Wayne Jocic, ‘A tale of two townhouses and quantum meruit: Mann v Paterson Constructions Pty Ltd’ (16 October 2018)

A majority of the High Court has allowed an appeal from the Victorian Court of Appeal, holding that a builder was entitled to sue for restitution upon a quantum meruit in relation to a terminated building contract insofar as that stage of the contract was not completed, but otherwise, a quantum meruit could not be claimed where the stage of the contract was completed or where it was an oral variation governed by statutory notice requirements.

Facts

The appellants, the Manns, engaged the respondents, Paterson Constructions Pty Ltd (‘Paterson’) to construct two double-storey townhouses in Blackburn, Victoria and executed a contract which was expressed to be prepared in accordance with the Domestic Building Contracts Act 1995 (Vic). The contract provided for progress payments to be made at certain intervals specified in the Appendix of the contract. The Manns orally requested 42 variations to the townhouses during the period of construction (11 to Unit One and 31 in relation to Unit Two). Paterson carried out the variations and did not give written notice according to the process under the contract and s 38 of the Domestic Building Contracts Act for owner-initiated variations. At the time that Unit One was handed over, Paterson told the Manns that there was around $48,000 to be paid for the oral variations, and the Manns refused to pay.  Paterson then refused to continue carrying out construction until the variation amount was paid. In the event, the Manns alleged that Paterson had repudiated the contract, and said that they accepted the repudiation. Paterson denied that it repudiated the contract, but said that the Manns’ conduct was in itself repudiatory, and that it accepted the repudiation.

Paterson then commenced proceedings in the Victorian Civil and Administrative Tribunal (‘VCAT’) to recover damages for breach of contract or restitution on the basis of a quantum meruit. VCAT awarded a quantum meruit reflecting the fair value of the work conferred on the Manns. The Manns appealed to the Supreme Court of Victoria, which held that the builder was entitled to obtain a quantum meruit. A further appeal by the Manns to the Victorian Court of Appeal was dismissed.

There were three grounds for appeal to the High Court:

1. That Paterson should not be entitled to a quantum meruit, and should be confined to its contractual claim;
2. That if Paterson could claim a quantum meruit, the price specified in the contract operated as a ‘cap’ on the fair value which could be recovered; and
3. That s 38 of the Domestic Building Contract Act precluded a claim for restitution in respect of variations.

Nettle, Gordon and Edelman JJ criticised the use of the term ‘quantum meruit‘ to describe the claim as being based on the rejected fiction of quasi-contract and the old forms of action at [150]. They seemed to prefer the term ‘restitution as upon a quantum meruit‘ (see eg [151]). However, this summary will use the term quantum meruit for the sake of brevity.

The legal background to the dispute: questions by the VSCA as to the status of resitutionary claims where a contract is repudiated

As a background to the dispute, there had been uncertainty regarding the status of restitutionary claims in regard to repudiated contracts. In Renard Constructions (ME) Pty Ltd v Minister of Public Works (1992) 26 NSWLR 234, Meagher JA held that a quantum meruit claim by a contractor was separate to contract, and should not be subject to a contractual ceiling. However, in a later case, Sopov v Kane Constructions Pty Ltd (No 2) [2009] VSCA 141, while the Victorian Court of Appeal applied Renard, it indicated at [9] – [11] that it might have held differently if the case law on this point had not been clearly established by Renard and Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd [1994] QCA 49, as it had been argued that the availability of a quantum meruit in such cases proceeded upon the mistaken basis that acceptance of a repudiation operates to rescind the contract ab initio.

First ground of appeal: Majority says a builder may elect to seek a quantum meruit but only where there is no accrued contractual right

As Gageler J notes at [57], there were three different kinds of claims in respect of which Paterson sought a quantum meruit:

1. Work done in respect of the contract for which Paterson had accrued a contractual right to payment at the time of its termination;
2. Work done in respect of the contract for which Paterson had not yet accrued any contractual right for payment at the time of termination; and
3. Work done in respect of the variation requests.

The majority (Gageler J in a separate judgment and Nettle, Gordon and Edelman JJ) said that Paterson was confined to its contractual remedies in relation to claims (1) and (3), but not in relation to claim (2). (The numbering in this summary differs from that of Gageler J’s because the question of the variation requests (claim (3) in this list) is dealt with under the heading of the operation of the Domestic Building Contracts Act.)

It is convenient to deal with claims (1) and (2) listed above.

