Mann v Paterson Constructions Pty Ltd case page

The facts of this case will not strain the imagination of anyone with experience of domestic building work. Angela and Peter Mann engaged Paterson Constructions to build two townhouses in Blackburn, in suburban Melbourne. The parties fell into dispute when the builder claimed nearly $50,000 for additional work. The Manns claimed the builder refused to return to site until the bill for the additional work was paid, and that the work was defective. They argued that this amounted to a repudiation of their contract, and purported to accept the builder’s repudiation. The builder responded that the Manns did not have a lawful right to terminate and that, as a result, their actions amounted to a repudiation which the builder accepted. On any analysis, the contract was terminated. The Victorian Civil and Administrative Tribunal (VCAT) found that the Manns had repudiated the contract. The Manns appealed to the Supreme Court of Victoria, then to the Court of Appeal, and finally to the High Court.

The critical issue: can the builder elect between contract damages or a quantum merit?

In all the appeals, the critical issue was whether, where a builder accepts an owner’s repudiation of a construction contract, the builder can elect between damages for breach of contract and a quantum meruit assessment of the value of the work performed. Consistent with longstanding — but heavily criticised — authority (see Nettle, Gordon and Edelman JJ at [146]), VCAT, the Supreme Court and the Court of Appeal gave the builder the right of election. The builder preferred a quantum meruit assessment. By the barest majority (Nettle, Gordon and Edelman JJ, and Gageler J for narrower reasons), the High Court held that quantum meruit remains available in limited circumstances. It appears that such claims remain open in two (or possibly three) situations:

• for work performed under a contract that provides for a single lump sum payable on completion (at least where security of payment legislation does not apply);
• for work performed under a contract with staged completion in respect of which an unconditional right to payment has not arisen; and
• just maybe, for work performed under a lump sum contract that provides for provisional payment on account.

The High Court’s decision can be read on two levels. Construction lawyers and canny principals, builders and consultants have a live interest in whether the variously revered and reviled quantum meruit assessment remains open. For private lawyers generally, the case is the latest inconclusive battle over the boundaries of contract law. Several subsidiary issues also arose. One was whether contractual prices should provide a ceiling for a quantum meruit assessment, if it were available. A second was the effect of section 38 of the Domestic Building Contracts Act 1995 (Vic) (DBCA), which concerns variations in work scope.

Are restitutionary quantum meruit claims dead?

The short answer is that restitutionary quantum meruit claims are now limited, but are not killed off entirely. The Court gave three judgments: Kiefel CJ, Bell and Keane JJ; Gageler J; and Nettle, Gordon and Edelman JJ. All judges allowed the Manns’ appeal, with costs, but this seeming unanimity is deceptive.

Common ground: completed stages are not subject to restitutionary claims

As the DBCA requires, the parties’ contract provided for stages of work: frame, lock up, and so on. A price for each stage was stated in the contract ([114] of Nettle, Gordon and Edelman JJ’s judgment). Their Honours all agreed that where a stage had been completed and money had been paid or was payable, no restitutionary action would be available. The difference in reasoning is instructive. For Kiefel CJ, Bell and Keane JJ, an amount due under the contract is recoverable as a simple matter of debt, and there is no room for restitution: [10], [19]. For Gageler J, similarly, the existence of an accrued contractual right patently excludes a restitutionary claim: [62]–[64]. Nettle, Gordon and Edelman JJ, however, also justified their position on the basis that there would be no total failure of consideration in respect of those stages: [176]. The tension between the judgments rises on the topic of work towards stages that the builder has not completed.

Nettle, Gordon and Edelman JJ

Their Honours held that, where some stages of work had been started but not finished, it was open to the builder to elect between damages and a restitutionary claim. They justified this from first principles at [173] (citations omitted):

if the obligation to perform work and labour is “entire”, so that nothing is due until all of the work has been completed by the contractor, then, upon termination of the contract by the contractor’s acceptance of the other party’s repudiation of it, there will be a total failure of consideration. … In that event, the “consideration” – in the sense of the condition or the “basis” for the performance by the contractor – will have failed, and restitution will lie as upon a quantum meruit in respect of work and labour done up to the point of termination. In those circumstances, there is a “qualifying or vitiating” factor, namely, a total failure of consideration, giving rise to a restitutionary remedy in the alternative.

The immediate question is whether a construction contract with no separately priced stages would amount to an ‘entire’ obligation to perform work and labour. Their Honours do not address this question. On the question that the facts do raise, their Honours held at [176]:

if there are any uncompleted stages, there will be a total failure of consideration in respect of those stages due to the failure of the builder’s right to complete the performance and earn the price. In that event, there will be nothing due under the contract in relation to those stages, and restitution as upon a quantum meruit will lie in respect of work and labour done towards completion of those uncompleted stages.

