QUANTUM MERUIT QUANTUM MERUIT FOR BUILDING SERVICES PROVIDED UNDER AN UNENFORCEABLE OR TERMINATED CONTRACT INTRODUCTION.

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1 QUANTUM MERUIT QUANTUM MERUIT FOR BUILDING SERVICES PROVIDED UNDER AN UNENFORCEABLE OR TERMINATED CONTRACT Chris Fenwick INTRODUCTION Quantum meruit simply means as much as he or she has earned. 1 Courts can award quantum meruit in a variety of circumstances 2. In Johnson s Tyne Foundry v. Maffra Corporation 3, a council claimed it was not bound to pay the plaintiff for repairing its steamroller, because the steamroller had been sent for repair without the statutory regulations for the making of a contract by the council being followed. The court held that the plaintiff was entitled to recover payment for work done because the council had obtained the benefit of his work and the acceptance by the council of this work implied a promise to pay enforceable by a common money count, notwithstanding that the contract for the repair was void 4. Likewise, where a person has expressly or impliedly requested another to render him a service without specifying any remuneration, but the circumstances of the request imply that the service is to be paid for, there is an implied promise to pay quantum meruit 5. Also, if a person by the terms of a contract is to do a certain piece of work for a lump sum, and he does only part of the work, or something different, he cannot claim under the contract, but he may be able to claim on a quantum meruit, for instance if completion was prevented by the act of the other party to the contract. On the other hand, a claim for quantum meruit is not available if a contract under which the work was performed remains effective 6 :...the action was not based upon a genuine agreement at all. Indeed, if there was a valid and enforceable agreement governing the claimant s right to compensation, there would be neither occasion nor legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration. The quasi-contractual obligation to pay a fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, void or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution. 7 Accordingly, the plaintiff must establish as a preliminary matter that no contract exists or that the contract in existence is inherently ineffective 8, or, if the contract is initially valid, that it has been terminated 9 or rescinded As a corollary, on breach or repudiation of the contract the innocent party must elect to terminate the contract for the breach or repudiation before a claim for quantum meruit is available 12. Upon so doing, the plaintiff may elect between a claim for damages for breach of contract or a claim for quantum meruit: The law is clear enough that an innocent party who accepts the defaulting party s repudiation of a contract has the option of either suing for damages for breach of contract or suing on a quantum meruit for work done. An election presupposes a choice between different remedies, which presumably may lead to different results. The nature of these different results renders it highly likely that the results will be different. If the former remedy is chosen the innocent party is entitled to damages amounting to the loss of profit which he would have made if the contract 6 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

2 had been performed rather than repudiated; it has nothing to do with reasonableness. If the latter remedy is chosen, he is entitled to a verdict representing the reasonable cost of the work he has done and the money he has expended; the profit he might have made does not enter into that exercise. 13 It is clear that a claim in quantum meruit is not a claim in contract, and money recoverable pursuant to a quantum meruit therefore is not to be recovered as damages for breach of contract, nor indeed as damages at all but as remuneration or restitution based on unjust enrichment. 14 Claims for restitutionary quantum meruit are generally analysed by way of four unifying elements: 1. The defendant has received a benefit i.e. been enriched. 2. The benefit or enrichment was at the plaintiff s expense. 3. The enrichment was unjust. 4. There is no defence available. 15 To these four elements, Byrne adds a fifth: what is the appropriate remedy and its quantum. 16 The analysis proceeds such that in cases where the first three elements are found to exist, and the fourth not to exist, the plaintiff will be entitled to restitution. It is the element proposed by Byrne, however, that has been the battle ground for recent Australian cases, particularly where contracts for building services have been terminated for repudiatory breach. The two leading cases are Renard Constructions (ME) Pty Ltd v. Minister for Public Works 17 ( Renard ), and Iezzi Constructions Pty Ltd v. Currumbin Crest Development Pty Ltd 18 ( Iezzi ), decisions respectively of the New South Wales and Queensland Courts of Appeal. In particular, in Renard, the Court of Appeal considered whether it was appropriate that the plaintiff should be entitled to recover quantum meruit in excess of the contract price for the works. The decision in Iezzi further illuminates the issue of the availability of the innocent party s election between the right to sue for damages for breach of contract, and to pursue restitution, in the light of academic criticism that such an election is contrary to Australian contract law; termination of a contract operating in futuro in Australia, not ab initio. 19 That is to say that in Australia the contract is not void, merely terminated in so far as it is executory with the right to recover profit costs under the contract still available. The court considers whether, given the availability of a remedy under the contract, the plaintiff should nevertheless be able to opt to claim quantum meruit. This issue, of course, is of utmost importance to those cases in which quantum meruit greatly exceeds the price bargained for in the contract, and may be seen (where available) to facilitate the plaintiff s escape from the consequences of a bad bargain. This then leads to the problem of identification and valuation of the benefit. The first of the four elements of a restitutionary claim requires that the defendant has been enriched or received a benefit. This concept, while simple in cases where the defendant has received money which belongs to the plaintiff, proves (in Iezzi) most difficult in relation to services rendered by the plaintiff to the defendant. I will limit discussion in this paper to: 1. the availability of quantum meruit and the right of election; What is the appropriate remedy and its quantum?. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

