Quantum meruit claims and wrongful termination of a building contract

/in

A building contractor may make a quantum meruit claim seeking payment of a fair and reasonable sum for work carried out and materials supplied in circumstances where the amount is not set out in contract. The expression quantum meruit literally means “the amount he or she deserves” or “what the job is worth”.

These type of claims generally arise when a builder carries out variations to the original scope of works, or a building contract has been frustrated, void or terminated.

In the recent judgement Mann v Paterson Constructions Pty Ltd, the Victorian Court of Appeal confirmed that a claim for quantum meruit is available to a builder, after the builder accepts the wrongful repudiation of a domestic building contract by an owner.

Further, s 38 of the Domestic Building Contracts Act 1995 (Vic) (the Act) does not apply to quantum meruit claims, at least where an owner has repudiated the contract. This was a good outcome for the builder, as the Act might otherwise have precluded or limited recovery by the builder.

This decision is especially important for builders based in Victoria and the particular statutory regime there, but as an appellate court decision it will be influential in jurisdictions across Australia.

Summary of facts

Peter and Angela Mann (the Manns) entered into a major domestic building contract with Paterson Constructions Pty Ltd (Paterson) for construction of two town houses with a completion date of 17 December 2014.

Disputes arose during construction, generally concerning delays, variations alleged to have been requested by the owners, and the payment of money. There were also issues concerning site access.

The first unit was constructed and handed over after the contract completion date. In April 2015, before the second unit was completed, the Manns terminated the contract, claiming that Paterson had wrongfully repudiated it.

As often happens in contract disputes, Paterson responded that it had not repudiated the contract. As such, by terminating without any basis, the Manns had wrongfully repudiated the contract. Patterson purported to accept this repudiation by the Manns, and sought recovery on a quantum meruit basis through the Victorian Civil and Administrative Tribunal (VCAT).

The claim included amounts for several variations carried out by Paterson.

The tribunal agreed with Patterson, and found that it was the Manns that had wrongfully repudiated the contract. They were ordered to pay Paterson $660,526.41 assessed by Paterson’s quantity surveyor to be the value of work performed, less the monies already paid by the Manns and the cost of some rectification work that they had to have completed.

The Manns appealed the decision, first in the Supreme Court of Victoria and when that failed, to the Victorian Court of Appeal.

Key issues

Essentially, the issues to be determined were:

  1. whether assessment of the amount recoverable should be limited to the builder’s actual costs rather than its fair and reasonable value;
  2. whether a quantum meruit award is available to a builder who accepts an owner’s repudiation of a building contract;
  3. whether s 38 of the Domestic Building Contracts Act 1995 (Vic) prevented a builder from recovering on a non-contractual quantum meruit basis.

The decision

The Manns were unsuccessful on all grounds. The Court of Appeal upheld the decisions of VCAT and the Supreme Court.

Assessment of amount recoverable

Relying on several authorities, the Court confirmed that “a builder seeking a quantum meruit amount following acceptance of an owner’s repudiation of a building contract is entitled to recover the fair and reasonable value of the benefit conferred on the owner by the work that the builder performed”.

A fair and reasonable value is not limited by the contract price, nor the actual costs incurred by the builder. In fact, where the scope of works that was in fact performed is significantly different to that set out in the original contract, little weight will be given to the original contract price.

Further, the actual costs incurred by the builder are not determinative and are not a cap on the amount of damages that a builder can recover on a quantum meruit basis.

The assessment of a fair and reasonable value of the benefit conferred on the owner depends on the circumstances and the availability and reliability of the evidence. In this case, evidence provided by Paterson’s quantity surveyor was considered comprehensive and was not sufficiently challenged. There was no evidence produced by another quantity surveyor contesting the assessment. Conversely, the Manns’ evidence constituted an incomplete spreadsheet which did not cover all of the work performed by the builder.

Overall, the tribunal member found Paterson to be a “truthful witness” whilst the Manns were considered unreliable. Although the Manns alleged that the variations were “suggested” by Paterson and not “requested” by them, the Tribunal did not accept this. It followed that, as the variations were requested by the Manns, they formed part of the quantum meruit claim.

