14 Jan 2019

Written by Daniel Morris, Special Counsel, Commercial Litigation

Construction contractors sometimes end up doing work without a right to payment under a contract. There can be several reasons for this:

  • the owner or upstream contractor abandoned the contract or breached it in such a serious way that the contract was terminated before practical completion;
  • the owner or upstream contractor became insolvent before practical completion;
  • the contract was illegal (this most commonly happens where a verbal home building contract is used but the law requires it to be in writing); or
  • the contractor was engaged to carry out urgent works under a letter of intent and then, no formal contract ever came into existence.

For 119 years,[1] the law has recognised a construction contractor’s right to be paid the “fair value” of their work, where they do not have any right to payment under a construction contract.

Some Judges, senior lawyers and academics have maintained over the decades, that there is no real basis in law for contractors to have this fair value payment right. Our special counsel, Daniel Morris, has sought to justify why the law can and should recognise contractors’ continuing right to fair value payments outside of any contract, in a paper awarded the Society of Construction Law’s 2014 Brooking Prize and published in the authoritative Australian Law Journal.[2]

Twice, the High Court, Australia’s highest court, has been asked for special leave (permission) to hear an appeal to overturn that legal right. Twice, the High Court has refused special leave (in 1992[3] and again, in 2010[4]). In 2018, special leave was sought for a third time. On 14 December 2018, for the first time in 119 years, special leave was granted.

The case was Mann and Anor v Paterson Constructions Pty Ltd (M151/2018). In that case, special leave to reconsider the right to fair value payments of contractors with no contract was granted to owners who, according to the Victorian Civil and Administrative Tribunal,[5] had caused the construction contract to fail by their own repudiation of it.

If the owners are successful in that appeal, contractors may in future have to resort to claims for the lost opportunity to earn the profit they could have made had the works been allowed to progress to practical completion. However, for a variety of reasons, such claims are sometimes unavailable, or otherwise inadequate to compensate contractors for the work they have done and not been paid for. An alternative payment right may still exist in such cases, should the Court find that, instead of “fair value”, the contractor can still claim a progress payment under the contract, even though that contract has been terminated.

However, this may not be enough to relieve the contractor where the contract itself has been lost. This is because, for a contractor, the contract’s true value is in more than just the right to progress payments. When a contractor agrees to do construction work, they are agreeing to invest a substantial sum of money upfront in mobilisation, labour and other procurement and planning costs, in the hope and expectation of profiting at the end of the job, when they have finally earned the contract price. If they are engaged in high-profile public or landmark works, it may even be their reputation at stake.

Often, at the early stages of construction works, the cost of delivering the works exceed the progress payments that the contractor can claim under the contract. This often means that when the contract is terminated early, the contractor will not yet have achieved a return on their investment in the construction works. Seen in this way, “fair value” awards take account of the true value of the lost contract to the contractor whilst progress payments alone do not.

Because of this, a High Court win for the owners in the Mann case may mean that contractors who, through no fault of their own, lose their contracts part-way through construction works, will need to make radical changes to their contracting practices. Rather than having a fairly even spread of progress payments at defined stages in the course of their works, contractors may need to insist on higher up-front deposits and front-load their early progress payments, to manage the risk of their investment and possibly their livelihood, being lost with their contract. If it becomes more common to front-load progress payments in this way, this may mean a greater portion of the owner’s capital being tied up earlier on in a typical construction project which could inflate the cost of construction activity as a whole. Despite surface appearances, then, a win for the owners in Mann may be no win for owners at all.

 

[1] Since the decision in Slowey v Lodder (1900) 20 NZLR 321

[2] In “Restitution Sans Rescission: Exposing the Myth of a Fallacy” (2015) 89 ALJ 117

[3] When the owner sought special leave to appeal from the NSW Court of Appeal’s decision in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234

[4] When the owner sought leave to appeal from the Victorian Court of Appeal’s decision in Sopov v Kane Constructions Pty Limited (No.2) [2009] VSCA 141

[5] Paterson Constructions Pty Ltd v Mann (Building and Property) [2016] VCAT 2100

 

 

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