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Focus: Contractor's entitlement to claim quantum meruit

3 July 2009

In brief: Partner Stephen McComish (view CV) and Lawyer Hollis Dufour review a recent decision of the Victorian Supreme Court of Appeal which considered whether a quantum meruit claim (ie, a claim for the value of the work done as opposed to a claim for contract damages) is available to a contractor who terminated a contract because of the principal's repudiation of the contract, and outlines the proper approach for assessing the amount payable as compensation in this type of claim.

• The facts
• Victorian Supreme Court of Appeal decision
• Whether amount of quantum meruit limited to contract price
• Proper assessment of the amount payable on a quantum meruit
• Is the contract price the best evidence of value?
• Profit and overhead
• Unsuccessful variation claims
• Delay costs
• Work not in compliance with the contract
• Practical considerations

The facts

In August 1999, Cole Sopov and Norma Walker (Sopov) entered into a building contract with Kane Constructions Pty Ltd (Kane).

During the course of the construction, Sopov refused to pay the full amount of a progress claim certified by the superintendent, claiming a right of set off in respect of an amount for liquidated damages arising from delay claimed by Sopov. Kane issued a 'show cause' notice stating that the failure to pay was a substantial breach of the contract. Sopov continued to insist on the right of set off, so Kane suspended work and removed its equipment from the site. Without giving proper notice as required under the contract, Sopov made a call on Kane's bank guarantee.

Kane then terminated the contract, claiming that Sopov had repudiated. The trial judge found in favour of Kane and made an assessment of the amount payable by Spov to Kane on a quantum meruit. Sopov appealed the finding of repudiation, and Kane appealed the assessment of the amount payable. (For details of the earlier case see our Focus: Dealing with common construction claims in Victoria and Focus: What is repudiatory conduct?)

In November 2007, the Court of Appeal upheld the finding that Sopov had repudiated the contract, and referred the assessment of the amount payable to mediation. The mediation was unsuccessful and the question of the assessment of the amount payable by Sopov to Kane on a quantum meruit moved to the Court of Appeal for determination.

Victorian Supreme Court of Appeal decision

The Court of Appeal first looked at the threshold question of whether a quantum meruit claim was available to Kane in the circumstances.

The court reaffirmed the principle laid down by the New South Wales Court of Appeal in Renard Constructions (ME) Pty Ltd v Minister for Public Works³ in respect to which the High Court refused an application for special leave to appeal. In Renard, it was held that an innocent party who accepts the defaulting party's repudiation of a contract has the option of either suing for damages for breach of contract or suing on a quantum meruit for work done.

Whether amount of quantum meruit limited to contract price

Following Renard, the court held that the contract price does not place a 'ceiling' on a quantum meruit claim. In an action brought under the contract following repudiation, the contractor is entitled to damages amounting to the loss of the benefit which was to have been derived if the contract had been performed (subject to mitigation). By contrast, a contractor who sues on a quantum meruit is entitled to be paid an amount representing the reasonable cost of the work done. As was explained in Renard, there is nothing anomalous in the notion that the two different remedies might yield different results, nor that the quantum meruit figure might exceed the profit that would have been made by performing the contract.

The court acknowledged 'a growing chorus of judicial and academic criticism of the availability of quantum meruit as an alternative to contract damages where repudiation is accepted', resting in part on the proposition that the law should not superimpose an obligation to pay a reasonable remuneration where there is a valid and enforceable agreement governing the right to payment.⁴

The court said that, unconstrained by authority, it might well have upheld Sopov's argument that the contractor's only remedy in the circumstances was to sue on the contract. However, it saw itself as heavily constrained, in particular by the High Court's refusal to grant special leave to appeal from the Renard decision. The issue could also not be taken any further because it had been raised too late (ie it was not raised in the trial court and only raised for the first time on appeal).

Proper assessment of the amount payable on a quantum meruit

As to the question of the amount payable, Chief Justice Warren had at first instance relied on a passage from the judgment of President Mason of the New South Wales Court of Appeal in Trimis v Mina,⁵ to hold that the influence of the contract cannot disappear entirely, even if the contract itself no longer exists. Her Honour reasoned that the assessment of the amount payable on quantum meruit should therefore take into account the conclusions she had reached with respect to claims under the contract for variations and for delay costs.

The Court of Appeal said this view could not be sustained. The quantum meruit remedy rests on the fiction of the contract having ceased to exist ab initio (ie, from the beginning), and so the contract can have no 'continuing influence' when the value of the work is being assessed on a quantum meruit. The price agreed on at the time of entry into the contract is merely evidence of the view of the parties at that time as to the value of the work to be performed. Trimis v Mina was distinguished, as the contractor in that case had sued for damages in contract following the principal's repudiation, rather than on a quantum meruit.

The proper approach to the assessment of a quantum meruit claim is to ascertain the fair and reasonable value of the work performed. As was said in Renard, it would be 'extremely anomalous' if the defaulting party could invoke the contract which it has repudiated to impose a ceiling on the amounts recoverable.

Is the contract price the best evidence of value?