Availability of quantum meruit claim

The Court confirmed that a quantum meruit claim (which is different to damages in contract) was available in circumstances where a builder accepts the repudiation of a building contract by an owner.

Several cases have recognised this principle and, despite controversy over these decisions, and the Manns’ suggestion to revisit this precedent, the Court considered it was not in a position to do so, concluding that only the High Court of Australia could do this.

Application of s 38 of the Domestic Building Contracts Act 1995 (Vic)

Section 38 of the Act deals with variations requested by an owner under a major domestic building contract. Unless a variation is minor and will not significantly affect the contract price, a builder must provide notice stating:

  • the effect the variation will have on the work as a whole;
  • a reasonable estimate of the length of the delay due to the variations;
  • the cost of the variation and its effect on the contract price.

If a builder does not comply with this section, no money is recoverable in respect of the variation unless VCAT is satisfied there are exceptional circumstances, that the builder would suffer hardship, and it would not be unfair to the owner if the builder was to recover the money.

The Court provided a lengthy analysis of the provision which it considered was “not clearly drafted”. Overall, however, the Court held that s 38 applied to claims in contract only and therefore did not impede the builder’s claim on a quantum meruit basis.

The Court also noted that, s 38 was essentially enacted to protect consumers from builders who might engage in the unscrupulous practice of underquoting projects to secure a contract and then recover the difference through subsequent unrecorded variations.

Consequently, there would be no loss of this consumer protection objective if the provision did not extend to claims in quantum meruit whereby an owner has wrongfully repudiated a building contract and might otherwise unfairly benefit from the builder’s work.

Conclusion

The legal principle of a quantum meruit claim is based on restitution and unjust enrichment; a party should not unfairly benefit at the expense of another when it would be unjust to allow the profiting party to retain that benefit.

The case is important for builders especially based in Victoria, in that it confirms that recovery on a quantum meruit basis rather than a contractual basis, may be available following the wrongful repudiation of a domestic building contract by an owner. In such circumstances, and where the claim is substantiated by the expert evidence of a quantity surveyor, a significantly better outcome might be achieved for the builder.

Additionally, the case confirms that the notice requirements for variations under s 38 of the Act may not apply where a building contract has been wrongfully terminated by the owners and a claim made by a builder on a quantum meruit basis.

Readers must, however, be aware that building disputes and quantum meruit claims can be complex and each case must be considered in light of the applicable state’s law and the circumstances of the case.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]

The role of an expert witness in a building dispute

/in ,

If you are involved in a domestic building dispute, whether as a building professional or homeowner, it will often be beneficial or necessary to retain an expert witness.

The role of an expert witness in a building dispute is to provide objective, qualified and documented evidence relevant to the facts in dispute.

Engaging an expert witness is usually a complex and expensive exercise. Further, the expert’s role as an impartial observer, and not as an advocate for the instructing party, is often misunderstood. Parties to a dispute can become anxious when it appears that the expert they have retained is not “on their side” or that the other party’s expert is an “opponent” in disputed proceedings.

It is therefore helpful to understand the role of expert witnesses, their obligations to a tribunal or court and how they can assist in determining a building dispute.

What is an expert witness?

An expert witness is a qualified professional with both specialised technical knowledge in a particular area or industry, and the necessary skills to provide an opinion, in writing and verbally. This opinion may be used as evidence in negotiations, dispute resolution processes or during tribunal or court proceedings.

When and why is an expert used?

The role of the expert is to assist the parties in negotiating a settlement, or if the matter proceeds to a tribunal or court, guide the decision-maker towards a reasonable determination.

A residential building dispute does not typically concern the interpretation of a contractual term, which, in a court or tribunal, would be a matter for lawyers to argue.

Rather, a residential building dispute typically concerns claims of incomplete and/or defective construction work the nature of which is highly technical and industry specific. The subject matter of the dispute may be a single dwelling or a multi-storey residential complex.

A layperson is not qualified to provide evidence of a technical nature which, in court or tribunal proceedings, could be considered an opinion or hearsay. Similarly, a lawyer is not qualified to assess the costs of rectification of a building.

