MANN V PATERSON CONSTRUCTIONS PTY LTD: THE INTERSECTION OF DEBT, DAMAGES AND QUANTUM MERUIT.

• Date: 01 December 2020
• Author: Winterton, David,Pilkington, Timothy
• Published date: 01 December 2020
• Author: Winterton, David

CONTENTS I Introduction II The Relevant Background to the Appeal III The Issues and Decision in the High Court IV The High Court's Reasons A Justices Nettle, Gordon and Edelman 1 The Availability of Non-Contractual Quantum Meruit and Its Doctrinal Basis 2 The Assessment of Non-Contractual Quantum Meruit B Chief Justice Kiefel, Bell and Keane JJ C Justice Gageler V The Broader Significance of Mann A The Availability of Non-Contractual Quantum Meruit as an Alternative to Damages Assessed on a Robinson v Harman Basis B The Doctrinal Basis for Non-Contractual Quantum Meruit 1 The Meaning of 'Failure of Consideration' in This Context 2 The Preferable Doctrinal Explanation for Non-Contractual Quantum Meruit C The Theoretical Basis for Quantum Meruit as an Alternative to Damages D The Availability of Non-Contractual Quantum Meruit as an Alternative to Debt E Boomer v Muir and the Contractual Ceiling Conundrum 1 Understanding Boomer 2 Combining Claims for Damages and Non-Contractual Quantum Meruit 3 Bad Bargains and Perverse Incentives F Measuring Non-Contractual Quantum Meruit under a Terminated Contract VI Conclusion I INTRODUCTION

Following the formation of a contract where some or all of the promised work has been completed but the agreement is unenforceable, Australian courts generally recognise the availability of a claim to recover the reasonable value of the work performed ('non-contractual quantum meruit'). (1) But what if the contract is brought to a premature end after a repudiation by the party who contracted for the work? If the innocent party (2) possesses an unconditionally accrued right to payment enforceable in debt, does this bar the availability of non-contractual quantum meruit? Additionally, in relation to work for which no unconditional right to payment has accrued, can the innocent party recover non-contractual quantum meruit as an alternative to damages designed to place it 'in the same situation ... as if the contract had been performed'? (3) Finally, if non-contractual quantum meruit is available as an alternative to damages, what is the relevance of the parties' contractually agreed price in assessing the sum awarded?

These are the questions that arose for determination by the High Court of Australia in Mann v Paterson Constructions Pty Ltd ('Mann'). (4) While the Court unanimously held that non-contractual quantum meruit is not available when an innocent party has an unconditionally accrued right to payment for work performed prior to the contract's termination, the Court divided on whether such a claim is available as an alternative to damages when the innocent party had no such right. By a bare majority, the availability of both claims in these circumstances was upheld.

But behind the majority view lay two different explanations for the doctrinal basis of non-contractual quantum meruit awards in the aforementioned circumstances. The explanation preferred by Nettle, Gordon and Edelman JJ ('the plurality') was that a contract's termination for repudiation by the recipient of partially-performed work results in a (total) 'failure of consideration' or the failure of a 'basis' upon which the work was performed. (5) This conclusion extends the scope of 'failure of consideration' from its application to claims to recover money paid to claims to recover the value of partially performed work. (6) For Gageler J, by contrast, such an extension was both unnecessary and undesirable. His Honour instead resolved the appeal by reference to the more narrowly tailored doctrine enunciated by Jordan CJ in Segur v Franklin ('Segur') (7) and Horton v Jones [No 2] ('Horton [No 2]'): (8) that in the circumstances described above the law imposes an obligation to pay reasonable remuneration for the executed consideration 'independently of any genuine agreement between the parties'. (9)

Both of these approaches have merit. Recognising the difficulties inherent in placing too much explanatory stock in the (commonly misunderstood) concept of 'failure of consideration, Gageler J's judicial minimalism in this context displays a certain wisdom, particularly because it simultaneously resolved the longstanding conundrum of whether non-contractual quantum meruit can ever exceed the contractually agreed price for the work. It is nevertheless argued that the plurality's rationalisation of the claim is preferable because only this approach provides a defensible normative explanation for the availability of non-contractual quantum meruit as an alternative to damages, and because the underlying normative justification for non-contractual quantum meruit claims, exemplified by cases such as Mann, cannot be differentiated from that which justifies the availability of a restitutionary claim following a 'failure of consideration' in relation to a monetary payment. (10)

