Mann v Paterson Constructions Pty Ltd: The end of the rescission fallacy By Travis Shueard & Seamus Brand

Mann v Paterson Constructions Pty Ltd: The End of the Rescission Fallacy

TRAVIS SHUEARD 1 AND SEAMUS BRAND 2

The 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. 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.”

The proper position under Australian law is that while neither party remains bound to complete their obligations under the contract upon rescission, the terms of that contract must still form the basis of the quantum of damages recoverable. If a claim for restitution was permitted to be “unconstrained by the bargain made by the parties” that claim would “impermissibly cut across the parties’ contract.” 8

This would be an unacceptable reallocation of the parties’ agreed to risks. 9

Termination of the contract provides no reason to disrespect that allocation. 10 The prior position was not without some justification, however. In Renard Constructions (ME) Pty Ltd v Minister for Public Works, 11

Meagher JA held that:

“…it would be extremely anomalous if the defaulting party when sued on a quantum meruit could invoke the contract which he has repudiated in order to impose a ceiling on amounts otherwise recoverable”. 12

Despite this, the High Court dismissed Meagher JA’s comments as failing “to acknowledge that it is precisely because the parties have agreed upon the contract price for the performance of work that it is to be regarded as the greatest possible remuneration for the work agreed to be performed.” 13

In doing so, Kiefel CJ, Bell and Keane JJ stressed that “it is a matter of public policy that under the law of contract a defaulting party is not to be punished for its breach.” 14 This was echoed by Nettle, Gordon and Edelman JJ at paragraph [205] of the decision. Their Honours held that where there is an enforceable contract, but terminated for repudiation, “there are no reasons of practicality and few in principle to eschew the contract price.” 15

APPLICATION OF THE ACT

The application of the Act, both generally and section 38(1) was dealt with by Nettle, Gordan and Edelman JJ. Their Honours concluded that s 38(1), required that notice under that section must be provided in writing. 16

The remaining subsections, their Honours determined, had the purpose of preventing a builder from obtaining any money in respect of ownerinitiated variations except in accordance with those subsections: the subsections were protective, designed to prevent the issues that would arise from an informal dealing with the business contract. 17

Should the parties fail to meet the required degree of formality, the builder may not recover any money unless the builder were to suffer exceptional hardship.

Their Honours determined that a proper construction of the relevant subsections excluded restitutionary relief for variations unless s 38 had been followed. As Peterson had not received and did not request written notice of the variations, Ground 3 was upheld and the question of the amount payable for variation remitted to VCAT. 18

PRACTICAL IMPLICATIONS

The High Court’s abolition of the rescission fallacy and redirection of quantum meruit claims towards, at most, the contract’s “ceiling price” provides only a partial clarification. Experienced building & construction practitioners are aware of the often-complicated nature of building contracts (particularly commercial projects) and the difficulties in determining just what the contract price is.

Security of payment legislation 19

also adds another dimension. This legislation operates on a “pay now, argue later” 20 basis. Accordingly, payments made under a payment claim are provisional in nature and not always the final amounts owed. Another example is the AS 4300- 1995 (General Conditions for Design and Construct) standard form contract. Clause 42.1 of that contract allows for provisional interim payment claims: “[these payments] shall not prejudice the right of either party to dispute… whether the amount …paid is the amount properly due and payable… shall not be evidence of the value of the work or an admission of liability or evidence that work has been executed satisfactorily but shall be payment on account only…” This standard term will no doubt add unwanted complications to future claims. Generally speaking, practitioners can now take a level of comfort that the outcome of a quantum meruit dispute is more aligned with a claim for contractual damages, at least with simpler building projects. At the very least, parties should think more carefully before terminating for repudiation during a dispute. B

Endnotes 1 LLB (Hons) (UniSA), GDLP, Associate at Charlton Rowley. 2 LLB (Hons) (UniSA), GDLP, Associate at Lipman Karas. 3 [2019] HCA 32. 4 Ibid [140]. 5 Ibid [148] citing Mann v Paterson Constructions Pty Ltd [2018] VSCA 23 at [142], [144]. 6 [1904] AC 442. 7 Mann v Paterson Constructions Pty Ltd [2019] HCA 32 [8]; see Baltic Shipping Co v Dillon (1993) 176 CLR 344, 355 (Mason CJ). 8 Mann v Paterson Constructions Pty Ltd [2019] HCA 32 [13]. 9 See, for example, Lumber v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635 for further discussion concerning the Court’s reluctance to interfere with the parties’ contractual allocation of risk. See also Mason, Carter and Tolhurst, Mason & Carter’s Restitution Law in Australia (LexisNexis, 3 rd

ed, 2016) 610 [1430]. 10 Mann v Paterson Constructions Pty Ltd [2019] HCA 32, 85 [205] (Nettle, Gordon and Edelman JJ). 11 (1992) 26 NSWLR 234. 12 Ibid 277-8. 13 Mann v Paterson Constructions Pty Ltd [2019] HCA 32, [36]. 14 Ibid [37]. 15 Ibid [205]. 16 Ibid [152]. 17 Ibid [157]. 18 Ibid [161]. 19 For example, Building and Construction Industry Security of Payment Act 2009 (SA). 20 See Justice Vickery’s comments in Hickory Developments Pty Ltd v Schiavello (Vic) Pty Ltd [2009] VSC 156 with respect to the Building and Construction Industry Security of Payment Act 2002 (Vic).