This conclusion required dealing with the effect of termination, a point upon which Kiefel CJ, Bell and Keane JJ sharply diverged from Nettle, Gordon and Edelman JJ. For Nettle, Gordon and Edelman JJ, obligations to make restitution could arise more widely than just where a contract was unenforceable, or void from the start. They reasoned that “principle, coherence and authority” required termination for repudiation to be treated in the same way as frustration (at [190]). Their Honours admitted (at [191]) that there is an obvious distinction because damages for breach of contract do not flow from frustration, meaning there is no alternative remedy to restitution. This, of course, is because neither party is at fault where a contract has been frustrated. The judgment devotes substantial argument to this point, beginning at [192]. In short, Nettle, Gordon and Edelman JJ gave restitution claims their greatest scope. Gageler J reached the same conclusion on narrower grounds, while Kiefel CJ, Bell and Keane JJ rejected the possibility. Despite this, Nettle, Gordon and Edelman JJ sought to show how their judgment was consistent with Australian (see [199]) and English (see [212]) authority cautioning against ‘top-down’ approaches to unjust enrichment. Thus, their Honours conclude at [199] (citations omitted):

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.

Given this, and their Honours’ sharp reminder about the importance of nomenclature (see [150]), practising lawyers might wonder how to plead a claim in the area. Their Honours provide several immemorable formulations, such as a claim:

• for ‘a remedy arising by operation of law in that category of actions concerned with restitution in the category of unjust enrichment’ (at [150]);
• ‘to recover restitution for a cause of action in the category of unjust enrichment’ (at [162]); and
• a claim for restitution lying ‘as upon a quantum meruit’ (at [174]).

(For simplicity, and to reflect the difference between Nettle, Gordon and Edelman JJ and Gageler J’s judgments, this note refers loosely to ‘quantum meruit’.)

Gageler J

Gageler J ultimately concluded that quantum meruit was available in respect of stages of work commenced but not completed, but took a cautious approach. His Honour recognised that the question was attended by difficulty (at [65]) and indeed was one of the most controversial topics in restitution (at [107]). Like Kiefel CJ, Bell and Keane JJ, Gageler J accepted that much of the historical authority was of limited value (see [68]–[69]). Gageler J resolved the question in a striking way. Unlike Nettle, Gordon and Edelman JJ, Gageler J was not content to reach his conclusion based on a failure of consideration, observing at [79] (citation omitted):

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.

Nor was the matter to be decided by reference to contractual risk allocation (an argument on which Kiefel CJ, Bell and Keane JJ relied), since ‘[p]arties contract against the background of the gamut of remedies that the legal system makes available to them’ (at [83]). Gageler J accepted, however, that parties were at liberty to prescribe their remedies (at [83]). This is an important practical point because construction contracts often include detailed schedules concerning the calculation of termination payments. Occasionally, they expressly provide that if the principal repudiates the contract and the contractor accepts the repudiation, no restitutionary quantum meruit will be available. (Clause 14.6 of the Department of Defence’s Head Contract is a prominent example). Having rejected the arguments central to both of the joint judgments, Gageler J reached the same outcome as Nettle, Gordon and Edelman JJ. His Honour did this primarily by reference to two judgments of Jordan CJ from the 1930s. Since they were decided after McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 (‘McDonald v Dennys Lascelles’), Gageler J argued that they did not suffer from the rescission fallacy: the incorrect view that an accepted repudiation renders a contract void from the start. (This matter will be discussed further below.) Jordan CJ’s view, which Gageler J adopted (see [70]–[74]), is that the innocent party that has performed work retains a right to sue in debt. This is a liquidated claim ‘imposed by law independently of any genuine agreement between the parties’ (at [73]). Gageler J repeatedly describes this as ‘an action for a non-contractual quantum meruit’. This conclusion bears a symmetry with work for which the builder had accrued a contractual entitlement (perhaps because a stage had been completed). There too, a builder could enforce the accrued right through an action in debt (see [62]).

Kiefel CJ, Bell and Keane JJ

By contrast, Kiefel CJ, Bell and Keane JJ took the view that the work performed towards incomplete stages should — and must — be governed by ordinary contractual principles. In their view, an aggrieved builder who has accepted an owner’s repudiation may only sue for loss of bargain damages. Damages would be assessed so as to put the builder in the position it would have been in had the contract been fully performed. This is inconsistent with Gageler J, and Nettle, Gordon and Edelman JJ, all of whom allowed the builder to elect between loss of bargain damages and quantum meruit in respect of incomplete work. Kiefel CJ, Bell and Keane JJ’s judgment is strident in tone; they conclude at [32]:

Given the clear contemporary understanding of the effect of termination, considerations of coherence, certainty and commercial convenience provide ample reason to move on from adherence to the vestiges of what is now seen to be an unprincipled right to remuneration for work done, unconstrained by the terms of the contract.