As to whether non-contractual quantum meruit can ever exceed the contract price, Mann displays no clear majority view. Justice Gageler and the plurality agreed that in Mann itself the amount recoverable by the respondent, Paterson Constructions Pty Ltd (the 'Builder'), could not exceed the amount to which it would have been contractually entitled upon completion of the work, and the plurality held that generally any claim 'should be limited in accordance with the rates prescribed by the contract'. (11) But only Gageler J was prepared categorically to rule out the possibility of such an award ever exceeding this 'contractual ceiling'. (12) While we agree that imposing a contractual ceiling is generally appropriate because it reflects the parties' agreed valuation of the completed work, we argue that there are rare cases where imposing such a ceiling may be inappropriate because it does not reflect an agreed valuation of the completed work.

II THE RELEVANT BACKGROUND TO THE APPEAL

The appeal in Mann arose in the following way. The appellants, the Manns, entered into a standard-form contract (the 'Contract') with the Builder for the construction of two double-storey townhouses on the Manns' land in Blackburn, Victoria at a fixed price of $971,000. The parties subsequently agreed orally to vary the scope of the works by adding certain items and altering others. Clause 25.7 of the Contract stated that it would 'in all respects be governed by and construed in accordance with the laws that apply in the State of Victoria'. (13) Relevantly, s 38 of the Domestic Building Contracts Act 1995 (Vic) ('DBC Act') provides that a building owner who wishes to vary plans or specifications set out in a domestic building contract in which the contract price is more than $5,000 must give the builder 'a notice' outlining the variation the building owner wishes to make. As the Court unanimously held, the effect of s 38 of the DBC Act is to preclude any claim for non-contractual quantum meruit for variations to the work contracted for in the absence of a notice in writing. (14)

At common law, a contractual obligation to perform building work is presumptively 'entire' in the sense that the builder will not earn an unconditional right (15) to payment until all of the promised work is either strictly or substantially performed. (16) This is generally the case even if progress payments are required, (17) unless on the contract's proper construction the payments are made in consideration for the performance of divisible entire stages of the work. The contract between the Manns and the Builder was 'divisible into several entire stages' (18) since cl 11.8 provided for the Manns to make progress payments in consideration for the completion of certain identifiable parts of the work. A contract is divisible into several entire stages where a promisor must only strictly or substantially perform a severable part of performance to earn an unconditional right to some identifiable part of the promised counter-performance. (19)

The relationship between the Manns and the Builder broke down when the project was at an advanced stage of completion. After the Manns purported to terminate the Contract and exclude the Builder from the site, the Builder commenced proceedings in the Victorian Civil and Administrative Tribunal, arguing that the Manns' conduct amounted to a repudiation, which it had accepted, and claiming for work done prior to termination in three distinct categories. (20) These categories were:

1 Work done by the Builder in respect of variations to the plans and specifications set out in the Contract that had been orally requested by the Manns;

2 Work done by the Builder in respect of the plans and specifications set out in the Contract for which the Builder had an unconditionally accrued right to payment upon termination; and

3 Work done by the Builder in respect of the plans and specifications set out in the Contract for which the Builder did not have an unconditionally accrued right to payment upon termination.

The Manns counterclaimed for damages for allegedly defective and incomplete work, (21) as well as liquidated damages for delay, (22) arguing that the Builder had in fact repudiated the Contract. The Tribunal preferred the Builder's version of events and held that for both category (2) and category (3) work it was entitled to non-contractual quantum meruit for work performed prior to termination as an alternative to damages. (23) The Tribunal also held that the quantum of this award was not capped by the contractually agreed price that would have been recoverable upon completion of the entire stages of the work. On appeal to Cavanough J, the Builder's entitlement to non-contractual quantum meruit was confirmed, (24) and a further appeal by the Manns to the Victorian Court of Appeal also failed. (25)

III THE ISSUES AND DECISION IN THE HIGH COURT

The Manns' appeal to the High Court raised four main questions. One was whether s 38 of the DBC Act excluded the availability of common law 'restitutionary' relief for variations to the contractually agreed work implemented otherwise...