3 ...claims arise either where there is a contract to pay a reasonable sum, or where the law imposes an obligation to pay a reasonable sum in the absence of a contract. 2. the concept of enrichment of the defendant; and 3. the assessment of quantum. Such limitation is not because there is no controversy or interest in the other elements of restitutionary claims, but because the above three elements most strongly focus on the issues raised by breach of building contracts. 1. THE AVAILABILITY OF QUANTUM MERUIT AND THE RIGHT OF ELECTION 1.1 The foundation of the right to recover on a quantum meruit The claim for quantum meruit is appropriate in a range of situations. Broadly speaking, claims arise either where there is a contract to pay a reasonable sum, or where the law imposes an obligation to pay a reasonable sum in the absence of a contract. The leading case is Pavey & Matthews Pty Ltd v. Paul 20, in which a licensed building company undertook the renovation of a cottage pursuant to an oral contract with payment to be for a reasonable sum calculated in accordance with prevailing industry rates. After the work was completed, the owner refused to pay the amount claimed by the builder. The builder sued. The owner, in his defence, relied on the Builders Licensing Act 1971 (NSW) which mandated that contracts for building work were not enforceable by the builder unless in writing. Deane J said: In such a case, the underlying obligation or debt for the work done, goods supplied, or services rendered does not arise from a genuine agreement at all. It is an obligation or debt imposed by operation of law which arises from the defendant having taken the benefit of the work done, goods supplied, or services rendered It is clear that the old indebitatis count could be utilised to accommodate what should be seen as two distinct categories of claim: one to recover a debt arising under a general contract, whether express or implied; the other to recover a debt owing in circumstances where the law itself imposed or imputed an obligation or promise to make compensation for a benefit accepted. 22 The second of these categories may be further divided into two sub-categories: alternatively where a binding contract does or does not exist. More accurately, therefore, there are three categories of cases: 1. There is a binding contract in effect for work in return for reasonable remuneration. The obligation to pay reasonable remuneration may arise by an express term of the contract, or by a term which provides an objective basis for the calculation of reasonable remuneration. Alternatively the obligation to pay reasonable remuneration may arise by implication. Such implication may arise, for instance, where there is a variation to the original contract and that variation does not specifically provide for remuneration. Strictly, these claims are contractual in nature and therefore do not fall within the scope of this paper. 2. There was a binding contract in effect, but payment pursuant to that contract is unavailable because the contract is void, uncertain or terminated. Contracts terminated for breach, by frustration 23 or by mutual abandonment fall into this category, as does a contract unenforceable for failure to comply with a requirement as to form imposed by statute or the 8 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

4 common law. Most of the recent building cases where successful claims for quantum meruit have been made fall into this category and are discussed below. 3. Claims arising outside the context of a contract. These claims are also not within the scope of this paper. In the second category of cases, the obligation to pay is imposed by law but usually analysed within the general context of the law of contract. So, for instance, Deane J makes the following comment: In the first category of case, the action was brought upon the genuine agreement regardless of whether it took the form of a special or a common count. It follows from what has been said above that the cases in which the claimant has been held entitled to recover in respect of an executed consideration under an agreement upon which the Statute of Frauds precluded the bringing of an action should be seen as falling within the second category and not the first category. In that second category of case the tendency of common lawyers to speak in terms of implied contract rather than in terms of an obligation imposed by law...should be recognised as but a reflection of the influence of discarded fictions, buried forms of action and the conventional conviction that, if a common law claim could not properly be framed in tort, it must necessarily be dressed in the language of contract. That tendency should not be allowed to conceal the fact that, in that category of case, the action was not based on a genuine agreement at all. 24 Textbooks on the law of restitution also deal with cases in this category as depending on restitutionary principles, and describe such cases as arising from ineffective transactions or ineffective contracts 25. What is important for the purpose of the foregoing discussion is that since the decision of the High Court in Pavey & Matthews