Mann v Paterson Constructions Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2018 0055

PETER MANN	First applicant
and
ANGELA MANN	Second applicant
v
PATERSON CONSTRUCTIONS PTY LTD (ACN 135 579 770)	Respondent

---

JUDGES:	KYROU, McLEISH and HARGRAVE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	17 August 2018
DATE OF JUDGMENT:	12 September 2018
MEDIUM NEUTRAL CITATION:	[2018] VSCA 231
JUDGMENT APPEALED FROM:	Mann v Paterson Constructions Pty Ltd [2018] VSC 119 (Cavanough J)

---

RESTITUTION – Building contract – Whether quantum meruit award available to builder who accepts owners’ repudiation of contract – Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510 applied.

RESTITUTION – Building contract – Owners’ repudiation accepted by builder – Claim in quantum meruit – Whether regard must be had to builder’s actual costs in assessing amount payable – Whether Victorian Civil and Administrative Tribunal erred in assessing amount payable on basis of quantity surveyor’s evidence rather than actual costs – Appeal dismissed – Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510 followed.

BUILDING AND CONSTRUCTION – Building contract – Owners’ repudiation accepted by builder – Whether Domestic Building Contracts Act 1995 s 38 precludes recovery on quantum meruit basis for orally agreed variations – Appeal dismissed.

---

APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr T J Margetts QC with Mr G F Hellyer	Telford Story & Associates
For the Respondent	Mr A J Laird	Kalus Kenny Intelex

KYROU JA
McLEISH JA
HARGRAVE JA:

Introduction and summary

The applicants, Peter and Angela Mann, are the owners of 6 Langtree Court in Blackburn. The respondent, Paterson Constructions Pty Ltd, is a construction company that builds residential properties. Its director is Stephen Paterson.

On 4 March 2014, the applicants entered into a written domestic building contract with the respondent for the construction of two double-storey townhouses on the property. The works specified in the contract commenced on 10 March 2014 but were not completed by the due date of 17 December 2014.

Unit 1 was completed and handed over to the applicants on 19 March 2015. On 16 April 2015, before unit 2 was completed, the applicants asserted that the respondent had repudiated the contract and purported to terminate the contract by accepting the alleged repudiation. On 28 April 2015, the respondent asserted that the applicants’ conduct constituted a repudiation of the contract and purported to accept their repudiation.

On 25 June 2015, the respondent made an application to the Victorian Civil and Administrative Tribunal (‘VCAT’) in which it sought relief on a quantum meruit basis or, in the alternative, sums allegedly due under the contract. Both forms of relief included amounts for variations to the works.

On 12 December 2016, VCAT found that the applicants had orally requested the variations claimed by the respondent, that they had repudiated the contract by their purported termination and that the respondent had determined the contract when it accepted that repudiation on 28 April 2015.[1] VCAT ordered the applicants to pay the respondent the quantum meruit sum of $660,526.41, being the value of the work performed by the respondent, less the sums already paid by the applicants and the cost of rectification of defects (‘VCAT order’).
[1]Paterson Constructions Pty Ltd v Mann [2016] VCAT 2100 (‘VCAT decision’).

The applicants sought leave to appeal against the VCAT order to the Supreme Court. Their grounds included that VCAT had misunderstood or misapplied the principles relating to the valuation of work on a quantum meruit basis and that VCAT had erred in allowing the respondent to recover for variations to the works on a quantum meruit basis.

On 19 March 2018, the judge granted the applicants leave to appeal and allowed the appeal for the limited purpose of correcting a minor mathematical error in VCAT’s order.[2] He otherwise dismissed the appeal.
[2]Mann v Paterson Constructions Pty Ltd [2018] VSC 119 (‘Supreme Court decision’).

