A quantum leap in the law of quantum meruit

This case may have implications for technology vendors that supply goods and services to customers on a milestone basis, where the customer repudiates the contract before a milestone can be completed.

What is quantum meruit?

Quantum meruit is a type of damages claim whereby payment is in the form of restitution for the fair value of goods and services that a supplier has supplied.

Prior to Mann v Paterson Constructions Pty Ltd [2019] HCA 32, it was uncertain when a quantum meruit claim could be brought and what amount could be recovered by it. The general position in the context of contracts wrongfully repudiated by a customer was that the supplier could recover a quantum meruit even if it had accrued rights to payment under the contract.

Crucially it meant that the amount recoverable could exceed the value of the contract.

The key facts in Mann v Paterson Constructions Pty Ltd [2019] HCA 32

Mr & Mrs Mann (Owners) entered a building contract (Contract) with Paterson (Builder) to build two townhouses.

The Builder was entitled to progress payments under the Contract as stages of the work completed.

Owners orally requested 42 variations (Variations) to the works which Builder carried out. Neither party followed the procedures under s38 of the Domestic Building Contracts Act 1995 (Vic) (Act). Under s38, a builder is not entitled to recover money for an owner requested variation unless the builder complied with that section or there were exceptional circumstances.

After delivering the first townhouse, Builder issued an invoice for the Variations. Owners refused to pay, repudiated the Contract, and Builder accepted the repudiation.

The issues before the High Court

The High Court was asked to consider:

1. whether Builder, after acceptance of the Owners' repudiation, was entitled to a quantum meruit and was not confined to claiming damages for breach of contract;
2. if the Builder was entitled to a quantum meruit, whether the price set out in the Contract was a cap on the value that the Builder could recover; and
3. whether s38 of the Act precluded a claim for restitution for the Variations.

The High Court decision

The High Court found that:

1. a quantum meruit was not available for the Builder's work done under the Contract where it had accrued a contractual right to payment at the time of termination. The Builder's only right to recovery for the Contract stages it had completed was for the amount due under the Contract and for damages for breach of contract.
2. a quantum meruit was available for the Builder's work done under the Contract where it had not accrued a contractual right to payment at the time of termination. Where the Builder had done work but not completed a Contract stage, the Builder was entitled to a quantum meruit for the fair value of the work it had done. The Builder also has a concurrent right to sue for damages arising from the Owners' breach of contract.
3. the value of any quantum meruit Builder was entitled to was capped at the price set out under the Contract. If the Builder had partly completed a stage, the quantum meruit would be equal to the fair value of that work but capped at the value of that stage under the Contract.
4. non-compliance with s38 of the Act precluded the Builder from making a claim for restitution for the Variations. The legislative purpose of s38 was clearly protective, and designed to prevent informal variations to building works and corresponding disputes.

Key takeaways for tech transactions

This case may have ramifications for tech contracts where the supplier is paid on achieving milestones rather than on a time & materials basis.

If a supplier has partly performed a milestone contract, and their customer wrongfully repudiates the contract, that supplier may previously have been entitled to a quantum meruit exceeding the so called “fixed price”. However now that expanded recovery right has gone. The amount recovered under a quantum meruit is now capped at the value of that "fixed price". The supplier may also sue for damages in respect of the customer's breach of contract.

If a supplier has completed a milestone and the customer repudiates the contract, a quantum meruit is not available in respect of that milestone but the supplier may claim damages for breach of contract.

This case highlights again the importance of careful drafting and making sure that milestones and associated payment rights are clearly defined.