v. Paul, the recovery is founded not on implied contract or promise 26, but on an obligation imposed by law: We are therefore now justified in recognizing, as Deane J. has done, that the true foundation of the right to recover on a quantum meruit does not depend on the existence of an implied contract The right of election between damages for breach of contract and quantum meruit In the event of a breach of contract by the owner entitling the builder to elect to terminate before the work is completed and, therefore, the agreed price has been earned, the builder may bring an action for quantum meruit for work done pursuant to the contract as an alternative to an action for damages. An award of damages will usually seek to provide for work done as well as loss of bargain. Accordingly the plaintiff cannot maintain a second action for reasonable remuneration for the work done. 28 In Williamson v. Commonwealth 29 Higgins J put it that He cannot have both remedies; he must elect between them 30 The right of election in England and Australia can be traced back to the 1853 case of De Bernady v. Harding 31, a case in which the defendant repudiated a contract with the plaintiff, who was to sell tickets to see the funeral procession of the Duke of Wellington. The principle was stated as follows by Alderson B.: Where one party has absolutely refused to perform or has rendered himself incapable of performing his part of the contract, he puts it in the power of the other party either to sue for a breach of it, or to rescind the...the recovery is founded not on implied contract or promise, but on an obligation imposed by law: AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

5 Before a quantum meruit claim can succeed, the contract must have been terminated. contract and sue on a quantum meruit for the work actually done. 32 In Lodder v. Slowey 33, a case in which a contractor was excluded from a work site, the Privy Council, on appeal from the Court of Appeal of New Zealand, held that:...the respondent [contractor] was in the circumstances entitled to treat the contract as at an end and to sue on a quantum meruit for work and labour done and materials supplied. 34 In so finding, their Lordships were in agreement with the Court of Appeal of New Zealand. Later an appropriate case came before an Australian court for decision and the principle was accepted and followed in Segur v. Franklin 35, a decision of the New South Wales Court of Appeal: I think it is clearly settled that if one party to a contract repudiates his liabilities under it, the other party may treat such repudiation as an invitation to him to regard himself as discharged from the further performance of the contract; and he may accept this invitation and treat the contract as at an end, except for the purposes of an action for damages for breach of contract... or, in a proper case, an action for a quantum meruit. Where a wrongful repudiation has the effect of preventing the other party from becoming entitled to receive remuneration for services already rendered, which remuneration, according to the terms of the contract, he is entitled to receive only if the contract is wholly carried into effect, the innocent party, who has elected to treat the contract as at an end may, instead of suing for damages, maintain an action to recover a quantum meruit for the services which he has rendered under the contract before it came to an end. 36 It is now clearly established that the right of election applies in Australia. 37 Before a quantum meruit claim can succeed, the contract must have been terminated. In most cases, the plaintiff elects to terminate on the defendant s breach. The election to terminate is usually express. However, in the Victorian case, Brooks Robinson Pty Ltd v. Rothfield 38, the Full Court indicated that the [P]laintiff, by not proceeding to complete the work and by suing for work already done and materials already supplied, had accepted such repudiation. 39. Given the above, as a matter of pleadings, the ideal in such circumstances would be to draw the statement of claim to bring an action on the contract and alternatively for quantum meruit, so as to be treated as having elected to terminate the contract in the event that the claim on the contract fails at trial. Thus, in Gino D Alessandro Constructions Pty Ltd v. Powis 40 ( Gino D Alessandro ), McPherson J said:...the defendant evinced a continuing intention to repudiate, of which the plaintiff was held entitled to take advantage notwithstanding the pendency of those proceedings. Here it is clear that by claiming upon, or alternatively outside, the contract the plaintiff elected to accept the defendants repudiation if, as the facts at trial turned out, the contract was found to have been repudiated by the defendants, and then obviously abandoned by both parties. As Macrossan J. said, the entitlement to relief was debated upon the basis of all available remedies and it would not seem right to defeat it by reason of the form of the proceedings. To do 10 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

