any quantum quantum meruit if there is no accrued disrespect that allocation.” calculated on a quantum meruit basis in meruit in that regard effectively subject contractual right for payment prior to relation to uncompleted stages of work to a cap by reference to the price(s) contract termination; and Therefore, where a contract does should generally not exceed the contract attached to the work or parts thereof not specify stages of the work and price or the relevant portion of it. within the terminated contract. • prima facie the contract sum will act as a corresponding amounts to be paid upon cap to damages. In this respect, the majority held at [200]: completion of those stages, a builder The Court reasoned that this approach may be entitled to claim on a quantum represents a more coherent application While the election to pursue a claim in “Admittedly, there is cause for concern meruit basis for the entirety of the works of remedies following termination of a restitution may still be available in limited about the potential for disparity performed, albeit that the eventual contract and places due weight on the circumstances, a claim for quantum between the amounts recoverable by assessment could be constrained by the contract price(s) negotiated between the meruit will likely now be less appealing in way of restitution for work done under a total contract price. The application of the parties and the contractual allocation of the average case, as it is now significantly contract which is terminated for breach High Court’s reasoning in Mann v Paterson risk that such represents. less likely to permit a party to recover an and the amounts recoverable by way of to such circumstances is likely to provide amount that is materially different from the damages for breach of contract. That fertile ground for further consideration by Variations – Domestic Building amount(s) payable under the contract. phenomenon – alarmingly widespread in Australian courts in the future. The Court unanimously held that relevant The reasoning of the Court in Mann v The minority⁷ on this relatively narrow provisions in Victorian domestic building Paterson represents a significant step point would have allowed the first ground legislation provided an exhaustive right forward in providing greater certainty and of appeal and limited the Contractor’s of recovery for variations subject to the coherence in the costs that may flow from remedial rights in the present case legislation and precluded the Contractor the termination of a contract. However, to damages in contract. This made it from obtaining restitution for variations on there is still some way to go before parties unnecessary for the minority to specifically a quantum meruit basis. can be certain how the case will be applied address the issue of whether the contract in relation to more complex construction price acted as a cap on any recovery in The High Court’s construction of the contracts and projects. restitution. Victorian legislation significantly narrows the scope for recovery of variations to In particular, the question remains how the contractual works covered by that (and, prima facie position of the contract sum likely, similar) legislation, where applicable. acting as a cap will be applied. In respect of a construction contract sum/price, there However, any application of the majority’s are many methods which provide for the broader reasoning to variation work not contractual sum to be adjusted or varied. covered by such legislation will likely need For example, by variations, increased costs to be considered further in future cases, as a result of latent conditions, provisional particularly where similar issues may arise sums and a change in law. This uncertainty as with progress payments, including may provide contractors with arguments whether contractual mechanisms for concerning the amount of the contract valuing variations are sufficiently certain sum and how the ‘ceiling or cap’ should be and whether entitlement to such payments determined. represents a sufficiently accrued right to preclude a quantum meruit recovery.

FOOTNOTES – 6 – – 7 – of construction contracts is that contract price is likely to form a basis for Conclusion benefits conferred at different stages or the calculation of a restitutionary claim workstreams can be severed. by providing a guide to the objective Although the position in the UK is clear market value of the work done, the source in respect of accrued rights under a In summary, the UK courts recognise (i) of the quantum of entitlement is not contract, it is less clear in respect of a the right to claim a restitutionary remedy contractual. contractor’s ability to claim in restitution for services rendered for which there has in respect of the value of work done been a corresponding failure of basis, and But the Supreme Court in Benedetti also where there is no accrued right under a (ii) the apportionment of basis under a underlined that there were limits to such repudiated contract. contract. an approach. Importantly, the concept of to payment, there would be a right to claim subjective revaluation was considered and In view of the reasoning of the Australian on a quantum meruit basis for the value of So long as (1) the contract in question rejected. If that principle were applied, the High Court, which is largely embraced the services provided.¹⁹ Save for the lonely has been repudiated by an employer; quantum of a claim in restitution might be by the UK courts, there seems little example of Newton v Trevor Toys Ltd²⁰ and (2) subject to the terms of a contract referable not to the objective market value, principled reason why the courts in this (Newton), no decisions in the construction meaning that a restitutionary award but to a higher figure, as the subjective jurisdiction might not also adopt the context have reached the same conclusion would not undermine the purpose of the value contended for by a claimant. In Australian court’s conclusions. as the Australian High Court – even then it contract,²⁹ is there a principled reason not rejecting this, Lord Reed noted that such was on a different basis. This is despite all to follow the example of the Australian a conclusion was inimical to the premise Adopting that approach, in view of the constituent elements of the Australian High Court in Mann v Paterson in respect of a restitutionary award: the Supreme Court’s approach to the Court’s reasoning being recognised in of rights that have not accrued under a quantum of the restitutionary remedy English law. contract?³⁰ “although I accept that a contract price in Benedetti, would achieve the same in excess of the ordinary market value narrowly drawn results as the decision First, it is recognised that a failure of basis Contract Price as Cap might be of the objective in Mann v Paterson – using the contract can give rise to a claim in restitution. The value in particular circumstances, I price as part of the calculation of the typical case is one in which a party pays a One objection, which was also addressed have difficulty, like ordL Clarke and Lord restitutionary remedy due. Moreover, sum for a service that it never receives.