Case note

Who does this affect?

Construction industry participants.

What do you need to do?

Ensure that the termination clauses are carefully worded to reflect your requirements.

Authors
Peter Megens  
Partner

Audrey Yeap  
Solicitor

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Peter Megens  
Partner
T +61 3 9643 4253

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Sydney
Peter Pether  
Adam Wallwork  
Julie Wright  

Melbourne
James Forrest  

Perth
Simon Lee  

Brisbane
Scott Budd  

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Cole Sopov & Anor v Kane Constructions Pty Ltd (No 2) [2009] VSCA 141 marks a significant decision on the availability and assessment of a claim on a quantum meruit following termination of a contract by a contractor. The decision confirmed that a contractor who is entitled to terminate a contract may choose to sue on a quantum meruit as an alternative to seeking contractual damages.

An action for quantum meruit is for recovery of the fair and reasonable value of works completed. One of the circumstances in which a contractor is entitled to terminate a contract and sue on a quantum meruit is where a principal repudiates the contract. Repudiation of a contract occurs where a principal, through their actions, demonstrate that they no longer intend to be bound by the contract. This decision confirmed that where a contractor terminates a contract following a principal’s repudiation, they may choose to sue for either contractual damages or for a quantum meruit.

The Court of Appeal considered whether Kane, the Contractor, was entitled to sue on a quantum meruit following repudiation of the contract by Sopov, the Principal. Other issues to be determined related to assessing the quantum of such claims.

Facts

The relevant proceedings arose out of a dispute relating to a construction contract. The works were to be completed in 130 working days. However, the works were incomplete over a year later due to a series of delays.

During the period of works, the Principal failed to pay the full amount of a progress claim. The Contractor alleged breach of contract and suspended works. The Principal responded by alleging undue delays and consequently called on the security under the contract.

At first instance the trial judge held that the Principal had repudiated the contract by failing to pay the progress claim and calling on the security under the contract. Accordingly, it was held that the Contractor was entitled to terminate the contract and subsequently sue on a quantum meruit.

Decision of the Court of Appeal

Is there a right to claim a quantum meruit?

There is a strong line of authority that supports the right of a contractor who has accepted repudiation from a principal to terminate the contract and sue on a quantum meruit as an alternative to contractual damages.

However, the right of a contractor to sue for a quantum meruit in these circumstances has been heavily criticised. Nonetheless, the Court of Appeal considered it was bound by the case law and stated that only the High Court could declare this remedy unavailable.

Having determined that a claim of quantum meruit was available, the Court of Appeal turned to consider a number of issues with respect to quantum.

Can a claim exceed the contract price?

This decision confirms that where a claim is made on a quantum meruit, the contract price is not the maximum amount recoverable. A contractor may recover an amount which exceeds the contract price as long as it represents the “fair and reasonable” value of the work performed.

The contract price may provide a guide as to the reasonableness of the remuneration claimed, however it is not necessarily the best evidence of the fair and reasonable value of the benefit conferred.

Can an amount for profit be included?

A contractor is entitled to recover an amount for profit when suing on a quantum meruit. It was noted that if works were carried out by another contractor in comparable circumstances the Principal would have been charged a profit margin. Therefore, the inclusion of a profit margin was considered reasonable as it meant that the quantum meruit claim represented the approximate replacement cost of the works.

Where there are delays in works, is the full amount of a quantum meruit claim available?

A delay in works is not fatal to a quantum meruit claim. The relevant question is whether the works were nonetheless completed within a “reasonable time”. Where the answer is yes, a contractor may be entitled to recover the full amount of the quantum meruit claim.

In determining whether works were completed within a reasonable time, it is necessary to establish to what extent delays were outside the control of the contractor. The court is more forgiving of delays attributable to factors such as bad weather or sub contractors. If delays were not within the control of the contractor, the court will take into account the period of delays when deciding what is a reasonable period of time.

What happens where there are unsuccessful variation claims?

Where work is completed in variance with the contract, but the work is fair and reasonable, the quantum of unsuccessful variation claims should not be deducted from the quantum meruit claim. It is essentially irrelevant whether the work was outside the original scope of the contract, what matters is that a benefit is conferred to the owner.

What happens where works are not performed in accordance with the contract?

Works which are not performed in accordance with the contract should not be automatically deducted from a quantum meruit claim. Non-compliance with the contract is essentially immaterial. There should be no deduction where the amount claimed is based on the cost of works completed and the costs are fair and reasonable.

Lessons learned

We can learn the following lessons from this decision:

• Contractors should be careful when exercising their right to terminate a contract. A contractor is entitled to terminate a contract where a Principal demonstrates that they no longer intend to be bound by the contract. If a contractor terminates a contract in absence of such an intention, one of the consequences is that they may be precluded from suing on a quantum meruit.

• Contractors should consider whether suing on a quantum meruit will be more beneficial than suing for contractual damages. If the contract is terminated at an early stage, an action for contractual damages may be preferable, as recovery on a quantum meruit for the value of profits and work reasonably performed at that stage may yield significantly less than a claim for contractual damages. However, later on in the project, it may be advantageous for a contractor to sue on a quantum meruit as the amount recoverable may significantly exceed a claim for contractual damages.

• Principals may wish to keep a contract on foot so that a contractor is not entitled to sue on a quantum meruit. They should be wary not to do or say anything which objectively conveys to the contractor that the contract is no longer binding.

• Principals should not assume that a contractor cannot recover for a profit margin, unsuccessful variation claims and works not performed in accordance with the contract. A contractor may be entitled to recover such costs where the works and the amount claimed is fair and reasonable.