First kind of claim: work done in respect of the contract for which Paterson had accrued a contractual right to payment at the time of termination:

Regarding work done in respect of the contract for which Paterson had accrued a contractual right to payment at the time of termination, Kiefel CJ, Bell and Keane JJ at [19] – [24], Gageler J at [62] – [64] and Nettle, Gordon and Edelman JJ at [172] – [179] held that Paterson could not recover a quantum meruit for work done, and the contractual amount prevailed. However, the reasoning between the judges differed.

Kiefel CJ, Bell and Keane JJ said at [19] that where the contracting party has accrued contractual rights, there was no reason for the party to be able to elect to claim reasonable remuneration unconstrained by contract, as this would subvert the contractual allocation of risk.

Gageler J said at [63] that:

The continuing existence of a contractual right to payment, enforceable by an action in debt, leaves no room to recover payment by another action in debt on a non-contractual quantum meruit.

Thus, through the contractual creation of the debt, Paterson received exactly what it agreed with the Manns that it would accept for having done the work, and there was no reason for the law to super-impose a non-contractual obligation.

Nettle, Gordon and Edelman JJ analysed the case in a restitutionary manner where the vitiating factor was total failure of consideration or a total failure of a severable part of the consideration (where consideration means “the state of affairs contemplated as the basis or reason for the payment”) (at [168]). The termination of the contract may give rise to a total failure of consideration, but it cannot arise where the contract is still on foot (at [169]). They then analysed the different ways this would play out with entire obligations and divisible obligations (at [172] – [179]). They distinguished between three situations:

• A contract where the party is entitled to payment upon completion of any part of the work and the price of services is fixed: in this case, the party will have an accrued right to payment at the contractual rate, and there is no quantum meruit (at [172]);
• A contract where the obligation to perform is ‘entire’ and nothing is due until all of the work is completed: in this case, if the contract is repudiated, there will be a failure of consideration, and the contractor will be entitled to quantum meruit for the work done (at [173]); and
• A contract where the obligation to perform is ‘divisible into several entire stages’: in this case, the party will have an accrued right to payment at the contractual rate for those stages that have been completed, and an entitlement to a quantum meruit for the stages which are not completed (at [174]).

It is worth noting that the other judges were critical of Nettle, Gordon and Edelman JJ’s use of total failure of consideration, Kiefel CJ, Bell and Keane JJ rejected the argument that a restitutionary claim could be available on the basis of total failure of consideration because it treats the contract as void ab initio, and thus commits the rescission fallacy (see [25] – [32]). Conversely, Gageler J said at [79] that:

Useful as the concept of total failure of consideration or failure of basis can be, it is important not to surrender to that one concept the hegemonic status steadfastly denied to the concept of unjust enrichment.

Second kind of claim: work done in respect of the contract for which Paterson had not accrued a contractual right to payment at the time of termination:

Gageler J at [65] – [107] held that Paterson could claim a quantum meruit for work done in respect of the contract for which Paterson had not accrued a contract right to payment at the time of termination, because this represents the predominant approach across the common law world, and the predominant scholarly opinion (at [67]).

He relied on two decisions of Jordan CJ after McDonald v Dennys Lascelles Ltd which did not apply the ‘rescission fallacy’: Segur v Franklin (1934) 34 SR (NSW) 67 and Horton v Jones (No 2) (1939) 39 SR (NSW) 305. The passage from Segur v Franklin which Gageler J references at [70] of his judgment is as follows:

Where a wrongful repudiation has the effect of preventing the other party from becoming entitled to receive remuneration for services already rendered, which remuneration, according to the terms of the contract, he is entitled to receive only if the contract is wholly carried into effect, the innocent party, who has elected to treat the contract as at an end may, instead of suing for damages, maintain an action to recover a quantum meruit for the services which he has rendered under the contract before it came to an end. Such an action is not regarded as an action for an unliquidated claim, but an action for a debt or liquidated demand…

He therefore saw the claim for quantum meruit as being a non-contractual claim based on debt (see [87]).

At [190], Nettle, Gordon and Edelman JJ said that the basis for recovery in such a case was total failure of consideration, which gave rise to an obligation to make restitution. At [176] – [179] they held that the contract was one divided into several entire stages (referring to the three categories set out above). Accordingly, the right to recover a quantum meruit was precluded in relation to the completed stages because there was no failure of consideration, but it only persisted in relation to the uncompleted stages because there had been a failure of consideration. In this case, it was not entirely clear which stages had been completed, and accordingly they recommended that the matter be remitted to VCAT.