6 so would deny a plaintiff the right of joining alternative claims in the same action. 41 In Gino D Alessandro, the contract was unenforceable due to the operation of statute, but that did not affect the application of the general principle. It should be noted, however, that there should in those cases where both claims are maintained be some reason for pleading quantum meruit. That is, there must be some concern that the contract may be unenforceable. In Ansett Transport Industries (Operations) Pty Ltd v. Alenia Aeritalia & Selenia SPA 42, Miles CJ was troubled that There is no substratum of fact alleged or conceded which permits a finding that the contract or contracts relied upon or any of their terms are unenforceable or fail for some reason 43. In any case, it should be made clear by the plaintiff, in bringing its claim, whether the object is to enforce contractual rights or otherwise to claim on the basis that the contract is terminated. 1.3 Criticism of the right of election While the right of election has not much been questioned by courts, its has received criticism from academics 44. Some of the criticism relates to the question of whether the agreed price, or a significant portion of it, provides a ceiling to the amount recoverable on a quantum meruit. I discuss this below under the heading Quantification of Quantum Meruit. The criticism, raised particularly by academics, that the availability of the election is inconsistent with Australian contract law since McDonald v. Dennys Lascelles Limited 45 ( McDonald ) I will deal with here. The important point of law in McDonald is that the acceptance of repudiation (in this case failure by a purchaser of land to make instalment payments) does not effect a recision ab initio. The contract is terminated only inasmuch as it is executory; the remedies available under it remain in force. Dixon J said: When a party to a simple contract, upon breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as they may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach. 46 In Johnson v. Agnew 47, Lord Wilberforce, after quoting from the judgment of Dixon J in McDonald and referring to other Australian authorities said that he accepted the Dixonian view of discharge for breach of contract. 48 The force of these decisions is that the plaintiff remains entitled to contractual remedies after termination of the contract. The The criticism... by academics, [is] that the availability of the election is inconsistent with Australian contract law AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

7 inconsistency noted by those academics referred to above 49 is that quantum meruit should be a co-existing remedy in cases where there is an agreement for a price contained in the contract, and that agreement on price remains an available remedy for the plaintiff. In other words, how can a remedy which ignores the contract be justified? Personally, I see no inconsistency in there being two distinct ways in which the plaintiff may formulate its claim: one based on the contract, and (as noted above) the other imposed by operation of law. They are independent actions. However, it must be admitted that, on one reading, views expressed by Deane J. in Pavey & Matthews v. Paul 50 ( Pavey ) may be seen to restrict an election to those cases which may be classed ineffective transaction. The matters the subject of the proceeding in Pavey involved a contract proscribed by statute. Generally, where a contract is proscribed by statute or otherwise contrary to the principles of public policy, the contract is of no effect and neither party may sue on it. In Pavey a builder sued to recover payment on a quantum meruit for work done under a contract unenforceable under the Builders Licensing Act The respondent argued that the builder was unable to succeed because the action was dependent on an unenforceable contract. Mason, Deane and Dawson JJ., in giving judgment for the builder, stated that the builder s action was different in character from the enforcement of a contractual obligation depending as it did on proof that the builder has done the work and the respondent has accepted it. Their Honours commented that the result claimed by the respondent was draconian 51 and that where it was open to a court to adopt an interpretation which would serve that statutory purpose and avoid a harsh and unjust result, that interpretation should be preferred. Deane J. said as follows (in a statement of the law which has become somewhat controversial): Indeed, if there was a valid and enforceable agreement governing the claimant s right to compensation, there would be neither occasion nor legal justification for the law to superimpose or impute an obligation or promise to pay reasonable remuneration. The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution. 52 The point is that Deane J. seems to confine the availability of restitution to those cases where damages under the contract are unavailable because the contract is void. However, in a standard case of breach of contract, and in view of the decision in McDonald, contracts in Australia are only terminated inasmuch as they are executory and damages under the contract remain available. Taken together, it is arguable that the above statement of Deane J. together with the decision in McDonald would have the effect that Lodder v. Slowey is no longer good law in Australia. Somewhat surprisingly in the light of the academic criticism, the courts have taken no notice of this termination/ recision point. The right of election remains. Lodder v. Slowey continues to be cited as authority for the proposition. 53 For instance, in Iezzi Constructions Pty Ltd v. Currumbin Crest Developments Pty Ltd 54 the plaintiff was a sub-contractor on a Gold Coast building project. The proprietors became insolvent and the project stopped when the site was closed, thereby repudiating the head contract. The contractor s inability to permit the sub-contractor to proceed was held to be a repudiation of the sub-contract which the sub-contractor had accepted. The plaintiff s claim for payment on a quantum meruit basis was accepted. At first instance 55 Williams J. held that the refusal by the builder to allow the sub-contractor access to the site to complete the works was a repudiation of the contract. His Honour held that Iezzi was entitled to judgment for $572,669, either as damages for breach of contract, or on a quantum meruit basis. His Honour s reasons were as follows:...the Privy Council in Lodder v. Slowey and the Full Court of this Court in James Birrell Mack & Partners v. Evans allowed a party to a contract to recover on a quantum meruit in not dissimilar circumstances. Connolly J. in his reasons in the latter case relied heavily on Planche v. Coburn (1831). In my view, it is clear that since 1831 the law has recognised that a party to a contract could recover on a quantum meruit in circumstances such as those which are established here on the evidence. 12 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

