Australia: top court rules on construction contract compensation

Construction disputes expert Matthew Croagh of Pinsent Masons, the law firm behind Out-Law, described the ruling as "the most significant affecting the Australian construction industry in many years".

The case, which involved a domestic building dispute arising between property owners Peter and Angela Mann and building company Paterson Constructions, centred on the remedy of 'quantum meruit'. This remedy provides builders with a right to the reasonable value of the work they have performed under a construction contract.

Paterson Constructions claimed entitlement to the remedy of quantum meruit from the Manns after a dispute arose between them.

The Manns had purported to terminate their contract with Paterson Constructions on the basis of a series of delays caused by the builder and refused to allow the builder further access to the site. In response, the builder asserted that this conduct itself constituted a repudiatory breach of contract, which it accepted by terminating the agreement.

One party is said to have 'repudiated' a contract if they act in a way so completely against the terms of the contract that their actions mean that the other party is deprived of the benefits of the contract. Where there has been a repudiatory breach by a party, the other party has a right to terminate the contract without penalty so long as they have accepted the repudiatory breach.

Paterson Constructions was successful in its claim for a quantum meruit remedy before the Victorian Civil and Administrative Tribunal, and appeals against that decision by the Manns were rejected by Victoria's Supreme Court and by the  Court of Appeal.

In its ruling, however, the High Court of Australia sided with the Manns and held that Paterson Constructions was not entitled to a quantum meruit for completed works since the payment terms for those works were set out in the contract between the parties.

Croagh said: "The court was unanimous in its decision that the remedy of quantum meruit is no longer available in respect of works performed for which there is an accrued right to payment. In those circumstances, the contractor is entitled to recover the amount due as a debt."

"A hypothetical example may be where there are four milestone payments and the builder accepts a repudiation and terminates after it has completed the first two but only has only partially completed milestone three, the builder will be entitled to the contract price for milestones one and two," he said.

The High Court did, though, consider what compensation can be claimed for works carried out that are incomplete. The judges were split on the question of whether the remedy of quantum meruit can be claimed in such circumstances, but the majority decided that the contractor may elect to claim either contractual damages or an amount representing a fair value of the work performed for incomplete work, with the value of what is payable to be capped at the contract price for that part of the work.

Construction disputes expert Gemma Thomas of Pinsent Masons said: "Quantum meruit claims were revered among contractors because they provided an opportunity to recover all costs reasonably incurred on a project. This was a particularly attractive avenue for contractors engaged on loss-making contracts. However, the remedy of quantum meruit also attracted a lot of criticism with the greatest being that the law should not ignore an otherwise enforceable bargain struck by the parties."

Croagh and Thomas said the High Court's ruling does not close off the option of termination for contractors where they are locked into loss-making contracts, but they said the risks of terminating agreements must be carefully considered.

"The judgment adds another layer of complexity to the decision of whether to terminate or not in that the contractor will need to weigh up the risks of termination against the compensation they might be entitled to and the future losses they might be able to avoid," Croagh said. "Their likely compensation will need to be calculated by adding up the contractor's accrued rights to payment plus fair value of the works performed under any incomplete portions capped at the contract price, alternatively contractual damages."

"It is also worthwhile remembering that the contractors is not necessarily limited to its rights under the contract. There may be avenues available to a contractor to recover under the Australian Consumer Law, for example," he said.