At [189] – [190], Nettle, Gordon and Edelman JJ also analogised the situation to the position which arises upon frustration of a contract, and noted that it had been held in earlier days that frustration excused all parties from further performance and there was no right of recovery in relation to work which had been completed or money that had been paid. However, this was no longer the case, and in Fibrosa Spoka Ackyjna v Fairbairn Lawson Combe Barbour Ltd, the House of Lords allowed restitutionary recovery for total failure of consideration in relation to a frustrated contract. They said, at [190], “Principle, coherence and authority dictate that the position in relation to a contract terminated for repudiation be the same.”

At [192], they rejected the proposition that there could be no failure of consideration for a contract terminated for breach as the basis for the claim was not only the promise to perform the contract (see also [195] – [197]). They also rejected the minority’s proposition that damages were “appropriate and adequate” to put the innocent party in a position as if the contract had been performed, and thus there was no need for restitutionary remedies (see also [198]).

First ground of appeal: Kiefel CJ, Bell and Keane JJ dissent and hold that no quantum meruit should be available

Kiefel CJ, Bell and Keane JJ would not have allowed Paterson to advance any quantum meruit claims, essentially on two bases. First, at [14] – [18], Kiefel CJ, Bell and Keane JJ said that restitutionary claims must not undermine the contractual allocation of risk. Secondly, they held that Paterson should be confined to its contractual claim on the basis that the law as it presently stood rested on a ‘rescission fallacy’. In other words, when a contract is terminated for repudiation, it has not been rescinded ab initio. The discharge only operates from the point of termination, and the contract prior to that point remains on foot, and to ignore the contract undermines it. They noted that the ‘rescission fallacy’ had been debunked by Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457. Consequently, they said that in the case of a building contract, the builder can recover as a debt any amount that has come due for completed stages of the contract, or claim expectation damages for the loss of bargain for any losses suffered in relation to uncompleted stages (see [10] and [20]). They emphasised repeatedly that to do otherwise would undermine the contractual allocation of risk (at [21] – [24]). They also rejected the application of the case of Slowey v Lodder (1901) 20 NZLR 321, which had held that a plaintiff was entitled the recover the reasonable value of services rendered because the contract had been ‘abandoned’ (see [6] and [33] – [52]) because that case was based upon the rescission fallacy, and undermined the contractual allocation of risk.

Gageler J in the majority criticised the minority’s reliance on contractual allocation of risk at [83]. He noted that while contracting parties are entitled to determine the ‘secondary’ obligations arising from breach of the ‘primary’ obligation to perform the contract, but continued:

However, it would be artificial as a matter of commercial practice and wrong as a matter of legal theory to conceive of contracting parties who have not addressed the consequences of termination in the express or implied terms of their contract as having contracted to limit themselves to the contractual remedy of damages in that event. Parties contract against the background of the gamut of remedies that the legal system makes available to them. The common law gives to them the benefit, and saddles them with the detriment, of what they expressly or impliedly agree in their contract. Outside the scope of what they agree in their contract, the common law gives to them what the common law itself allows them to get.

Second ground of appeal: the price specified in the contract generally operates as a ‘cap’ on the fair value which could be recovered

Gageler J said that while he was prepared to allow a concurrent claim in quantum meruit for a contract where there was no accrued contractual right, he was aware that this might confer substantial benefits on the plaintiff, particularly as the claim would be in debt. Thus, to stop unfair recovery he would cap the recovery according to the contractually agreed price (at [90] – [101]).

Nettle, Gordon and Edelman JJ also agreed that where the contract had been terminated the contractual price provided a ‘cap’ on the fair value. They said at [205]:

The contract price reflects the parties’ agreed allocation of risk. Termination of the contract provides no reason to disrespect that allocation. Granted, there may be difficult questions of apportionment of the contract price, such as where the expected benefits to the contractor include not only payments of money but also the value of promises or releases. But such difficulties of valuation and apportionment have long been encountered in other areas.

They left open the possibility that in other circumstances the contract price may not provide a guide as to the fair value: at [203] – [204], [215]. They approvingly cited English case law on ‘subjective devaluation’ at [207] – [212] (that is, where the defendant argues that he never wanted the benefit anyway), including Benedetti v Sawiris [2013] UKSC 50, and say that subjective devaluation could be a basis for capping restitutionary awards where the contract price indicates that the defendant would never have accepted the service at a different rate. To award a greater amount than the contract would have given undermines the contractual allocation of risk (see [211]).