Their principal arguments, with some reorganisation, were that:

• their conclusion flowed from the proper understanding of the effect of termination for repudiation or breach;
• their conclusion supported the parties’ contractual risk allocation;
• restitution was not available, because there had been no total failure of consideration (including in respect of a distinct and severable part); and
• the cases supporting restitution were ambiguous or unpalatable.

Central to their decision was Dixon J’s judgment in McDonald v Dennys Lascelles, with which Rich and McTiernan JJ agreed. On Kiefel CJ, Bell and Keane JJ’s analysis at [10]–[13], Dixon J’s judgment reveals two fundamental principles of contract law:

• where an innocent party accepts a repudiation, the parties are absolved from future performance; and
• the wrongdoing party is liable for damages for loss of bargain, a liability that arises from the parties’ contract.

Their Honours argue that the prior law on point largely flows from the rescission fallacy, an error that McDonald v Dennys Lascelles Ltd exposes. This leads to the second argument, that restitutionary claims must yield to contractual arrangements and contractual allocations of risk (at [14]), an argument redolent of Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635. While the argument infuses the entire judgment, it is perhaps put clearest at [20]:

To allow a restitutionary remedy by way of a claim for the reasonable value of work performed unconstrained by the terms of the applicable contract would undermine the parties’ bargain as to the allocation of risks and quantification of liabilities, and so undermine the abiding values of individual autonomy and freedom of contract.

Consistent with this, their Honours argued that restitution was unavailable because there had been no total failure of consideration, whether in respect of an entire or a distinct and severable obligation. Their Honours considered the idea that the construction contract was ‘entire’ was artificial and unreasonably strained the characterisation of the contract (see [27]). On the question of failure of a distinct and several part of the consideration, Kiefel CJ, Bell and Keane JJ (at [30]) are in plain opposition to Nettle, Gordon and Edelman JJ:

To allow a restitutionary claim for quantum meruit in respect of work done before termination, but in respect of which a right to payment has not yet accrued, on the basis of a total failure of consideration is to apply the rescission fallacy under another guise because it treats the contract as if it were unenforceable as having been avoided ab initio.

Finally, their Honours observed that the many historical authorities frequently incanted are in fact not clear or consistent (at [47]). Given the state of the authority and their Honours’ view that an error of principle had been uncovered, Kiefel CJ, Bell and Keane JJ concluded that the error needed to be corrected (at 51]).

First subsidiary issue: can a quantum meruit assessment exceed the relevant portion of the contract price?

The most interesting subsidiary issue in the case was whether the contract price imposed a ceiling on any quantum meruit assessment. Kiefel CJ, Bell and Keane JJ held that no restitutionary quantum meruit claim was available. There was therefore no need for their Honours to address the issue (see [4]). Nettle, Gordon and Edelman JJ attempted to state a general rule, of sorts, at [215]:

It is, therefore, appropriate to recognise that, where an entire obligation (or entire divisible stage of a contract) for work and labour (such as, for example, an entire obligation under or an obligation under a divisible stage of a domestic building contract) is terminated by the plaintiff upon the plaintiff’s acceptance of the defendant’s repudiation of the contract, the amount of restitution recoverable as upon a quantum meruit by the plaintiff for work performed as part of the entire obligation (or as part of the entire divisible stage of the contract) should prima facie not exceed a fair value calculated in accordance with the contract price or appropriate part of the contract price.

Gageler J addressed the question more decisively, at [102]:

The common law rule should accordingly be that the amount recoverable on a non-contractual quantum meruit as remuneration for services rendered in performance of a contract prior to its termination by acceptance of a repudiation cannot exceed that portion of the contract price as is attributable to those services. Issues concerning the identification and appropriate method of apportionment of the contract price are best left to be addressed on a case by case basis if and when they arise.

While these statements are an attempt to address the ceiling issue directly, there are at least three reasons to expect legal uncertainty to continue. First, there is no clear majority view. At best, it might be said that a claim for a quantum meruit that exceeded the relevant portion of the contract sum might face problems. Second, Nettle, Gordon and Edelman JJ’s prima facie test naturally invites case-by-case argument. Further, as Gageler J acknowledges, any apportionment of the contract sum would also require factual argument. Third and pressingly, the abstract reference to a contract price belies the typical complexity of construction contracts. Commonly, the contract price will be a lump sum adjusted in accordance with the contract. In particular, latent conditions (such as unexpected ground conditions) and variations in the work scope frequently affect the contract price. Where the contract price has not been adjusted, or has only been provisionally adjusted, it may be difficult to determine what the relevant ‘ceiling’ is, let alone whether it is permeable.

