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30 Jun 2009

Vic Appeal Court confirms builder's right to claim a quantum meruit where owner repudiates contract

by Leah Ratcliff, Mathew Stulic

In the long-running saga of Sopov v Kane the Victorian Court of Appeal holds that the right of a builder to sue on a quantum meruit basis where it accepts an owner's repudiation is a settled part of Australian contract law. Any reconsideration of the availability of the remedy is a step which the High Court alone can take.

Where an owner repudiates a building contract and the builder accepts the owner's repudiation and terminates the contract, the builder will usually make a claim to be paid on the basis of a quantum meruit, which literally means "what he deserves". The builder can claim to be paid "reasonable remuneration" for work carried out for the owner on the basis of the builder's actual costs plus a reasonable margin without reference to the "contract sum" negotiated by the parties at tender time. The commercial risks for an owner if it repudiates the contract can be significant. As a project progresses towards completion and the project costs incurred by the builder increase, the potential downside of "repudiation risk" increases for owners.

An entitlement to be paid on the basis of a quantum meruit is a restitutionary concept which flows from the concept of unjust enrichment. Restitutionary remedies are, in essence, gain-stripping remedies which seek to return to a party who has conferred a benefit to another party remuneration equal to that benefit. Damages for breach of contract, on the other hand, is a compensatory remedy which seeks to put an innocent party in the position it would have been in had the contract not been breached.

In practice this means that recovery of damages for breach of contract is constrained by the terms of the bargain already brokered between the parties. In construction contracts this usually means that recovery is capped by a contract sum (as adjusted under the contract, for example for matters such as variations). By contrast the monetary value of restitutionary remedies may in practice be greater than the value of the contract negotiated by the parties.

Where one party repudiates a contract and the innocent party elects to terminate, should the right to payment be governed by the terms of the contract, up to the point of repudiation? Further, if an entitlement to be paid on the basis of quantum meruit exists, should the extent of this entitlement be limited by contract rates and prices or should the contract sum operate as a ceiling on the maximum sum recoverable?

These questions were recently considered by the Victorian Court of Appeal in the ongoing case of Sopov v Kane Constructions Pty Limited (No.2) [2009] VSCA 141 handed down on 15 June 2009.

Sopov v Kane

The latest instalment in this Victorian case (which relates to a judgment entered at first instance for the builder for the sum of $910,578.64) affirms the entitlement of a builder to sue on a quantum meruit following its acceptance of the owner's repudiation of a contract rather than suing for damages under the contract.

In an earlier decision handed down in November 2007, the Court of Appeal upheld the decision of the judge at first instance, holding that the owner had repudiated a building contract and that therefore Kane Constructions, the builder, had validly accepted the owner's repudiation and terminated the contract.

The latest instalment followed the failure of the parties to successfully resolve the quantification of Kane's entitlement following the earlier decision on liability. The owner sought to attack the trial judge's finding that Kane was entitled to be paid on the basis of a quantum meruit on four alternative bases:

  1. As a matter of law, the builder was only entitled to contractual damages and not entitled to claim on the basis of a quantum meruit.
  2. If it was entitled to claim on the basis of a quantum meruit, the amount recoverable was limited to the contract price on a pro-rata basis.
  3. If the contract price was not a limit to the amount recoverable by the builder, it was nevertheless the best evidence of the value of the benefit conferred on the owner.
  4. If the trial judge was otherwise correct, additional deduction ought to have been made to reflect the benefit received by the owner.

Despite significant academic debate and criticisms of the availability of quantum meruit as a remedy, the Court held that it remains part of the law of Australia.

The Court of Appeal regarded as significant the High Court's refusal in 1992 of special leave to appeal an analogous decision of the NSW Court of Appeal in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.

The Court of Appeal went on to conclude that the contract price is merely evidence (and nothing more) of what two parties (at a particular time) regarded as the fair and reasonable value of the work. Evidence of the contract price will thus be weighed against other evidence, including costs incurred in undertaking the work. The Court regarded the correct approach for the assessment of a quantum meruit claim is to "ascertain the fair and reasonable value of the work performed".

The Court also concluded that a calculation of a reasonable value of the work does not preclude an amount for profits and overheads. It reasoned that "the inclusion of a margin for profit and overhead means that the calculation approximates the replacement cost of the works" because replacement costs would include another builder's margin for profit and overheads. For Kane, this meant that it was entitled to a margin of 10 percent.

Implications

Sopov v Kane supports the proposition that if a builder terminates a construction contract following repudiation by an owner, it is entitled to elect sue on the basis of a quantum meruit. That entitles the builder to claim its reasonable actual costs plus a margin for profit and overhead.

At the procurement phase, some owners seek to reduce "repudiation risk" by using contract mechanisms including:

  • the express exclusion of recovery on a quantum meruit basis where the builder terminates a contract subsequent to a repudiatory act by the owner; or
  • defining the builder's right to payment as referable to milestones throughout the project as opposed to payment of an "indivisible" contract price, and limiting recovery on quantum meruit commensurate with the contract price "earned" at any point in the project on a pro-rata basis.

These types of provisions seek to exclude an entitlement which otherwise exists at law and very clear contract language is required to achieve that intent.

Commercially, owners often need to weigh the benefits of these types of provisions against the commercial implications. Faced with insistence by an owner to expressly exclude quantum meruit, contractors may seek a risk premium through higher tender prices to compensate for reduced legal entitlements. An owner who decides not to pay such a premium and to bear the risk of quantum meruit must ensure that it implements appropriate risk management processes through the life of the project. In Australia, failure by owners to meticulously administer contracts so that they do not at any stage place themselves in substantial breach amounting to repudiation means they run the very high risk that the owner will be liable to pay the builder's actual costs plus a reasonable margin.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.