Kiefel CJ, Keane and Bell JJ did not need to address this ground of appeal as they would not have allowed any restitutionary or quantum meruit claim (see [4]).

Third ground of appeal: s 38 of the Domestic Building Contract Act precludes a claim for restitution in respect of variation requests

Regarding work done in respect of the variation requests, there was unanimity. Kiefel CJ, Bell and Keane JJ at [4], Gageler J at [58] – [59] and Nettle, Gordon and Edelman JJ at [151] – [161] held that s 38 of the Domestic Building Contracts Act precluded recovery under a quantum meruit for work done under a variation request, as the effect of the section was protective, and the intention of the legislation was to prevent the problems which arise when variations are dealt with informally (see Nettle, Gordon and Edelman JJ at [157]). Accordingly there was no room for quantum meruit claims, and the procedure under the Act prevailed.

General comments about restitution

Gageler J said at [80]:

Bearing constantly in mind the adage that the life of the common law has been not logic but experience, there is a need to resist the temptation to intellectual gratification that accompanies any quest to portray cases in which the common law recognises an obligation of restitution as the conscious or unconscious application of one Very Big Idea. The need is to avoid the pitfalls of overgeneralisation, just as it is to ensure that considerations that are practically important but theoretically inconvenient are not overlooked or underappreciated.

Nettle, Gordon and Edelman JJ said at [199]:

Moreover, as Gummow J was at pains to point out in Roxborough v Rothmans of Pall Mall Australia Ltd, ours is not a system in which the theory of unjust enrichment comes first and decisions must then be made to comply with it. It is a common law system of stare decisis that develops over time and through which general principle is derived from judicial decisions. Unjust enrichment may be conceived of as a “unifying legal concept” which serves a “taxonomical function” that assists in understanding why the law recognises an obligation to make restitution in particular circumstances. But it is in no sense an all-embracing theory of restitutionary rights and remedies pursuant to which existing decisions are to be accepted or rejected by reference to the extent of their compliance with its proportions. Consequently, where a doctrine of the common law has grown up over several centuries – as has the availability of restitutionary relief for work and labour done under a partially completed entire obligation following termination of a contract for breach – and the doctrine remains principled and coherent, widely accepted and applied in kindred jurisdictions, it can hardly be regarded as a sufficient basis to discard it that some of the conceptions which historically informed its gestation have since changed or developed over time. Whatever doubts might remain about the theoretical underpinnings of the doctrine by reason of the problematic nature of its origins or subsequent developments in the law of contract, it is too late now for this Court unilaterally to abrogate the coherent rule simply in order to bring about what is said to be a greater sense of theoretical order to the range of common law remedies.

Later at [213] – [214], they said:

Whether or not that is so, however, in this country restitution arises in recognised categories of case and is not necessarily available whenever, and to the extent that, a defendant is enriched at the plaintiff’s expense in circumstances that render the enrichment unjust. Although, over time, novel categories of case may come to be recognised, or existing categories refined, that must occur in accordance with the common law’s ordinary process of incremental development: by analogy with decided cases, albeit that, within that process of development and refinement, the four questions may serve to focus attention on the nature, availability and measure of restitutionary relief, and so assist in structuring understanding as to avoid the development of the law of unjust enrichment degenerating into an exercise in idiosyncratic discretion.

Accordingly, in this country, it has not been found necessary to resort to a generalised approach of so-called subjective devaluation and, at least to that extent, what was held in Benedetti is incapable of direct application. But the concerns which inform the analysis in Benedetti are just as relevant here as they are in England. For just as a contract may inform the scope of fiduciary and other equitable duties, the price at which a defendant has agreed to accept the work comprising an entire obligation is logically significant to the amount of restitution necessary to ensure that the defendant’s retention of the benefit of that work is not unjust and unconscionable. In point of principle, deference to contract as a reflection of parties’ agreed allocation of risk is at least as appropriate in Australia as it is in England.

 

High Court Judgment	[2019] HCA 32	9 October 2019
Result	Appeal allowed
High Court Documents	Mann v Paterson Constructions Pty Ltd
Full Court Hearing	[2019] HCATrans 92	14 May 2019
Special Leave Hearing	[2018] HCATrans 261	14 December 2018
Appeal to VSCA	[2018] VSCA 231	12 September 2018
Appeal to VSC	[2018] VSC 119	19 March 2018
VCAT Judgment	[2016] VCAT 2100	12 December 2016