Second subsidiary issue: does s 38 of the DBCA apply to quantum meruit claims?

In summary, this section requires builders to give homeowners a detailed notice where the owner requests a variation in the work scope that will require a change to a permit, will cause a delay, or will increase the original contract price by more than 2%. Under section 38(6), a builder that has not complied with the statutory notice requirements for particular variations is not entitled to be paid for those variations. This is so unless VCAT determines that there are exceptional circumstances and that requiring the owner to pay would not be unfair. The builder in this case had not complied with section 38. In VCAT, the Senior Member seemed to proceed on the basis that section 38 did not affect quantum meruit claims. Nettle, Gordon and Edelman JJ considered the matter in detail at [151]–[161]. Their Honours concluded that section 38 did exclude restitutionary relief for non-compliant variations, subject to VCAT’s discretion. Kiefel CJ, Bell and Keane JJ (at [4]) and Gageler J (at [58]) agreed with this conclusion and with the substance of the reasoning.

What does the case leave unresolved?

Mann v Paterson Constructions Pty Ltd could never resolve all uncertainty in the area. Practitioners will continue to struggle with some important questions, such as how to frame a quantum meruit claim, and how an adjustable contract price might (or might not) limit a quantum meruit assessment. The greatest uncertainty, by a long margin, is how the decision affects contracts that provide for provisional payment, which is the standard arrangement outside domestic building. A representative example is the AS 4300–1995 (General Conditions for Design and Construct) standard form. It appears to be the standard form construction contract most commonly used in Australia (see this Melbourne Law School report at page 25). That contract provides for interim payment claims, which are typically monthly. Clause 42.1 provides:

A payment made pursuant to this clause 42.1 shall not prejudice the right of either party to dispute under clause 47 whether the amount so paid is the amount properly due and payable … Payment of moneys shall not be evidence of the value of work or an admission of liability or evidence that work has been executed satisfactorily but shall be payment on account only … [except in respect of the final payment].

Under such arrangements, a superintendent assesses the value of the work performed. The superintendent must do this on a provisional basis. (This provisional nature is reinforced by security of payment legislation, which is premised on maintaining cash flow and not on determining final rights.) This is very different from Mann v Paterson Constructions, where there were defined stages and precise dollar amounts attributed to completion of each stage. Under staged completion, it is plain that the builder typically has an unconditional contractual right to be paid for completed stages. This is not nearly so clear for unstaged contracts that provide for regular payment on account only. It may be arguable that an accepted repudiation in these circumstances: (a) would not generate an unconditional contractual right to payment; and (b) would instead amount to a total failure of consideration under an entire contract. On the basis of Nettle, Gordon and Edelman JJ’s judgment, it may thus be that a builder retains a right to elect between damages and restitutionary quantum meruit. Gageler J avoided relying on failure of consideration. It may nonetheless be Gageler J’s judgment also supports the possibility of a quantum meruit assessment (arising as a debt, based on Jordan CJ’s reasoning). This is because it is not obvious whether the builder has an accrued contractual right enforceable in debt in respect of work completed before the builder accepts a repudiation of a contract providing for payment on account only. The dollar amount of any accrued right to payment would be subject to dispute. This is important if the accrued contractual right must be unconditional. In McDonald v Dennys Lascelles at 476, Dixon J expressly contemplates unconditionality, but what Dixon J meant may be open to interpretation (see also Nettle, Gordon and Edelman JJ at [197]). Doubtless, many related issues will be tested in trial and appellate courts.

A final observation

The parties’ first day of argument in VCAT was 1 August 2016. Then Senior Member ordered the Manns to pay the builder just over $660,000. The dispute rose to the Supreme Court of Victoria, then the Court of Appeal and penultimately to the High Court. The matter has now been remitted to VCAT. For all the case has contributed to the common law, it is hard not to feel some sympathy for both parties.

AGLC3 Citation: Wayne Jocic, ‘A tale of two townhouses and quantum meruit: Mann v Paterson Constructions Pty Ltd‘ on Opinions on High (16 October 2019) <https://blogs.unimelb.edu.au/opinionsonhigh/2019/10/16/jocic-mann/>.

Wayne Jocic is a Senior Lecturer and Co-Director of Studies for Construction Law at Melbourne Law School.