8 Counsel...submitted that, since Pavey & Matthews v. Paul, Lodder v. Slowey was no longer good law, and because the plaintiff could not bring itself within the principles of unjust enrichment, it was not entitled to recover on a quantum meruit......in Renard Constructions (ME) Pty Ltd v. Minister for Public Works, Meagher JA (with the concurrence of Priestley and Handley JJA) recognised that Slowey v. Lodder was still good law. 56 The entitlement of Iezzi to a quantum meruit was upheld on appeal 57. The main point argued by the appellant was that Clause 10(d), which provided it is expressly agreed that the subcontractor s right to receive payment is entirely dependant upon the builder having actually received from the Proprietor payment in respect of the work... disentitled Iezzi to claim on a quantum meruit basis. Fitzgerald P. reasoned as follows:...rights which are contingent upon some event, not involving further performance of the contract, may mature and become immediately enforceable...further, unless otherwise provided by the contract, provisions of the contract continue to apply under the contract after it has been discharged, including claims for damages for breach...the appellant submitted that the provisions of the subcontracts, notably clause 10(d) similarly operate to limit the respondent s recovery on a quantum meruit claim, although such a claim, following discharge of a contract by acceptance of a repudiation, is not a claim made under the contract but a claim to restitution or based upon unjust enrichment, which arises by law independently of any contract. 58 Later, the President comments: No point was taken on appeal to the effect that the separate remedy of quantum meruit was not available nor was it suggested that any inconsistent election occurred in bringing an alternative claim for damages for breach of contract. In this regard Gino D Alessandro Constructions v. Powis suggests that the remedy was properly available to the plaintiff. 59 The position in New South Wales is the same as it is in Queensland: claims may be made for damages for breach of contract, alternatively for quantum meruit. In Renard the parties had entered into a standard form of building contract. The principal, who was dissatisfied with the contractor s progress issued a certificate to show cause why the principal should not cancel the contract. The principal, after receiving the contractor s reasons, issued notices to take over the works. The contractor treated this as wrongful repudiation and rescinded the contracts. On the point of the availability the two distinct remedies, and the academic criticism of the availability of quantum meruit in such cases, Meagher JA said: The cases to which I refer have been received with somewhat lukewarm enthusiasm by certain academic writers...on the apparent ground that they are anomalous...there is nothing anomalous in the notion that two different remedies, proceeding on entirely different principles, might yield different results. Nor is there anything anomalous in the fact that either remedy may yield a higher monetary figure than the other...the most one can say is that the amount contractually agreed is evidence of the reasonableness of the remuneration claimed on a quantum meruit; strong There is nothing anomalous in the notion that two different remedies, proceeding on entirely different principles, might yield different results. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

9 A contractor faced with a repudiatory breach may treat the contract as discharged and choose between alternative remedies, evidence perhaps, but certainly not conclusive evidence. On the other hand, it would be extremely anomalous if the defaulting party when sued on a quantum meruit could invoke the contract which he has repudiated in order to impose a ceiling on amounts otherwise recoverable. 60 Thus despite some academic Thus, despite some academic criticism, the approach taken by the courts is clear. A contractor faced with a repudiatory breach may treat the contract as discharged and choose between alternative remedies, which choice need not be made until judgment. The clear facts of Renard show that a contractor who has performed part of its obligations under a contract subsequently discharged will have causes of action alternatively in breach of contract and restitution. This is, apparently, a role for restitution which Deane J saw as an unnecessary occasion for the imposition by the law of the obligation to make restitution. There is a footnote in the judgment of Priestley J in Update Constructions Pty Ltd v. Rozelle Child Care Centre Ltd 61 which is thoroughly apposite. His Honour notes that aside from the areas of employment contracts: I know of no cases...where an existing enforceable contract governs specific relations between two parties and yet one has recovered against the other in respect of a matter governed by the contract, on the basis of quantum meruit, quasi contract, or restitution. As Mason CJ said of the situation in Foran v. Wight (1989) 168 CLR 385; 64 ALJR 1:... so long as the contract continued on foot, it governed the relations between the parties and there is no basis in these circumstances for an appeal to the law of quasi contract (at 143 [sic 413]). 62 As this comment correctly states, an election is not available in all cases. 