On 9 October 2019, the High Court handed down a landmark judgment which has restricted the ability of contractors to rely on the long-standing option of claiming quantum meruit. What used to be an alternative method of relief has now been restricted and highlights the importance of adhering to and following the provisions of the written contract.
What you need to know
Quantum meruit has been a long-standing principle whereby a contractor could claim their reasonable value of the work carried out as an alternative to damages under contract. Importantly, this reasonable value was usually calculated with the assistance of expert witnesses and not by reference to the contract. In some contracts, the calculated reasonable value could exceed the contract price significantly.
Ultimately, contractors are now on notice that the contract will be the overarching and binding document more than ever before.
In the case of Peter Mann & Anor v Paterson Constructions Pty Ltd  HCA 32, the owners entered into a fixed price domestic building contract for the construction of two townhouses with Paterson Constructions Pty Ltd. The contract was governed by the Domestic Building Contracts Act 1995 (Vic) (the Act), in particular section 38, which required that variations must be requested in writing by the owners and then notice be given by the contractor setting out what effect the variation would have on the project if the effect was an alteration of 2% or more.
The owners orally requested 42 variations to the contract. As none of the individual variations altered the contract by more than 2%, the builder accepted their oral variations and carried out the works. The contractor later invoiced for all the variations. Unfortunately, neither party had complied with the notice requirements for variations under section 38 of the Act.
At the first hearing in VCAT, the original claim for the unpaid work for the sum of $518,597.97 was later amended to $944,898 based on a quantity surveyor report. The total contract value was uplifted from $971,000 under the contract to $1,898,673 as the assessed reasonable value under the quantum meruit principle.
High Court Decision
The High Court ultimately determined that the right to recovery of the builders’ costs was linked to the stage of progress achieved under the contract.
The builder was not granted the ability to claim a quantum meruit calculation for the completed stages.
Further, to the extent that there were incomplete works at the time of termination, any claim would be limited to the fair value by reference to the contract price.
Oh Mann, what now?
First, it must be made clear that not all contracts would be excluded and the Court has noted that it is a ‘most cases’ situation. However, in the absence of a further test of the principle, a prudent contractor should carefully and strictly document and follow the contract as carefully as possible.
The Contract will, more than ever, be the decisive document in a dispute. The chances of accessing greater compensation through quantum meruit are significantly limited and contractors are advised to ensure that:
- the notice and variations provisions are carefully followed;
- when quoting the contract, to keep in mind that their rates and quotes will form the basis of any future works; and
- the assistance of an expert witness will not be sufficient for a claim for damages, and that the Court will prefer to refer back to the contract to determine the contractor’s entitlement to payment.
Please discuss any concerns or queries you have with respect to any construction contracts with our Litigation Team.