Quantum meruit claims after termination: a changing of the tide?

International

A decision of the Hight Court of Australia earlier this week has held that restitutionary claims on a quantum meruit (i.e. reasonable price) basis by contractors after the termination of a construction contract can only be brought in limited circumstances and should be limited by reference to the agreed contract sum. The Court’s decision marks a change from the position in most common law jurisdictions around the world (including England) which allow a contractor to claim losses on a quantum meruit basis in excess of the contract price where it has accepted the owner/employer’s repudiation of a construction contract. Despite this principle of law existing for more than 100 years, there has been significant criticism of its operation insofar as it undermines the allocation of risks agreed by the parties and may allow a contractor a means of escaping from an otherwise loss-making contract. This is a decision of Australia’s highest court and is likely to encourage arguments for change in other jurisdictions.

Mann v Paterson Constructions Pty Ltd

Paterson Constructions (the “Contractor” in this case) was contracted to construct two townhouses on the Manns’ property in Victoria, Australia. As a result of various matters arising during the project which the High Court did not need to address in its judgment, but which were considered by the earlier decisions in this matter (including the Contractor’s failure to complete and handover the works to the Manns by the due date set out in the contract), the Manns considered the Contractor to have repudiated the agreement, purported to accept that repudiation and terminated the contract. The Contractor considered this termination to be unlawful and of itself an act of repudiation, which it accepted. On this basis, the Contractor advanced claims against the Manns on a quantum meruit basis.

The Victorian Civil and Administrative Tribunal (‘VCAT’) found that the Contractor was not liable for the delay that resulted in its failure to complete the works by the due date, and determined that the Manns had repudiated the contract by their purported acceptance of the Contractor’s alleged repudiation and their subsequent termination. VCAT ordered the Manns to pay the Contractor’s losses on a quantum meruit basis. VCAT noted that the effect of this was that the Contractor was able to recover an amount well in excess of what it would have been entitled to under the contract.

The Manns unsuccessfully appealed to the Supreme Court of Victoria and the Victorian Court of Appeal, which both upheld the entitlement to claim on a quantum meruit basis and VCAT’s valuation of the Contractor’s losses (save for a minor mathematical correction). Pursuant to a grant of special leave to appeal, the Manns further appealed to the High Court of Australia, Australia’s highest court.

The traditional position revised

It has long been the position that an innocent party may elect to claim on a quantum meruit basis (i.e. the reasonable value of work performed) as an alternative to claiming for damages in the wake of a termination for repudiation.  That proposition was confirmed by the Judicial Committee of the Privy Council in Lodder v Slowey on the basis that once terminated for repudiation the relevant contract had been rescinded ab initio, as if it never existed. The contractor was therefore entitled to recover a sum assessed as the reasonable value of the services rendered, even though the amount so assessed might substantially exceed the agreed price. At Court of Appeal stage, Williams J explained: “As the defendant has abandoned the special contract, and as the plaintiff has accepted that abandonment, what would have happened if the special contract had continued in existence is entirely irrelevant.” This proposition was subsequently accepted in most Australian jurisdictions, as well as many other jurisdictions internationally.

In upholding the Manns’ appeal in the present case, the High Court held that “the theory that the contract between the parties becomes "entirely irrelevant" upon discharge for repudiation or breach is indeed fallacious” (the ‘recission fallacy’). The court relied upon a number of authorities which show that the termination of a contract for repudiation or breach does not result in a contract being void ab initio, but only that the parties are discharged from future performance. These authorities had been decided after Lodder v Slowey, but that case had continued to be applied. The High Court also relied upon the following further points as the basis for its decision:

  • The recession fallacy incorrectly denies the basic principle that the effect of the acceptance of a repudiation is that the innocent party is only absolved from future performance of its obligations under the contract. It does not alter or replace the accrued rights and obligations arising under the contract prior to the date of termination. Accordingly, the loss that the contractor is entitled to recover in the event of such termination is in effect a ‘loss of bargain’, which is “no less a creature of the contract than the right to recover sums that become due before its termination”. It follows that the terms of the terminated contract must inform the quantum of damages recoverable. To suggest otherwise would expand the law of restitution to redistribute risks for which provision has been made under an applicable contract and “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”.

  • In circumstances where the respondent has enforceable contractual rights to money that have become due under the contract, there is no room for a right to elect to claim a reasonable remuneration unconstrained by the contract between the parties.  To allow a restitutionary claim in these circumstances would be to subvert the contractual allocation of risk and may result in a windfall that is inconsistent with the contract whereby the parties’ commercial risks were allocated between them and their liabilities limited (including in relation to price).

  • Where a contractual entitlement to payment had not yet accrued for works carried out by the contractor prior to termination (e.g. where the obligations under the contract were entire), a bare majority of the court held that non-contractual quantum meruit claims were permissible but that the agreed contract price operates as a cap on the contractor’s entitlement. The contract price agreed to by the parties for the performance of the work (or that part of it which relates to the claim in question) is to be regarded as the greatest possible remuneration for the work even on a quantum meruit basis.

Whilst this decision does not entirely remove the availability of quantum meruit claims in repudiation scenarios, it does significantly narrow their scope (namely, in respect of works for which a contractual entitlement has not yet accrued) and the maximum sum of losses that will be claimable (namely, by reference to the contract price).

Conclusions and implications

This is one of the first decisions internationally to significantly depart from a substantial body of accepted common law jurisprudence regarding the availability of quantum meruit claims arising from the repudiation of a construction contract, and in doing so, grants credence to the long stream of judicial and non-judicial criticism of the traditional position. The traditional position had provided a potential loophole for contractors to overcome loss-making contracts, by provoking the owner/employer to terminate in the hope that any ambiguity over the validity of the termination would allow a credible case to be made as to repudiation and the bringing of a quantum meruit claim considerably in excess of the contract price. This decision will give greater comfort to owners/employers (in Australia) that the risks of pursuing termination in such circumstances are much reduced.

One issue left unclear by the High Court’s decision is the extent to which ordinary interim payment provisions will prevent the making of quantum meruit claims. The contract before the court contained staged payments referable to specific portions of work, rather than “one entire obligation to complete the whole of the contract works in order to become entitled to payment of an indivisible contract price”. The position might well be different for interim payments made on a periodic basis by reference to the value of the works and expressly stated to be “on account”. There may also be complexities insofar as claims include works which the contractor alleges arose as a result of variations which have not been formally approved/accepted by the employer prior to termination.

However, the potential for large quantum meruit claims to be made in relation to entire contracts, and to a lesser extent in relation to indivisible parts of non-entire contracts, will now be significantly tempered by the court’s finding that the contract price imposes a ceiling on the quantum of any claim. The same may be said in respect of disputed variation claims, since contractors will now need to invest significant efforts in evidencing any adjustment to the contract sum, as opposed to simply evidencing the value of work it has carried out (as identified by Gageler J, “a non-contractual quantum meruit has the advantage that proof of the value of services rendered is almost invariably more straightforward than proof of contractual loss.”)

As noted above, the traditional position overturned by this decision is mirrored in a number of jurisdictions (including England) and has similarly been criticised in these jurisdictions. It is likely that this decision will provide persuasive support of such criticisms when similar cases come before the courts of other jurisdictions, potentially resulting in similar changes to those favoured by the Australian High Court.


References:

Lodder v Slowey [1904] AC 442

Mann v Paterson Constructions Pty Ltd [2019] HCA 32