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Focus: Construction – July 2008

Restitution v contract? Contract prevails

In brief: The High Court of Australia has rejected a claim in restitution where there was a direct chain of contractual relationships between the parties involved. This decision has emphasised the courts' reluctance to interfere where parties have entered into arm's length commercial transactions. Partner Nick Rudge (view CV), Solicitor Yvonne Cross and Articled Clerk John-Paul Santamaria review the judgement.

How does it affect you?

  • The decision demonstrates that the courts are unlikely to provide equitable relief where there is an enforceable chain of contracts that give rise to certain legal relationships. To do so would be counter to the parties' intentions.
  • A quantum meruit claim for work done will not be an available remedy where an enforceable contract delivers an unfavourable commercial result to one of the parties.
  • The decision also suggests that in jurisdictions where legislation has been enacted to protect subcontractors, for example Security of Payment legislation, courts should not impose equitable principles across established allocations of risk.
  • It is essential to consider the implications on contracts that are on foot during an internal restructure of an organisation and whether assignment or novation of the contract is necessary.

Facts and preliminary judgements

In 1993, Matthew Lumbers and his father Warwick Lumbers (the Lumbers) entered into an oral agreement with W Cook & Sons Pty Ltd (Cook & Sons) to build a house. Construction of the house was completed in May 1995.

Early in 1994, there was an internal re-organisation of the Cook group of companies, the result of which was that W Cook Builders Pty Ltd (Builders), which to that point had been a shelf company, was to take over the building side of the business and Cook & Sons would continue to undertake joinery services. The Lumbers were not informed of the re-organisation and throughout the course of construction, the Lumbers paid payment claims to Cook & Sons as and when they arose. The Lumbers did pay some subcontractors directly; however, the remainder of the subcontractors were paid by Builders.

Builders went into liquidation in 1998 and, in late 1999, the liquidators of Builders claimed that the Lumbers had not paid the full amount owed for the construction of their house. Builders claimed against the Lumbers for the balance (which was found to be $261,715). Builders also claimed against Cook & Sons for the balance; however, it did not comply with an order to provide security for Cook & Sons' costs and those proceedings were stayed.

At first instance, the court decided in favour of the Lumbers and upheld the contractual relationship between Cook & Sons and Lumbers and held that Cook & Sons and Builders had a contractor and subcontractor relationship. On appeal, the decision was reversed on the basis of a claim in restitution. The majority held that the Lumbers:

  • had freely accepted an incontrovertible benefit;
  • that the benefit was at Builders' expense; and
  • that it would be unconscionable for the Lumbers to retain that benefit.

The Court of Appeal put aside the contract between Cook & Sons and the Lumbers on the basis that Builders had done all the work and that Cook & Sons did not make a claim for any outstanding monies, hence giving the Lumbers a 'windfall'.

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High Court ruling

The High Court unanimously overturned the Full Court decision and reinstated the trial judge's decision.

Chief Justice Gleeson stated that both parties agreed that in an ordinary building case, a subcontractor does not have a restitutionary claim against a property owner. Chief Justice Gleeson also stated that many states have enacted legislation to protect the interests of subcontractors and that such legislation should discourage any attempts to extend the scope of restitutionary claims especially where to do so would be to cut across or disturb contractual relationships and an established allocation of risk.1

Further to this, and fundamental to the decision, Chief Justice Gleeson found that Builders' restitutionary claim could not be made out as:

  • the Lumbers had not received an incontrovertible benefit from Builders and, if there was any benefit to be had by the Lumbers, it was received from Cook & Sons. Builders was to be considered no more special than any other subcontractor engaged to undertake the works;2 and
  • if the Lumbers' liability to pay the full price had not been met, then it was a consequence of Builders' failure to pursue Cook & Sons. Any enrichment by the Lumbers was at the expense of Cook & Sons and Cook & Sons was the only party that could have been claimed to have been enriched at the expense of Builders.3

In a joint judgment, the other members of the High Court warned against the risk of applying legal principles, such as that of unjust enrichment, at a certain abstract level. The risk was that it may produce a result, such as that produced at the appeals level, that was discordant with accepted principle, creating a lack of coherence in the application of the law.4 In this case, applying the principles of unjust enrichment would produce a result that conflicted with principles of contract law and would re-allocate risks that had been previously accounted for in a valid contract.5

The joint judgment confirmed that this was not a case to which the principle of 'work and labour done or money paid' applied, as the Lumbers had made no direct request to Builders to undertake the works. While it could be accepted that confusion about the identity of a relevant contracting party can and does occur, especially given what are often complicated commercial arrangements in modern corporate life, in the case of Builders and Cook & Sons there was no case of a mistake run at trial or on any appeal.6

The joint judgment specifically addressed the majority's decision at the appeals level to set aside the existence of the contractual relationships between the Lumbers and Cook & Sons and to treat it as irrelevant. On this, the joint judgment stated that:

  • the legal relationships that brought about the undertaking of the work cannot be ignored and Builders, in performing the obligations it owed to Cook & Sons meant that Cook & Sons did in fact perform the obligations it owed to the Lumbers, and so Cook & Sons had in no way failed to do the work under its contract with the Lumbers;7 and
  • the absence of a claim by Cook & Sons does not demonstrate a 'windfall' by the Lumbers to the detriment of Builders, but only reflects whether Lumbers has fulfilled its contractual obligations to make payments to Cook & Sons.8

The key point on which the decision turned was that Builders had no claim, as it could not point to a direct request from the Lumbers to undertake the work and any acceptance of the work or acceptance of the benefit of monies paid by the Lumbers was irrelevant, as it distracted from the contractual legal relationships that clearly existed between the Lumbers and Cook & Sons and Cook & Sons and Builders.9

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Practical considerations

This High Court decision is a reminder, once again, that it is important to have a written contract and to adequately allocate risks and obligations under that contract. It is also a reminder to establish clear rights under the contract in relation to assignment and novation, especially in the case of related entities. It is important to establish to what extent the express permission of a beneficiary to the contract, to such assignment or novation, should be required.

The courts are hesitant to impose equitable remedies where there are enforceable contractual rights in existence. It is important to remember that the facts arose before the enactment of the current Security of Payment legislation. As was remarked by Chief Justice Gleeson, the presence of such legislation will be a further deterrent to the court imposing equitable principles across contractual relationships and established allocations of risk.

Footnotes
  1. Lumbers v W Cook Builders Pty Ltd (in liquidations) [2008] HCA 27 at page 16 [48].
  2. Ibid at page 17 [50].
  3. Ibid at page 18 [54].
  4. Ibid at page 26 [78].
  5. Ibid at page 26 [79].
  6. Ibid at page 32 [91].
  7. Ibid at page 35 and 36 [107 and 112].
  8. Ibid at page 38 [117 and 120].
  9. Ibid at page 40 [126].

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