In such matters evidence should be given by a person with specialised knowledge in the subject matter that is based on his or her training, study or experience. One example of an expert is a quantity surveyor.

Retaining an expert witness

The selection of an expert witness is typically made by the lawyer representing a party to the dispute, who will identify a professional with the necessary expertise required for the particular case and the ability to provide written, and oral evidence, if required.

Written instructions should be provided to the expert which will include an overview of the matter, the issues in dispute, the matters to be addressed, and additional information that will assist in compiling the report, such as building contracts, plans and specifications, and invoices for building materials.

Most unresolved domestic building disputes are heard in a tribunal with specific rules and codes of conduct regarding the use of an expert witness and the required format for expert reports. This is generally to ensure consistency and uniformity. A copy of the relevant expert evidence guidelines and reporting requirements from the tribunal should always be attached to the instructions given to the expert.

It may also be necessary to engage an additional expert with specialist knowledge, such as a structural engineer, to provide a supplementary report for specific issues like a retaining wall claimed to be defective.

A quantity surveyor may be engaged to assess the cost of rectification works for more complex matters. For relatively simple matters, retaining an expert may not be necessary, as obtaining quotes from building professionals and tradespersons may be sufficient.

The expert report

An expert will draw upon his or her construction knowledge to provide a qualified opinion in response to the issues raised in the instructions. A report will typically include:

  • the expert’s formal qualifications, experience and field of expertise in which the evidence is being provided;
  • a summary of the issues upon which the expert is required to report;
  • any facts or assumptions upon which the expert has relied (i.e. the letter of instruction);
  • the identification (and categorisation) of incomplete, non-compliant and/or defective building work;
  • an opinion as to why the building work is incomplete, non-compliant and/or defective, qualified with reference to relevant standards, construction codes and tolerances, and the building contract, plans and specifications;
  • any examinations, investigations or tests used to form the opinion;
  • an assessment of the cause of a defect;
  • recommendations for the rectification of incomplete, non-compliant and/or defective building work including reasons for the recommendation;
  • suggested methods for rectifying the incomplete, non-compliant and/or defective building work including any reasonable alternative remedies;
  • the estimated cost of the recommended rectification work.

The duty of impartiality

Tribunal and court rules, practice notes and directions require that an expert witness is impartial and not an advocate for a party to a proceeding. He or she has an overriding duty to assist a tribunal or court on the matter relevant to the expert’s expertise.

Independence is paramount and any hint of bias towards the instructing party by the expert can be detrimental to that party’s case and may initiate a request by the opposing side for the tribunal to disregard that expert’s evidence.

The expert’s reputation and credibility in such circumstances will also be at stake.

Conclusion

An expert witness may be retained to provide an impartial qualified opinion to assist in determining a matter in dispute.

Choosing an expert with the requisite qualifications, knowledge and experience to provide an objective opinion is essential for many building disputes. When retaining an expert, it is also important to bear in mind that the expert is not an advocate for the instructing party.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]

Protecting your plans: intellectual property basics for architects

/in

Architectural designs and plans are a valuable commodity in the building and construction industry. With technology facilitating the seamless reproduction, transformation and dissemination of printed and digital material, architects should be vigilant in protecting their original creations and their livelihoods.

This article provides an overview of copyright law in Australia and explains how architects may take steps to protect their original works from copyright infringement.

Application of copyright law to architectural designs

Federal copyright protection was introduced in Australia in 1905 and has since evolved into the Copyright Act 1968 (Cth) which is currently in force. This Act includes broad categories of subject matter benefiting from its protection, to keep pace with emerging technologies.

The subject of copyright material comprises ‘artistic works’ or ‘forms of expression’ rather than ‘ideas, information or facts’ – that is, the actual production of work in a material form, rather than a mere idea or thought.

Architectural drawings and designs (whether sketched or generated with software), models of buildings and the buildings themselves all fall within the category of ‘artistic works’ and are therefore protected by copyright law. An architect will also have copyright over plans drawn from ideas or instructions received from a client, as they have been produced and expressed in a material form.

What is copyright infringement?

The owner of copyright work has an exclusive right to reproduce it in material form, publish the work and communicate it to the public.

