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14 Feb 2020

HHG’s Construction and Infrastructure Special Counsel, Daniel Morris and Lawyer, Kai Yeo explain how this recent High Court case may have changed 120 years of contract law.

20200214 MannvPatterson

For nearly 120 years, Australian construction contractors have had the choice to terminate a contract based on certain wrongdoing by principals. This recent High Court decision does not take that choice away, but it does mean that contractors can no longer take it for granted. Some recent cases have opened up a can of worms for the construction industry, whereby the strength of the terms of a legal contract and the damages that may be claimed for breach of these terms can be questioned.

 

 

Since 1901[1] the law has given a choice to construction contractors that have had to terminate their contracts before practical completion of works based on certain wrongdoing by the principal. The choice is: claim damages or claim restitution.

A claim for damages will be made to compensate contractors for losing the opportunity to earn a profit on delivery of their works whereas a claim for restitution will be made to recover quantum meruit: literally, what the work is worth. These two kinds of claims are mutually exclusive: if you make one claim, you cannot make the other claim.

Not everyone believes contractors should have a right to choose

In Sopov v Kane[2], the Court observed a “growing chorus of criticism” surrounding this right to choose between damages and quantum meruit. Critics of this right to choose, complain that it undermines the bargain the parties have struck by their contract, particularly where the Court assesses the contractor’s work to be worth more than they would have earned upon full performance under the contract, as happened in Sopov.

Why, say the critics, should the contractor be entitled to escape a bad bargain by asking a Court to substitute its own judgment, for the commercial judgment that the parties freely and voluntarily exercised when negotiating the terms of their bargain?  Not only does this offend basic principles of contract law that say that remedies like a contractor’s quantum meruit must give way to terms of a legally binding contract; it is also contrary to what the High Court has said about the effect of terminating a contract.[3] According to the High Court, where a party (in this case, a construction contractor) terminates its contract based on certain wrongdoing by the other party, the result is that:

  • all the rights that each party has gained and all the obligations that each party has assumed under the contract before it is terminated, survive the termination (i.e. they do not disappear or change); but
  • neither party can gain any more rights or assume any further obligations under the terminated contract.

In other words, what you have under the terminated contract, you keep; but if you have not yet earned, assumed or acquired something under the contract at the time of termination, you never will.This reasoning, say the critics, does not sit well with the idea that you can look outside the contract to find another legal basis to claim an amount of money (restitution) that is not available under the contract. Before the contract was terminated, the contractor was entitled to progress payments; after the contract is terminated, the contractor is entitled to nothing more. If the contract was not a profitable one to begin with, then, say the critics, the contractor should not be able to exploit the termination of the contract by gaining in restitution what they would not have gained if the contract had run its course.

That sounds like a good argument if you accept that progress payments under a construction contract are payments that the contractor has earned before the contract was terminated. On this view, to recognise the contractor’s right to claim quantum meruit in restitution would be to ignore that rights in restitution cannot apply inconsistently with the rights that someone has earned under a contract. It is only when someone has lost the whole of their bargain – that is, when the contract has totally failed – that a contractor who has done work with the disappointed expectation of being paid for it under the contract can make their claim in restitution instead.

How can contractors who are paid something under the contract say they have earned no part of the contract price?

So, say the critics, how can a contractor that has been paid something under the contract – in the form of progress payments – say that they have received nothing under the contract at the time of termination, such that the contract has totally failed?  One way to answer this question is to treat the contract as an entire contract for delivery of one, indivisible scope of work, in exchange for a single, lump sum price. In that case, unless the work scope has been completed (or at least, practically completed) under the contract, no part of the agreed price for that work scope is taken to have been earned by the contractor under the contract. Even so, say the critics, how can a contractor say that they are entitled, under the contract, to progress payments, and in the same breath, say that they have not earned any payments under the contract? The answer is that progress payments are payable on an interim, or temporary, basis, under the contract, not in exchange for any part of the contractor’s incomplete work, but in order to fund expensive projects which the contractor otherwise could not afford to progress to practical completion.

Progress payments will not typically be taken as paying off a debt that the principal owes to the contractor for the work that the contractor has delivered. That is because in most cases, the contractor will not have delivered any work to the principal until they have practically completed the whole of the agreed scope of works. If the contract provides for payment to the contractor of a single, lump sum contract price upon delivery of (practically) the whole of the agreed scope of works, then termination of the contract before practical completion of those works will mean that the contractor will have never earned the contract price despite having received some progress payments along the way. This was already the position following Sopov and earlier cases. Mann v Paterson did not change this position.

Does this mean that Mann v Paterson has not affected contractors’ right to choose?

Not quite. For a start, until Mann v Paterson, courts and lawyers tended either to take this right to choose for granted or to criticise it as being based on a misunderstanding of the law.

For the first time in Mann v Paterson,  a 4:3 majority of the High Court looked closely at why and when contractors have this right to choose and clarified that it only exists where the contract is an entire contract for delivery of one, indivisible work scope in exchange for one, lump sum contract price.[4] The High Court rejected the idea that you could just take it for granted that this is how construction contracts work. Instead, each and every contract has to be read carefully in order to work out whether the work scope really is one and indivisible, or whether the contractor is taken to earn, by their ongoing supply of labour and materials, the payments that they receive as they go.

The High Court also reaffirmed what had been said in the earlier decision of Renard[5] that, where the contractor can and does choose restitution, the fair value of their work will not, except in very limited circumstances, exceed the agreed price for their work as stated in the contract.[6] It may have been necessary to reaffirm this because in Sopov, the Court had assessed fair value in an amount that was substantially higher than the contract price and in doing so, appeared not to be following Renard.

In the final analysis, then, contractors do still have the right to choose between being compensated for lost profits and having the fair value of their work restored to them. Therefore, commentators that proclaim that, following Mann v Paterson, “Sopov is dead” are, with respect, wrong. Sopov is not dead: it has just been clarified.

So what are the implications for contractors?

If your principal has abandoned their contract with you part-way through the job, your typical claim for loss of profits may not always be enough to put you back “in the money”. In that case, you can choose instead to claim the “fair value” of the work you had done before the contract came to an end. Australian law has recognised this right to choose for 119 years. But uncertainty about exactly when and why the law gives contractors this right to choose was adding unnecessary cost and complexity to contractors’ “fair value” claims. Last year, the High Court resolved this uncertainty once and for all in the case of Mann v Paterson.

How can we help?

If you are concerned about the terms of your current contractual arrangements Daniel Morris and his Construction Law team are on-hand to assist from any of our office in Perth, Joondalup, Mandurah and Albany. Call (08) 9321 1966 or email reception@hhg.com.au to make an appointment.

 

 

 

References

[1] Slowey v Lodder (1901) 20 NZLR 321.

[2] Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, [9] (‘Sopov’).

[3] McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457.

[4] Mann v Paterson Constructions Pty Ltd [2019] HCA 32, [172]-[176].

[5] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.

[6] Mann v Paterson Constructions Pty Ltd [2019] HCA 32, [214]-[216].

 

 

 

 

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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