BUILDING LAW
Mann v Paterson Constructions Pty Ltd: The End of the Rescission Fallacy TRAVIS SHUEARD1 AND SEAMUS BRAND2
T
he High Court recently handed down its decision in Mann v Peterson Constructions Pty Ltd,3 dismissing the “rescission fallacy” as a poor basis for quantum meruit claims. This “fallacy” should no longer be implemented in Australian law. The decision means that building and construction lawyers will now be restrained by the “ceiling price” of a contract when making claims of quantum meruit. Accordingly, the right to seek compensation as quantum meruit will be unavailable where the contract provides for an accrued right of payment at the time of repudiation. While the decision will lead to practical complications (e.g. contracts which allow for provisional payments), the decision does mean that parties will generally be unable to issue a quantum meruit claim oping to extract far larger amounts than for what the contract otherwise provides.”
OVERVIEW Mann v Paterson concerned a contract between Peter and Angela Mann (the Manns) and Paterson Constructions Pty Ltd (Paterson) to build two townhouses in Blackburn, Melbourne. The parties entered into the contract on 4 March, 2014 at a fixed price of $971,000. In Victoria, domestic building contracts are governed by the Domestic Building Contracts Act 1995 (Vic) (the Act). The Contract provided for a variation procedure which permitted the Manns to request variations by providing written notice to Paterson. Section 38(1) of the Act requires a building owner who wishes to vary the plans or specifications set out in a major domestic building contract to give the builder a notice outlining the proposed variation, though it does not specify whether it is to be in writing. During construction, the Manns orally requested 42 variations without providing written notice to Paterson. When Paterson handed one of the townhouses over, it informed the Manns that $48,844.92 was due to be paid for the orally requested variations.
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Following a dispute over the variations’ price, Paterson ceased work on the second townhouse until the invoice was paid by the Manns. The Manns claimed that by Paterson ceasing the work and by issuing the invoice contrary to the Act’s requirements, Paterson had repudiated the Contract and the Manns had accepted this repudiation. Paterson rejected that repudiation and later claimed that the Manns had repudiated by their determination of the Contract. Paterson instituted proceedings in the Victoria Civil Administrative Tribunal (VCAT) for damages or a balance of moneys for work and labour done and materials provided up to the date of termination. VCAT decided in favour of Paterson on the basis that the Manns had repudiated the Contract and that the Manns owed $660,526.41 to Paterson, “considerabl[y] more than it might have recovered had the claim been confined to the Contract.”4 Following VCAT’s decision, the Manns unsuccessfully appealed to the Supreme Court of Victoria. The Manns then appealed to the Court of Appeal but were again unsuccessful, with the Court of Appeal determining that the builder’s right to seek quantum meruit as an alternative to damages ‘seeks to achieve an equitable outcome by ensuring that the builder receives a fair and reasonable amount for the benefit the builder has conferred’ and that the Act did not apply to claims in quantum meruit.5 The Manns appealed to the High Court.
HIGH COURT APPEAL The Manns’ appeal to the High Court was founded on three grounds: Ground 1: That the Court had erred in holding that Paterson, having terminated the contract upon repudiation by the Manns, was entitled to sue on a quantum meruit basis for the works carried out;
Ground 2: Alternatively, if Paterson was entitled to sue on quantum meruit, that the Court of Appeal erred in finding that the price of the contract did not operate as a ceiling on the amount claimable under a quantum meruit claim; and Ground 3: The Court erred in allowing Paterson to recover on a quantum meruit basis for variations because it incorrectly found that s 38 of the Act did not apply to a quantum meruit claim for variations to works under a domestic building contract.
THE RECISSION FALLACY The Court’s dismissal of the rescission fallacy stems from the first ground. Kiefel CJ, Bell and Keane JJ traced the origin of the rescission fallacy, which originated from the Privy Council in Lodder v Slowey.6 This principle had subsequently been applied by the State appellate courts. In Lodder, the Privy Council determined that as the contract in question had been rescinded ab initio, the plaintiff was entitled to recover a sum assessed as the reasonable value of the rendered services, despite that amount substantially exceeding the agreed price. Lodder’s effect is that parties were entitled to advance a claim for quantum meruit in lieu of a claim for damages if it accepted repudiation and termination of the contract. The Lodder principle was based on the theory that where a contract was terminated for breach or repudiation then the contract became irrelevant and rescinded ab initio. The High Court has since determined that this position is untenable, with Kiefel CJ, Bell and Keane JJ unequivocally labelling the position “fallacious.”7 The High Court noted that correcting the position was important due to the “danger that the error may spread in other directions, and a portion of our law be erected on a false foundation.”
