Given the current pandemic circumstances and general economic downturn, construction contracts have greater risk elements than ever before. It is important to know the rights of a builder to payment for work done under a construction contract that has been terminated. The most common method for this is known as a quantum meruit claim, which is a claim for fair value of the work done to date.
A quantum meruit claim in the construction industry is mostly invoked under the following circumstances:
- Work done under a contract that does not include a price – The contract will outline the scope of work but there is no fixed price or method for calculating costs.
- Work outside of the contract – Where the contractor does work outside the scope of the contract at the principal’s request.
- Work under a void, unenforceable or terminated contract – Where a contract is void, rendered unenforceable by operation of statute or where the contract has been repudiated by the principal.
The legal basis for making a quantum meruit claim is for there to have been unjust enrichment of the principal. In showing unjust enrichment, the following must be established:
- The principal must have been enriched by the receipt of a “benefit” (e.g. construction work they have not paid for);
- The benefit must have been gained “at the contractor’s expense”; and
- It would be “unjust” in the circumstances to allow the principal to retain the benefit.
In the case of Peter Mann & Anor v Paterson Constructions Pty Ltd  HCA 32 regarding quantum meruit claims, the High Court held that a builder’s right to recovery will become dependent on the stage of works, and will no longer be able to claim in excess of the contract sum.
The High Court considered and decided as follows in three scenarios:
- Where the builder has completed a stage of the contract when the termination occurs, the amount of recovery is limited to the amount due under the contract for that stage of works.
- Where there are incomplete stages of work at the time of termination, the builder is entitled to make a quantum meruit claim but the amount recoverable cannot exceed a “fair value” and must be calculated with reference to the total contract price; and
- Where the builder has completed variations under a major domestic building contract, section 38 of the Domestic Building Contracts Act (Vic) prevents a builder from making a quantum meruit claim and builders must comply with the relevant provisions of the Act to recover variation sums.
Needless to say, in current times there are increased risks that may force construction projects to stop, and it is important to know your rights and obligations with respect to payment should it happen. For more information, please contact our Construction Team.