Infringement of copyright occurs when a person does anything that constitutes the exercising of these rights, or the authorising of another person to do so without permission of the owner.

Essentially, the creator of the work should have control over its commercial exploitation including licensing the use of the work to a third party.

To prove infringement, there must be a fundamental link between the original work and the copy. This link can often be established where an infringing party has seen or had access to the original work.

The alleged reproduction of the work must be in a material form with an objective similarity between the original and copy. The objective similarity need not relate to an entire work provided a substantial part of it is reproduced.

In copyright cases concerning architectural drawings and plans, the reproduction of unique, distinctive or important design aspects can be influential in determining whether the work has been infringed.

Protecting plans from infringement – service agreements

Because copyright subsists in an original creation, such as architectural drawings and designs, there is no requirement (or method) to register the work with an authority to obtain the protection of copyright law. This makes the process appear simple, however it opens the door to disputes over who is the original creator of the work.

Architects can be proactive in protecting their original work by ensuring that a service agreement is entered into by every client who retains their services.

The agreement should set out the terms of retainer, the parties’ respective rights and their respective responsibilities. It should also include provisions regarding intellectual property rights and the licensing of the work created by the architect.

A licence may be exclusive or non-exclusive.

Generally, a service agreement will provide that an architect retains ownership in the copyright of their work but allow for the licensing of the work created to the client who has paid for it.

An exclusive licence will allow the client of the architect (the licensee) to exercise the rights to the exclusion of all others. This means that the licensee may take action against others for infringing the copyright and using the material, including action against the original creator of the work.

A non-exclusive licence limits the use of the material by the client (licensee) in accordance with the terms negotiated and contained in the agreement. A non-exclusive licence will enable the architect to continue to use the works and allows the architect to grant further non-exclusive licence rights to other parties. This may be appropriate if an architect intends to reuse the work elsewhere.

Implied licences

If there is no service agreement or if an agreement is silent as to the assignment of copyright, the law generally recognises an implied licence for the benefit of a client who has commissioned the architect for a certain purpose, such as the production of plans for a specific site.

The extent of the implied licence will depend on the circumstances. However, it is generally limited to one-off use of the plans on the site for which they were designed.

The recognition of an implied licence may leave an architect vulnerable in circumstances where the relationship between the architect and client breaks down and the retainer is terminated. A written agreement with provisions stating that any implied or express licence will be revoked, and that the agreement is terminated in the event that the client refuses to pay the architect for the services, should help to protect the architect in such circumstances.

Other steps to protect copyright works

In addition to having a service agreement in place before commencing work, there are other steps architects can take to protect their designs.

Copyright notices and the copyright symbol “ © ” should be placed in prominent positions on all original work.

When giving sample drawings and designs to potential clients, architects should also provide a written warning stating that allowing access to the plans does not constitute an implied licence to use them, and that copyright remains at all times with the original creator.

Architects can also keep original drafts, drawings and references tracking the production of their work, and any other information such as commencement dates, instructions, notes and communications, that all may assist in proving the work’s originality, should this become necessary.

Remedies for infringement

Proceedings for copyright infringement may be instigated in the Federal Court or the Federal Circuit Court.

Remedies include an injunction (restraint) which prevents the immediate and future use of the copyright material by the infringing party, an award of damages for financial loss, or an account of profits requiring the infringing party to forward all profits made from the material to the owner or licensee. The infringing party may also be ordered to pay legal costs.

When calculating damages, the Court may consider the infringing party’s conduct and whether it was deliberate or reckless, the benefit accrued to the infringing party and the need to deter others. Exemplary damages, which are additional damages, may be awarded for conduct that is flagrant and deliberate.

Conclusion

Copyright laws acknowledge that creators of original material should receive legal recognition and reward for their efforts and that third parties should not benefit unlawfully from a creator’s work.

Although copyright subsists for the benefit of the creator of an original work, architects must be proactive in protecting and enforcing these rights.

Builders should also be cautious when requested to work with clients who bring ‘their own’ architectural designs to be used in a proposed building project to ensure that use of the design has been authorised.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]