The court also rejected Sopov's submission that the contract price is 'the best evidence' of the value of the benefit conferred, noting that the contract price is struck prospectively, based on the parties' expectations of the future course of events, whereas the quantum meruit is assessed with the benefit of hindsight, on the basis of the events which actually happened.

Kane argued that the contract price provided very little guidance because the actual carrying out of the works was 'radically different' from what had been anticipated when the contract was entered into. For example, it was found at trial that the superintendent's incompetence and lack of independence 'had a cumulative and influential effect upon the performance of the contract.'⁶

The court held that the trial judge was entitled to approach the assessment of the value of the works in the way she did, by requiring Kane to prove:

• the total costs incurred and payments made by it in carrying out the works; and
• that the amounts in question were fair and reasonable in the circumstances.

The court further affirmed that the value of the work done can be proved by evidence of costs actually incurred.

Their Honours then considered the arguments about the appropriate adjustments to the cost figure.

Profit and overhead

The trial judge had disallowed Kane's claim for a 10 per cent margin for overhead and profit on the basis that such a component did not fall within the actual cost of the work, and should not be included in the assessment on a quantum meruit. The Court of Appeal rejected this conclusion, stating that an appropriate index of the value of the benefit conferred is to ascertain what it would have cost the principal to have the works carried out by another builder. The inclusion of a margin for profit and overhead meant that the calculation approximated the replacement cost of the works, and so was entirely consistent with the restitutionary objective of measuring the value of the benefit conferred.

Unsuccessful variation claims

The Court of Appeal also reversed the trial judge's decision to deduct the total value of unsuccessful variation claims from Kane's quantum meruit entitlement. As it was not disputed that the work (the subject of the variations) had been carried out, the only question was the fair and reasonable value of that work, and it was irrelevant to assessment on a quantum meruit whether or not the work fell outside the original contract scope. The court emphasised that all that matters is that the performance of the work has conferred a benefit on the owner, for the reasonable value of which the builder should be remunerated.

Delay costs

Kane's claim for delay costs succeeded in part at trial. As part of its cross-appeal, Kane argued that there was no evidentiary basis for the finding that it was responsible for those extensions of time which were disallowed by the trial judge, as the requisite matters had not been put in issue. Sopov submitted that it was incorrect to simply translate Kane's delay claim made under the contract as being delay costs pursuant to the quantum meruit.

The Court of Appeal said that the relevant questions were:

• first, what would in ordinary circumstances have been a reasonable time for Kane to carry out the works, and
• second, to what extent the time for performance was in fact extended by circumstances outside Kane's control.

Further, the common law is, in important respects, more forgiving of delays than the provisions of the contract. The trial judge had therefore erred in deducting an amount for delay costs calculated in accordance with the contract. While the premise of Sopov's submission was accepted, the court rejected the conclusion advanced.

Work not in compliance with the contract

The trial judge had deducted sums from Kane's quantum meruit entitlement for variation items where Kane had not performed the work as specified in the contract. Kane appealed the deduction, arguing that it had costed this work within its quantum meruit claim on the basis of what it had done (rather than on the basis of what the contract specified). The court upheld Kane's argument. Provided the work was done, and the costs of the work were fair and reasonable, Kane could recover these costs on its quantum meruit claim, and non-compliance with the contract was wholly irrelevant for the purpose of this assessment.

Practical considerations

It is important for principals to bear in mind that restitutionary liability is independent of contract; a principal who repudiates a contract will not be able to invoke the contract price as a 'ceiling' on the amount of payable if the contractor chooses to bring a quantum meruit claim.

The contractor will be entitled to be paid for the fair and reasonable value of the work, and can prove the value of that work by evidence of the total costs incurred and payments made in performing it. As a consequence, the fair and reasonable value of rejected variation claims will be included in the assessment, provided the work the subject of the variations has been carried out. Similarly, the contractor will be allowed to recover the costs of work not performed as specified in the contract, provided the work was done, and the costs of the work were fair and reasonable.

The courts are also willing to accept replacement cost of the works as an index of value, and to allow the contractor to recover a margin for profit and overhead on this basis.

This decision underscores the risks of restitutionary liability for principals who are found to have repudiated.

Footnotes

1. [2009] VSCA 141.
2. The court did express the view that, if it were not constrained by previous High Court authority, it might have upheld the principal's argument that the contractor's only remedy in the circumstances was to sue on the contract.
3. (1992) 26 NSWLR 234 at 277.
4. Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256.
5. (2000) 16 BCL 288 per Mason P at 296-7 (in obiter).
6. Kane Constructions Pty Ltd v Sopov (2006) 22 BCL 92 at 151; [2005] VSC 237 at [873].

For further information, please contact:

• Stephen McComishPartner, Perth
  Ph: +61 8 9488 3767
  Stephen.McComish@aar.com.au
• Nick Rudge Partner, Melbourne
  Ph: +61 3 9613 8544
  Nick.Rudge@aar.com.au
• John BaartzPartner, Brisbane
  Ph: +61 7 3334 3254
  John.Baartz@aar.com.au
• John CooperPartner, Sydney
  Ph: +61 2 9230 4804
  John.Cooper@aar.com.au

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