In Mann v Paterson the High Court substantially clarified an ongoing controversy as to the remedial options available to a building contractor upon a termination of the building contract following a repudiation by the principal.
Significantly, the decision applies not only to building contracts but any contract where an innocent party performs work but terminates for repudiation before it has accrued a contractual entitlement to payment for that work.
Prior to this decision of the Court, the State appellate courts adopted the proposition that where a principal under a building contract repudiated the contract leading to a termination by the contractor, the contractor became entitled to elect between a claim for loss of bargain damages and a claim in restitution as upon a quantum meruit for the recovery of the value of work performed to the date of termination. This was so even though the contractor may have enjoyed an accrued right to payment for that work under the contract. The State appellate courts also adopted the view that in determining value for the purposes of the restitutionary claim, the contract price did not impose a ceiling on the amount recoverable although it did operate as evidence of value.
The availability to the contractor of an election between remedies was dubiously based on the proposition that the effect of a termination based on repudiation was the rescission ab initio of the contract (that is, as if the contract never existed). This view as to the effect of a contract termination is wholly inconsistent with earlier High Court authority. As a general principle, a restitutionary remedy is not available where a contract governs the relationship between the parties.
The Court has now held as follows:
1. If, under the relevant building contract, the contractor is not entitled to payment until work under the contract is completed and the principal repudiates the contract prior to completion which is accepted by the contractor, the contractor will be entitled to elect between a claim for loss of bargain damages and a restitutionary claim as upon a quantum meruit for the value of work performed by the contractor to the date of termination.
This represents the so-called entire contract scenario. The availability of the election between remedies is predicated upon the proposition that by repudiating the contract the principal has deprived the contractor of any contractual entitlement to payment (as the effect of the termination is to discharge the parties from further performance) and has thus brought about a total failure of consideration (in the sense that the innocent party cannot complete performance so as to entitle it to payment).
2. If, on the other hand, the contractor’s performance obligations are divisible into several entire stages or separable portions and the principal repudiates the contract which is accepted by the contractor then:
(a) in respect of a partially completed separable portion for which the contractor has no accrued contractual right to payment, the contractor may elect between:
(i) a claim for loss of bargain damages in respect of the uncompleted separable portion and future separable portions identified under the contract but no longer performable by the contractor; and
(ii) a restitutionary claim for the value of work performed under the uncompleted separable portion to the date of termination of the contract; and
(b) in respect of an entire stage or separable portion which has been completed under the contract prior to termination the contractor has no election and may only claim under the contract in respect of accrued rights under the contract (that is, for amount payable in the nature of a debt).
It is noteworthy that under the principles followed by the State appellate courts, the contractor would still have an election as between remedies in the scenario in (2)(b). This represents a significant reversal of the law in this area.
3. The contract price constitutes a cap on the amount recoverable under a restitutionary claim. However, there is a divergence of view in the Court as to whether recovery may, nevertheless, exceed the contract price in exceptional circumstances where confining the contractor to the contract price would in all the circumstances be unconscionable.
There is also some divergence of view as to whether the calculation of value of the benefit conferred by the innocent party for the purposes of a restitutionary claim should be based upon a simple pro rating of the contract price or should otherwise be determined by reference to the market value but subject to the contract price as a cap on the amount recoverable. It has been recognised that a simple pro rating of the contract price may not accurately reflect true value.
4. A restitutionary claim is a claim for a liquidated amount. It, therefore, has a significant procedural advantage over an unliquidated claim for loss of bargain damages which has all the hurdles (breach, causation, remoteness and mitigation) associated with such a claim.