1.4 Election not available after the contract price has accrued It appears that no claim can be made for quantum meruit for work done where a contractually agreed price has accrued and there is no legal obstacle to its recovery. There is no clear authority for this proposition in England or Australia. However, a comment made by Burchett J. in Carr v. McDonald s Australia Ltd 63 that there was no basis for the claim in restitution 64 where the plaintiff was awarded damages in lieu of specific performance tends, by analogy, to support the position. It is also indirectly supported by the cases discussed above which allow an election following a repudiatory breach by the defendant which prevents the plaintiff from completing the contracted works 65. In such cases, the plaintiff will be restricted to recovering the agreed price, and cannot (for instance) escape a bad bargain by choice of remedy. The British Columbia Court of Appeal considered the issue in Morrison-Knudsen Co Ltd v. British Columbia Hydro and Power Authority 66 That case concerned the constructions of a hydroelectric dam. During the course of construction the principal committed several breaches of contract, including non-payment for accelerated works, but the contractor nevertheless completed the project. 14 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

10 The contractor claimed the contract price, but also for payment on a quantum meruit. The Court decided that the completion of the project excluded a claim for quantum meruit on the basis that the contractor had not accepted the principal s repudiation, and that on complete performance of the contract its rights were the contract price and damages if applicable. 67 Goff and Jones lend support to the view that the election is not available after completion of the works: It is difficult to contemplate with equanimity windfall awards, such as the award in Boomer v. Muir, particularly when, if the innocent party has substantially or fully performed, the common law rule is that the contract price is the limit of his recovery, even though the defendant was guilty of breach of contract. 68 The contrary view, however, is supported by Burrows who suggests that it is illogical to allow election after partial performance but to deny it after completion. 69 Mulheron suggests that the Australian position is at odds with Canadian authority and with the views of Goff and Jones because: In this context, the Powis decision is interesting, for the house had been substantially completed by Mr D Alessandro prior to the repudiation of the contract by the owners wrongful letter of termination. The entitlement to relief upon a quantum meruit was upheld without discussion of the types of concern referred to in Morrison-Knudsen. 70 With respect, the two cases are not open to comparison because in Gino D Alessandro the contract was rendered unenforceable by operation of statute, the work was not completed and the contract price had not accrued. I suggest that the position in Australia would be consistent with the decision in Morrison- Knudsen. That view flows from the facts that there can be no promise implied in fact which contradicts the express promise of contractual remuneration and, further, from Deane J s comment that there is no reason for the law to superimpose an obligation different from that agreed by the parties Summary Where the agreed price for work pursuant to a contract has not accrued or otherwise cannot be claimed there is no inconsistency in the law imposing an obligation to pay quantum meruit for work actually done. This is not the result of an implied promise, but since the decision in Pavey & Matthews v. Paul 72 - arises instead from an obligation imposed by law. A claim for quantum meruit may only be brought if the original contract has been terminated or is otherwise ineffective. Such termination may be by exercise of a right to terminate, or by frustration. Where performance of the work contracted for is complete, no claim for quantum meruit may arise. Nor may a claim for quantum meruit arise prior to termination of the contract, because the possibility of earning the remuneration contracted for remains available, and that possibility prevents imposition by the law of an obligation inconsistent with the contractual obligation.... there is no inconsistency in the law imposing an obligation to pay quantum meruit for work actually done. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

11 So a benefit is something less than enrichment but more than mere performance 2. THE CONCEPT OF ENRICHMENT OF THE DEFENDANT 2.1 Defining the problem As stated in the introduction, the first limb of a claim for restitutionary quantum meruit is that the defendant received a benefit. However, unlike the receipt of money, the receipt of services is not necessarily a benefit. 73 Fuller and Perdue provide the following comments: The inescapable flexibility of the concept benefit means that drawing the line between the reliance [i.e. contractual] and restitution interests is in the end a rather arbitrary affair. By substituting for benefit a stricter term like enrichment we shift the line in one direction; by substituting a looser term like performance received by the promisor we shift it in the other. In view of the fact that the line is set ultimately by a kind of definitional fiat it is remarkable that it should have become customary to think of restitution as a remedy entirely distinct from the usual suit on a contract. Where the contract is regarded as furnishing a kind of conduit for the ordinary suit, it becomes an obstruction in the way of restitution and must be removed by rescission. That in this legal hydrodynamics sight should be lost of the purposes underlying the remedies involved can occasion no wonder. 