For recovery of progress payments for which a right to payment has accrued at the time of termination, the court unanimously held that a claim in restitution was not available as that would subvert the parties' contractual bargain. This marks a significant change in the law and puts an end to "rescission fallacy" which has been the subject of much judicial and academic criticism.

For works performed prior to termination for which the right to a progress payment has not yet accrued, a builder may still elect whether to recover these amounts by a claim for breach of contract or on restitutionary grounds. However, if the builder elects to recover these amounts on restitutionary grounds, the amount recoverable is to be confined by the rates prescribed by the contract. In other words, a builder cannot rely on quantum meruit to recover more than the contractual price in respect of that portion of work.

What are the Facts?

Peter and Angela Mann (owners) and Paterson Constructions Pty Ltd (builder) entered into a contract to build two double-storey town houses on the owners' property in Blackburn, Victoria for a fixed-price of $971,000.

The owners purported to terminate the contract during construction based on the builder's alleged delay in carrying out works and purported suspension and refused the builder access to return to the property. The builder, in turn, asserted that the owners' purported termination and refusal to allow the builder onto the site amounted to a repudiation and accepted that repudiation.

The builder brought a claim at the Victorian Civil and Administration Tribunal (VCAT) against the owners seeking relief and was awarded damages of $660,526.41 on the basis of that this was an amount representing the fair and reasonable value of the work performed, rather than the contract amount.

The owners appealed the decision to the Supreme Court of Victoria which at first instance dismissed the appeal save for correction of a minor mathematical error in quantum. Subsequently, the Court of Appeal also dismissed the appeal relying on the prevailing authority in Sopov v Kane (2009) 24 VR 510.

The owners appealed to the High Court of Australia on the grounds that the Court of Appeal erred in finding that:

• the builder was entitled to sue on a quantum meruit for the works carried out by it;
• alternatively, if the builder was entitled to sue on a quantum meruit, the price of the contract did not operate as a ceiling on the amount claimable under a quantum meruit claim;
• section 38 of the Domestic Building Contracts Act 1995 (Vic) (DBC Act) did not apply to a quantum meruit claim for variations to works under a domestic building contract.

Decision

In three separate judgments, the High Court allowed the appeal and remitted the matter to VCAT for further determination according to the law. The legal position that arises from the case is as follows.

Works for which the right to payment has accrued

For works in respect of which the right to a progress payment has accrued on or before the date of termination (complete stages or milestones), the court unanimously held that the builder was entitled to relief by way of a common law action in debt for amounts owing under the contract, or damages for breach of contract.

The court held that restitution would not operate to grant the builder relief in such circumstances because the builder had an enforceable right to recover under the contract. To allow restitution would subvert the parties' intentions as reflected by the contract.

Works for which the right to payment has not yet accrued

 For works performed before termination of the contract in respect of which a right to payment has not yet accrued (incomplete stages) the High Court unanimously held that the builder could recover damages for breach of contract.

However, the majority (comprising Gageler, Nettle, Gordon and Edelman J) held that in respect of the incomplete stages, the builder was also entitled, at its option, to recover payment for the incomplete stages on restitutionary grounds upon a claim of quantum meruit. If the builder elected to recover by way of restitution, the majority considered that the amount recoverable on restitutionary grounds should be limited by the rates prescribed by the contract, in order to reflect the agreed bargain and risk allocation between the parties.

Application of section 38 of the DBC Act to variations

Section 38 of the DBC Act prevents a builder from claiming ‘any moneys’ for variations requested by an owner unless the requirements of that section are satisfied or, if not satisfied, VCAT exercises its discretion under subsection (6)(b). The Court of Appeal narrowly interpreted section 38 of the DBC Act to apply to claims in contract only and not claims in restitution.

Unanimously, the High Court overturned the Court of Appeal's decision in holding that section 38 of the DBC Act prevented a builder from recovering an amount in restitution for variations implemented otherwise than in accordance with that section.