²¹ in Mann v Paterson, is the disruptive Neuberger, in seeing how the recipient it would bring coherence to an and Regeneration Act 1996 (HGCRA), a What matters for a ‘failure of basis’ claim effect of the availability of a restitutionary could be required, in the absence of a unsettled body of UK jurisprudence, construction contract must provide for is the total failure to receive promised remedy which, if calculated on a quantum contract, to pay more than the objective while also affirming the trend toward interim payments;¹¹ the right to payment performance of a contract.²² Though it meruit basis, might exceed the sum value of the benefit on the basis of the convergence on the subject of will accrue periodically. It follows that if a was previously thought that a claim for otherwise due to a contractor under the contract is repudiated by an employer, a ”³⁶ restitutionary remedies, noted in the failure of basis was restricted to claims for contract.³¹ However, this concern can be contractor may have some accrued rights decision of Nettle, Gordon and Edelman JJ. the payment of money,²³ the UK Supreme allayed by the principle that any benefit Though there is no express authority to payment at the point of termination; Court has since recognised that the awarded in restitution would be made in that a restitutionary claim is capped however, it may not have accrued rights principle can extend to the provision of reference to the contract price. by the contract price, it seems likely to payment under the contract in respect The UK position on Repudiation services, too.²⁴ that the contract price will play a role in of all the work that it has carried out. How of Contract, Restitution and In Newton the Court of Appeal accepted determining the value of the work done. do the UK courts deal with this distinction, Second, the decision in Mann v Paterson the view that when a contractor accepts Although it is logically possible that a Quantum Meruit, and How it which formed the basis of Gageler J’s relied on an ability to apportion and an employer's repudiation, in addition to claim on restitutionary grounds could Now Differs From Australia different categories of entitlement?¹² divide the benefits under a contract: claiming accrued rights, the contractor exceed the contract sum, the more likely where, say, an employer has performed may be entitled to payments at result, in a competitive construction On a review of the leading authorities in the In respect of Gageler J’s first category, the in respect of stage 1 of the works under a contractual rates for work done but not market, and in view of reigning judicial UK⁸ and Australia, the majority, in Mann v English High Court in Taylor v Motability contract, it has not in respect of stage 2. covered by the contractual instalments.³² instinct, is that the restitutionary claim Paterson, noted that: Finance Ltd¹³ established that where a A principle apportioning the benefits of a In that case, the Court of Appeal found will not exceed the contract price: as Lord party has an accrued right to payment contract, thus severing the ‘basis’ for the “In view of those developments, it may be that restitution should be made with Neuberger stated in Benedetti: under a contract, which is then repudiated purposes of a restitutionary claim, has reference to the contract prices, rather that the law of restitution in the United by the paying party, the innocent party been recognised in the English courts. In than on a different basis of valuing the “It would seem wrong, at least in many Kingdom and the law of restitution in cannot elect to claim on a quantum Stocznia Gdanska SA v Latvian Shipping worth of the services rendered. This such cases, for the claimant to be better Australia are no longer quite as far apart meruit basis.¹⁴ In his Judgment, Cooke Co²⁵ (Stocznia) the House of Lords suggests that although the source of the off as a result of the law coming to his as was previously imagined.”⁹ J recognised that if the contract, which decided that where a shipbuilder designs remedy in restitution is independent of rescue, as it were, by permitting him to has been repudiated, set out a basis and builds a ship under a stage payment But how does the decision of the High the contract, the basis upon which the invoke unjust enrichment.”³⁷ for remuneration in respect of those contract, the benefit of that contract is Court fit into a perceived trend of quantum is calculable is not.³³ accrued rights, there was no space for a divided accordingly. For the purposes convergence on this issue? ²⁶ restitutionary remedy.¹⁵ Once repudiated, of determining failure of basis, Lord Goff However, the majority decision in the the primary obligations under the contract The majority decision on this point in Mann stated the test as: Supreme Court in Benedetti v Sawiris³⁴ are replaced by a secondary obligation to v Paterson relied upon threads of legal (Benedetti) stated the basis of the pay damages. Despite earlier authorities “The test is not whether the promisee principle, all of which are recognised in ¹⁶ calculation for a restitutionary claim in indicating that there was such a right to has received a specific benefit, but rather English law, but which were drawn together unjust enrichment is the objective market election on repudiation, in view of recent whether the promisor has performed any to reach a conclusion which, on similar ¹⁷ value of those services, subject only to High Court decisions confirming no part of the contractual duties in respect facts, has not previously been reached in the concept of ‘subjective devaluation’: a such right in respect of accrued rights to of which the payment is due” the UK. Accordingly, the decision provides ²⁷ reduction in the objective market value payment, the position in English law, now, an interesting point of reflection on both (i) to reflect the subjective value of the seems settled. Though the decision in Stocznia was the availability of restitutionary remedies in ¹⁸ services to the defendant.³⁵ Although the decided by reference to the terms of the the context of contractual repudiation, and Gageler J’s second category focused on relevant contract, Lord Toulson has since (ii) restitution on a quantum meruit basis. the availability of restitution for the value noted that “Modern authorities show that of work done where there is no accrued the courts are prepared, where it reflects A principle central to the decision in right to payment. The majority decision in commercial reality, to treat consideration Mann v Paterson is that a contractor Mann v Paterson relied upon the principle as severable.” In view of the frequent use under a construction contract normally ²⁸ of failure of basis: where the contractor of staged performance and milestones has no accrued right to payment, unless proceeds in a stage of work under a for payment, it is clear that this reasoning that is provided for by the contract.¹⁰ contract, for which it is prevented from would be likely to apply in construction Under the Housing Grants, Construction completing and accruing an entitlement contracts: often the commercial reality

FOOTNOTES – 8 – FOOTNOTES – 9 –