74 In Pavey & Matthews Pty Ltd v. Paul 75 it was stated by Deane J. 76 (and accepted by Mason and Wilson JJ. 77 ) that the basis of the obligation imposed by law to pay compensation for a benefit accepted under an unenforceable contract lay in restitution. To this Deane J. added: That is not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognises, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case. 78 So a benefit is something less than enrichment but more than mere performance. Is the benefit a desired outcome or an economic advantage; do we consider it from the point of view of the recipient or on some economic or market value? Byrne J. in Brenner v. First Artists Management Pty Ltd 79 in a case involving the provision of management services said that the issue of benefit must be seen from the perspective of the recipient 80. That benefit must then be translated into a monetary figure. What, then, if the recipient is able to show that he has not benefited by the receipt of the services in question? or as Birks calls it, the argument of subjective devaluation. 81 Birks says that the argument is based on the premise that it is irrelevant that there is a market for the services, or that they are in demand, if the actual recipient has not benefited, and if he has not benefited he has a right to dissent from the demand. 82 Further, it is apparently not essential that the provider of services expects payment for those services; it is sufficient that the receiver requested them. In ABB Power Generation Ltd v. Chapple 83 Murray J (with whom Einfeld AJ agreed) made the following statement of principle: 16 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

12 A requested or accepted service will generally be accepted by the court as being of benefit to the defendant and will certainly prevent the plaintiff from being regarded as a mere volunteer, providing the services in effect as a gift...[t]here is nothing in the authorities necessarily to require a reasonable expectation of payment by the defendant who has received the benefit and upon whom it is sought to impose the obligation to make restitution. 84 Many tests have arisen in order to overcome the argument of subjective devaluation, giving truth to the statement of Byrne J. that [i]f the law of restitution is available to oblige the recipient of the benefit of services to make restitution, it must acknowledge that such a benefit may take many forms 85. The most common of these forms are as follows: 1. Incontrovertible Benefit. 2. Free Acceptance. 3. Bargained-for Performance. Before looking at each of these tests, it must be said that the need to resort to them is limited by the fact that it is rare for the defendant in restitutionary cases to argue that he has not received a benefit from the plaintiff s provision of services. To take the major cases noted above, the argument does not receive airing in Pavey & Matthews, Renard Constructions, or (perhaps surprisingly) in Iezzi. In Pavey & Matthews the dispute centred on whether quantum meruit was available. The defendant had obviously received a benefit in that she had reentered the renovated dwelling. 86 In Renard Constructions the plaintiff had part completed sewerage works, and quantum meruit was calculated in accordance with reasonable remuneration for the contractor: The first [argument raised by the cross-appellant] is that the arbitrator (and his Honour) was wrong to calculate the quantum meruit claim on the basis of what would be a reasonable remuneration for the contractor; he should have essayed that task of enquiring what was the value to the principal of the work performed.quantum meruit was now perceived, so the argument ran, to be based on concepts of unjust enrichment; it followed, according to this argument, that since the principal should not be unjustly enriched, he should pay to the contractor the value to him of the works performed as distinct from the reasonable cost to the contractor of performing the works. His Honour had already rejected such an argument in Jennings Construction Ltd v. Q.H. and M. Birt Ltd (unreported, 16 December 1988). That decision is precisely in point and, in my view, entirely correct. His Honour was therefore justified in applying it. 87 The case, therefore, was not analysed in terms of unjust enrichment, and the question of benefit never seems to have been put in issue. In Iezzi, the question of benefit is somewhat problematic. Iezzi was a sub-contractor to Watpac, who had no proprietary interest in the works. Also, each of the two companies constituting the proprietor was insolvent, and there would be no distribution to creditors in either liquidation. In the circumstances, the reasoning of Fitzgerald P. seems rather arbitrary: The respondent s work produced little actual benefit to the appellant, only a valueless right to be paid for the respondent s work by the proprietor. Further, the parties agreed by the subcontracts under which the Many tests have arisen in order to overcome the argument of subjective devaluation, AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL

13 respondent performed work that it would not be paid under the subcontracts even after the work was completed unless and until the appellant was paid by the proprietor and, as noted earlier, the appellant has not been, and will not be, paid... Even so, it is no easy task to balance the competing considerations. In the end, one of two innocent parties will suffer. I have concluded that that party should be the appellant, which was in a better position than the respondent to obtain payment from the proprietor in the course of the respondent s performance of the work The benefit here posited is the possibility, in the past, that the appellant could have obtained payment in respect of the respondent s performance, though it no longer can obtain payment. This is a very broad interpretation of benefit, perhaps more akin to what Fuller and Perdue simply called performance. I will now return to the forms of benefit mentioned above to examine whether they are useful as tools of analysis in the practical situations which the cases present. 2.2 Incontrovertible Benefit Under this test, the law should recognise benefit where the defendant is in receipt of something undeniably enriching. 89 Certain benefits money, for instance are said to be so clearly beneficial to the recipient that it would be fanciful for him to regard them as worthless. 