Court upholds VCAT decision on quantum meruit claim – builder’s windfall gain

Court upholds VCAT decision to allow builder to recover on quantum meruit basis (after wrongful repudiation by owner), based exclusively on evidence of quantity surveyor; and finds that s 38 of the Domestic Building Contracts Act 1995 (Vic) does not apply to quantum meruit claims.

Mann v Paterson Constructions Pty Ltd [2017] VSC 119

 

In Mann v Paterson Constructions Pty Ltd [2017] VSC 119, the Supreme Court of Victoria upheld a decision of VCAT to award over $660,000, on a quantum meruit basis, to a builder in dispute with property owners. The dispute concerned variations to a residential property development, in circumstances where the proprietor had wrongfully terminated the building contract.

The decision is important for two reasons:

  • first, because the Court found that a builder may quantify a quantum meruit claim based, exclusively, on a quantity surveyor’s evidence as to the reasonable value of the building work performed (and the actual costs incurred in carrying out the work need not, necessarily, be considered in determining the reasonable value conferred); and
  • second, because the Court found that when a builder succeeds on a quantum meruit claim following wrongful termination, the builder need not have complied with s 38 of the Domestic Building Contracts Act 1995 (Vic) (Act) (which requires a builder to provide notice of the cost of variations, and any delay, in some circumstances).


Facts

Pursuant to a contract entered into in 2014, the builder, Paterson Constructions Pty Ltd, agreed to construct two units for approximately $1M for the owners of a property in Blackburn. The builder carried out a significant number of variations as the works proceeded, and a dispute arose in relation to payment for the variations.

The owners paid the builder $945,787.00 and, after the dispute arose, purported to terminate the contract. The builder denied it was in breach, accepted the purported termination as repudiation, and sued the owners for the value of the variations, on a quantum meruit basis. In quantifying its claim, the builder relied exclusively on the evidence of a quantity surveyor as to the reasonable value of the works, including the variations.

At first instance, VCAT determined that the owners’ termination was unlawful, and assessed the builder’s claim on a quantum meruit basis. In doing so, it accepted the expert evidence of a quantity surveyor as to the reasonable value of the completed works (not the actual cost incurred in carrying out the works), and ordered the owners to pay the builder an additional $660,526.41.

This amount was significantly more than could be expected for a claim based on breach of contract in the circumstances.


Appeal to the Supreme Court

The owners appealed VCAT’s decision to the Supreme Court of Victoria on two grounds:

  • first, on the footing that it was not permissible to quantify the reasonable value conferred on the owners solely from evidence given by a quantity surveyor (i.e. other factors had to be considered as well); and
  • second, the builder had failed to comply with s 38 of the Act to establish an entitlement to be paid for variation work under the contract.

Justice Cavanough dismissed the appeal, on both grounds, as explained below.


First ground of appeal: alleged inadequacy of quantity surveyor’s evidence

In relation to the first issue, the Court found that the Tribunal was correct to follow the Victorian Court of Appeal’s approach in Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510 (Sopov), at [25], where the Court said:

“The proper approach to assessment of a quantum meruit claim is, as the trial judge said, to ascertain the fair and reasonable value of the work performed. Axiomatically, the measure of the restitutionary remedy is the value of the benefit conferred on the party which received it. … [I]t would be ‘extremely anomalous’ if the defaulting party could invoke the contract which it has repudiated to impose a ceiling on the amounts recoverable. [footnote omitted, emphasis added]

The owners contended on appeal that in determining the value of the benefit conferred, the court or tribunal could not simply rely on the evidence given by a quantity surveyor as to the value of the work. Instead, it was bound to take into account other factors, including the contract price and the actual costs incurred by the builder in carrying out the work.

Justice Cavanough noted that Ball J of the Supreme Court of NSW in Home Site Pty Ltd v ACN 124 452 786 (formerly Nahas Construction (NSW) Pty Ltd) [2017] NSWSC 698 took a similar view. In that case Ball J said, in relation to items supplied to the builder by third parties, that he could not see why the builder should be able to recover more than the actual cost plus a reasonable builder’s margin, regardless of what might otherwise be a reasonable allowance for the work performed.

However, Cavanough J rejected this approach, preferring the approach of Barrett J in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273, in which case the Court found that the “actual costs” expended did not limit the quantification of the benefit conferred.

Accordingly, the Court rejected the owners’ contention, and said that while the contract price or costs incurred will often be a relevant consideration, these were not matters the decision maker was bound to take into account.

The Court found it was permissible for the tribunal to assess the value of the benefit conferred by relying (solely) on the evidence given by the quantity surveyor in relation to the reasonable value of the works. For these reasons, the owners’ first ground of appeal failed.


Second ground of appeal: non-compliance with s 38 of the Act

The second ground of appeal concerned whether the builder had to comply with s 38 of the Act, and whether VCAT’s failure to squarely address the application of s 38 to the facts was an error of law.

Section 38 of the Act provides, in essence, that if a building owner requests a variation that will add more than 2% to the original contract price, then the builder must give the owner a notice advising of the effect on the work, any likely delay that will ensue, and the increased costs. If no notice is given, then recovery by the builder for the work done on account of the variation is barred unless the Tribunal is satisfied that there are exceptional circumstances.

VCAT in this case did not make any specific finding with respect to s 38, (and made no finding that there were “exceptional circumstances”) but instead simply determined the reasonable value of the variation works, based on the expert evidence, as if s 38 did not apply.

Justice Cavanough conducted a detailed assessment of the history of s 38 and the relevant cases and determined, in essence, that s 38 had no application because s 38 deals with the contractual recovery of variations; whereas the claim made by the builder was based on quantum meruit, and not the contract. Put differently, because s 38 of the Act did not expressly curtail or limit the right to make a quantum meruit claim, and because the use of the word “variation” in the context of s 38 “tends to favour the meaning of a change in the terms of the contract rather than a change in the work”, s 38 had no application.

On this basis, the Court found that it did not matter that the Tribunal did not apply s 38 because the section did not apply in circumstances where the contract had been wrongfully terminated and the claim was prosecuted on a non-contractual, quantum meruit, basis.


Conclusion

This case sets an important precedent because it establishes that (in Victoria) a builder, if it succeeds in establishing that an owner has repudiated a building contract, can recover on a quantum meruit basis and quantify its claim (solely) by leading evidence from a quantity surveyor. This may result in the builder recovering significantly more than it otherwise could have under the contract.

Further, it establishes that s 38 of the Act does not apply to a quantum meruit claim where the contract is wrongfully terminated and the claim is prosecuted on a non-contractual, quantum meruit, basis.

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