The High Court (Court) overturned the majority judgment of the Full Court of the Supreme Court of South Australia (Full Court) in finding that the Respondent was not entitled to payment on a quantum meruit basis. The Court found that existing contractual relationships between a developer, contractor and subcontractor cannot be ignored in assessing a claim for quantum meruit.

Background

In September or October 1993, W Cook & Sons Pty Ltd (Sons) entered into a “cost plus” oral agreement with Mr Matthew Lumbers and Mr Warwick Lumbers (collectively known as the Lumbers) to construct a house in North Haven. The contract was formed in an informal manner as the Lumbers placed great trust in Mr McAdam who was the secretary of Sons at the time of the contract and thereafter continued as a director of the company.

Most of the work required by the contract was performed, not by Sons, but by the Respondent, W Cook Builders Pty Ltd (in Liquidation) (Builders) as a result of informal reorganisation within the Cook group of companies of which Builders and Sons were a part. The shareholders and directors of Builders and Sons were not identical. Although Sons was a licensed builder, Builders was not. The change of identity of the builder from Sons to Builders was not known or approved by the Lumbers. In fact, the Lumbers were not informed of the reorganisation within the Cook group of companies and were not aware of Builders’ existence. On 26 May 2008, Builders was placed into voluntary administration and it subsequently went into liquidation on 22 June 1998.

The payment mechanism relied upon throughout the construction period was also informal and involved Sons submitting to the Lumbers at its discretion progress payments at chosen intervals and the Lumbers providing payment by cheque made payable to Sons. The Lumbers had paid all amounts which Sons had requested and unbeknown to the Lumbers, Sons had paid these amounts to Builders. Four years after the construction was completed, Builders notified the Lumbers that they owed an outstanding amount of $274,791 for the construction work.

Builders commenced an action in the District Court of South Australia against the Lumbers and Sons as joint defendants. Prior to the hearing, Builders was ordered to provide security for Sons’ cost however Builders did not provide the security and the action against Sons was stayed.

Beazley J at first instance rejected Builders’ argument that it was an equitable assignee of the benefit of the agreement between the Lumbers and Sons and was therefore entitled to recover in its own name against the Lumbers. Beazley J found that the Lumbers would not have approved the substitution of another corporate entity and that Sons had not intended to assign the benefit of the contract to Builders. Builders’ alternative argument that it was entitled to “fair and just compensation for the benefit or enrichment accepted by the Lumbers” was also rejected and Beazley J pointedly stated that the claim ought to have been made against Sons.

The Full Court rejected Builders’ assignment proposition on the same grounds as Beazley J had denied the argument. However, the majority of the Full Court overturned Beazley J’s decision on the issue of quantum meruit and formulated their reasoning by putting to one side the contractual relationship between the Lumbers and Sons. Consequently, the majority of the Full Court found that the provision of services and payments to subcontractors had been at Builders’ expense and that it would be unconscionable for the Lumbers to retain the benefit without payment. The Lumbers appealed the decision of the High Court.

Issues in dispute

The main issue confronted by the High Court was whether Builders was entitled to claim directly against the Lumbers on the basis of quantum meruit. Gleeson CJ recognised that the contract between Sons and Builders still remained in force and that Sons’ obligations under the contract had been delegated to Builders so as to establish a head contract between Lumbers and Sons, and a subcontract between Sons and Builders. Both parties accepted that in the ordinary case a building subcontractor does not have a restitutionary claim against a property owner, but must look to the head contractor for payment. This raises the question as to whether the case fell within any recognised exception or within general principles justifying a new exception.

Held

Gleeson CJ handed down a separate decision to Gummow, Hayne, Crennan and Kiefel JJ (joint judges) although both decisions achieved the same result and conveyed disapproval of the Full Court’s limited consideration of the contractual relationships between the parties.

Gleeson CJ adamantly affirmed that the contractual relations between the Lumbers and Sons “cannot be put to one side as an inconvenient distraction” in spite of the fact that Sons had no active part in the litigation. The joint judges noted Lord Goff of Chieveley’s warning in Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 WLR 161: “serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract”. Essentially the joint judges pointed to the importance in considering how the claim fits with any particular contracts the parties have made.

The joint judges rejected Builders’ application of Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 (Pavey & Matthews) in submitting that acceptance of a benefit, without request, suffices to found an action for work and labour done or money paid. According to the joint judges that issue did not arise and was not decided in Pavey v Matthews which in fact directs attention as to “whether the long-established and well-recognised category of cases constituted by claims for work and labour done or money paid at the request of another should be extended or developed in the manner for which Builders contended”. (Emphasis added)

The joint judges also rejected Builders’ proposition that it and not Sons performed the work on the basis that this analysis obscures the legal relationships that existed. It was noted that the correct analysis is as follows:

“Builders performed or procured the performance of the work in satisfaction of an obligation it owed to Sons, as it is with Builders performing or procuring performance of the work in satisfaction of an obligation that it owed to the Lumbers.”

Gleeson CJ rejected the approach of the majority in the Full Court which proceeded with the position that the Lumbers did not take the reasonable opportunity open to them to reject the proffered services. His Honour rejected this proposition and noted that the benefit was that which Sons had undertaken to provide for the Lumbers and for which the Lumbers had agreed to pay Sons. His Honour stated that if the principle relied upon by Builders applied to the claim by Builders against the Lumbers, it is difficult to see why it would not extend to the work performed by the numerous subcontractors that had been engaged in the works. Gleeson CJ could not justify why Builders should be elevated to a different position from that of the other subcontractors.

The joint judges also addressed the issue of acceptance and noted that it was an irrelevant factor considering that the Lumbers not had requested Builders to perform the work:

“It is irrelevant because it distracts attention from the legal relationships between the three parties: the Lumbers, Sons and Builders. To now impose on the Lumbers an obligation to pay Builders would constitute a radical alteration of the bargains the parties struck and of the rights and obligations which each party assumed. There is no warrant for doing that.”

The evidentiary and procedural deficiencies in this case also made it difficult for Gleeson CJ to conclude that Lumbers’ conduct was unconscionable. Gleeson CJ noted that if the Lumbers had been enriched, it was at the expense of Sons and if any party has been enriched at the expense of Builders, it was Sons.

The Court allowed the Lumbers’ appeal and set aside the decision of the Full Court.