Warning for principals, developers and owners: Financial risks in wrongfully ending a construction contract

A recent decision handed down by the Supreme Court of Victoria (Court of Appeal) considered whether a claim for the “value of work” done by a contractor, as opposed to a claim for damages pursuant to the contract, is available to a contractor who terminated a contract because of the principal’s repudiation of it.

A warning for principals, developers and owners

The decision in Sopov & Anor v Kane Constructions Pty Ltd (No. 2) [2009] VSCA 141 (15 June 2009) reaffirms long standing authority (including High Court authority) to the effect that a contractor who terminates a contract by accepting a principal’s repudiation of the contract (thereby bringing the contract to an end) has the choice of claiming either damages under the contract or compensation to be assessed on a “quantum meruit” basis – in effect, an assessment of the fair and reasonable value of the work done.

The law on repudiation (in particular, on what constitutes repudiation) as well as the termination of construction contracts is very complex. Wrongful termination or repudiation by a principal alone can have a severe detrimental impact on the ability to claim completion costs from the contractor, quite apart from the exposure that can be generated by a quantum meruit claim. In short, the decision in Sopov is a warning to principals of the risks associated with repudiation

Facts

Cole Sopov and Norma Walker (Sopov) entered a construction contract with Kane Constructions Pty Ltd (Kane) in August 1999.  While the construction proceeded, Sopov refused to pay parts of progress claims certified by the superintendent administering the contract.  Sopov claimed a “right of set off” relating to a claim for liquidated damages for delay allegedly incurred by Kane.  Kane then issued a show cause notice alleging that the failure of Sopov to pay was a substantial breach of the contract.

There was eventually a stand off between the parties and Kane ended up suspending work and left the site.  Sopov then called on Kane’s bank guarantee although without giving the proper notice as required by the contract’s security for performance provisions.

After Sopov called on Kane’s bank guarantee, Kane terminated the contract claiming that Sopov had repudiated the contract.  The trial judge at first instance decided in favour of Kane and awarded an amount payable by Sopov to Kane on a quantum meruit basis.  Sopov appealed the trial judge’s finding of repudiation and Kane appealed the assessment of damages.

In November 2007, the Victorian Court of Appeal upheld the original finding that Sopov had repudiated the contract.  The Court then ordered a mediation to deal with the assessment of the amount payable, although the mediation was unsuccessful.  The Court subsequently heard submissions on the assessment of the amount payable by Sopov to Kane on a quantum meruit basis.

Quantum meruit claims

When the matter came before the Court of Appeal, the judges considered the question whether a quantum meruit claim was a type of claim that Kane could make on the facts of its case. In doing so, the Court reinforced long standing principles to the effect that an innocent party who accepts the defaulting party’s repudiation of a contract can sue wither for damages for breach of contract or on a quantum meruit basis for the reasonable value of work done.

Following the principles set out in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 277, the Court held that the price set out in the contract does not act as a limit or ceiling on the potential amount of a quantum meruit claim. The innocent party’s right to elect to sue on a quantum meruit basis is completely independent of the terms of the contract.

The Court acknowledged a “growing chorus of judicial and academic criticism of the availability of quantum meruit as an alternative to contract damages where repudiation is accepted”. In other words, why create an obligation to pay a reasonable sum (with the can of worms that this opens) where there is an enforceable contract dealing with payment rights? Despite the concern, the Court felt constrained by current law, including High Court authority, to the effect that where a construction contract is repudiated and where that repudiation is accepted, the contract is “void ab initio” (void from the beginning) so that the contract itself cannot influence the availability of a quantum meruit remedy

Assessing the value of work

In reaching its decision, the Court of Appeal made the following important points in relation to the quantum meruit remedy (where this remedy becomes available):

• a contract price merely is evidence of the view of the parties at the time of entering the contract as to the value of work to be performed, not necessarily the best evidence of the value of the benefit to be received;
• a quantum meruit claim is to be assessed with the benefit of hindsight on the basis of events that actually occurred. On that basis, the contract price should not be given any automatically significant weight in assessing the quantum meruit claim. As long as the work has been done, it is irrelevant to assessing damages on a quantum meruit basis as to whether the work fell within or outside the original contractual scope; and
• the contractor only needs to prove the reasonableness of total costs incurred and payments it has made in carrying out the work, as well as completion within a reasonable time. Since this assessment is non-contractual, quantum meruit damages can exceed the contract price. This might also include the reasonable value of rejected variations claims which can be included in the assessment, as long as the work the subject of the variations has been performed.

Those intending to bring a construction contract to an end – for whatever reason – should seek immediate legal advice before taking any steps in that direction.

Author: Stuart Miller