90 More difficult is the consideration when services are involved. I will not provide an in depth analysis here, as the ground is amply covered by McInnes in his Commentary: Incontrovertible Benefits in the Supreme Court of Canada: Peel (Regional Municipality) v. Canada; Peel (Regional Municipality) v. Ontario 91. Suffice to say that the analysis is divided into positive benefits (which result in an accrual to the defendant s overall wealth) and negative benefits (which prevent a diminution in the defendant s wealth). The text writers, however, are not agreed on how these definitions are to be applied. In the case of positive benefits, Goff and Jones state that it is sufficient that the defendant has a gain which is readily realisable in money. 92 However, Birks has a more limited view that such benefits must have already been realised in order for them to amount to a positive benefit. 93 Burrows adopts the middle ground that it must be reasonably certain that the defendant will realise the benefit. 94 In the case of negative benefits, Goff and Jones state that the defendant is benefited if a reasonable person would conclude that he has been saved the expense which he otherwise would necessarily have incurred 95. Birks test is similar. 96 Goff and Jones, Birks and Burrows agree that where the plaintiff has met an expense which, as a matter of legal or factual necessity, the defendant would have had to incur, then the defendant has received a benefit. 97 In the context of building contracts, the incontrovertible benefit test is of little value to the plaintiff unless the works under the contract have been completed (and therefore, then, only when the contract is void). Partially completed works (as in Iezzi and Renard) will not satisfy the test as partially completed works are not a readily realisable commodity. That characteristic really only applies to the end product. Carter notes in respect of Pavey & Matthews, on the other hand, that that case illustrates the strength of the builder s restitutionary claim in circumstances where he has fully performed the work requested so as to provide the defendant with an end product having an ascertainable market value Free Acceptance Free acceptance operates such that the defendant will be barred from arguing subjective devaluation if he should have known that the benefit was not being conferred gratuitously and nevertheless did not make use of a reasonable opportunity to reject it: A defendant, who is not contractually bound, may have benefited from services rendered in circumstances in which the court holds him liable to pay for them. Such will be the case if he freely accepts the services. In our view, he will be held to have benefited from the services rendered if he, as a reasonable man, should have known that the plaintiff who rendered the services expected to be paid for them, and yet he did not take a reasonable opportunity open to him to reject the proffered services. Moreover, in such a case, he cannot deny that he has been unjustly enriched AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL 2005

14 Free acceptance, therefore, operates like equitable estoppel 100 : it would be unconscionable for the defendant to resile from the benefit having stood silently while the defendant performs work for him. Birks gives an example to illustrate free acceptance as a test of benefit: Suppose that I see a windowcleaner beginning to clean the windows of my house. I know that he will expect to be paid. So I hang back unseen till he has finished the job; then I emerge and maintain that I will not pay for the work which I never ordered. It is too late. I have freely accepted the service. I had the opportunity to send him away. I chose instead to let him go on. I must pay the reasonable value of his work. 101 Neither the test, nor the example, seem particularly useful in terms of building services. Building services are rarely performed unless requested. In the example, how is the plaintiff to prove that the defendant hung back and let him continue, rather than that he didn t see him at all. Accordingly, the defendant (the owner of the house, usually, in domestic building contracts) must make a choice when he or she requests the builder to perform work. Once that request is made, the reasonable opportunity to reject the work is gone. Goff and Jones make such comments in respect of the facts in Pavey & Matthews. 102 A further criticism of the test is that it does not focus the issue on the question of benefit. A service not rendered gratuitously is seen as a benefit, so long as the recipient does not reject it. However, as stated above, in most building cases, the owner has no opportunity to reject the work in the sense meant by the test. Therefore, the defendant would automatically be deemed to have received a benefit, except that precisely what is requested is not received: that is, the defendant would have requested a completed project, whereas the plaintiff claims on a quantum meruit for partial performance. The test, therefore, is meaningless in respect of the fact situations in Renard and Iezzi. 2.4 Bargained-for Performance In view of the problems associated with the free acceptance test, some writers have argued that passive free acceptance is insufficient to preclude subjective devaluation, and that something more is necessary; something positive to indicate that the defendant places a value on the benefit. Burrows, in particular, modified his view to be that if a defendant has bargained for a benefit they thereby indicate that they value its receipt. In such cases it does them no injustice to make them pay for the benefit. 103 This test also suffers from a failure to focus on what it attempts to prove: that a benefit has accrued to the defendant.... in most building cases, the owner has no opportunity to reject the work in the sense meant by the [free acceptance] test. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #101 MARCH/APRIL