The applicants now seek leave to appeal against the judge’s order on four proposed grounds of appeal. Ground 1 contends that the judge erred in holding that VCAT had applied the correct legal principles in valuing the respondent’s work on a quantum meruit basis. Grounds 3 and 4 contend that the judge erred in finding that s 38 of the Domestic Building Contracts Act 1995 (‘Act’)[3] did not prevent the respondent from recovering the value of the work covered by the variations on a quantum meruit basis. Ground 2 contends that this proceeding affords a ‘particularly good opportunity’ for this Court to reconsider the correctness of the long-established principle that a builder who accepts an owner’s repudiation and determines a building contract is entitled to sue the owner in quantum meruit.
[3]Section 38 of the Act deals with variations requested by an owner and, in certain circumstances, prohibits a builder from recovering any money for variations where the builder does not comply with the written notice and other requirements set out in the section. Section 38 is set out at [99] below.

For the reasons that follow, we have concluded that the application for leave to appeal will be granted in respect of grounds 1, 3 and 4 but not in respect of ground 2, and that the appeal will be dismissed.

Facts

The contract included the following terms:

(a)The respondent was obliged to carry out the works ‘in accordance with the Plans and Specifications set out in the Contract’.

(b) The price for the works was $971,000 (including GST).
(c) The construction period was 290 days.
(d)The party causing delay was obliged to pay liquidated damages of $500 per week.
(e)Variations to the works requested by the applicants had to comply with the requirements of cl 12.[4]

[4]Clause 12 of the contract is set out at [101] below.

In the course of the project, the parties agreed to reduce the contract price from $971,000 to $916,779 by removing certain items from the scope of the works. They also agreed orally to vary the scope of the works by adding items and altering others.

The applicants made progress payments totalling $945,787.

As already noted, the works were not completed by the due date of 17 December 2014. The respondent did not issue any notices of delay to the applicants or make any claims for extensions of time pursuant to the contract.

On 16 February 2015, the respondent gave to the applicants a final claim for $63,000 for unit 1.

On 3 March 2015, an occupancy permit was issued for unit 1. At 8:59 pm on 18 March 2015, the respondent emailed to the applicants a claim for variations totalling $48,403.07 in respect of unit 1. On 19 March 2015, unit 1 was handed over to the applicants.

In a letter dated 16 April 2015 to the respondent, the applicants’ solicitors asserted that it had repudiated the contract, and that the repudiation was accepted by the applicants. The alleged acts of repudiation included the delay in carrying out the works and an alleged statement by Mr Paterson that the respondent would not complete unit 2 unless the applicants paid the unit 1 variations claim.

Also on 16 April 2015, the applicants refused to allow the respondent to return to the building site.

By letter dated 28 April 2015 from its solicitors to the applicants’ solicitors, the respondent asserted that the applicants had repudiated the contract, and that the repudiation was accepted by the respondent. The alleged acts of repudiation were said to be the applicants’ letter dated 16 April 2015 and their refusal to allow the respondent onto the building site.

VCAT hearing

In its VCAT application, as originally filed on 25 June 2015, the respondent sought the following relief:

(a)damages in the sum of $446,770.18, including claims for variations in the amount of $231,515.16 for both units and prime cost adjustments in the amount of $176,877.54; or in the alternative,
(b)a balance of monies for work and labour done and materials provided up to the date of termination, in the amount of $518,597.97.

However on 1 August 2016, by updated particulars of damage, the respondent replaced its claim for a balance of monies in the amount of $518,597.97 with a claim in quantum meruit for the amount of $944,898.

The sum of $944,898 was based on an interim expert report by Stephen Pitney, a quantity surveyor and registered builder, who assessed the value of work performed by the respondent at $1,898,673. Taking into account the amounts already paid by the applicants to the respondent totalling $945,787, the balance said to be owing was $944,898.[5]
[5]We note that there is an unexplained discrepancy of $7,988 in the respondent’s quantum meruit claim based on Mr Pitney’s interim report: $1,898,673 less $945,787 equals $952,886 rather than $944,898.

The applicants filed a counterclaim seeking damages for allegedly defective and incomplete work as well as liquidated damages for delay and other losses. The amount they ultimately claimed was $391,331.35.

VCAT heard evidence over 19 days. The witnesses for the respondent included Mr Paterson, employees and contractors of the respondent, a building expert (James Campbell) and Mr Pitney. The witnesses for the applicants included the applicants and a building expert, Robert Lorich. Mr Lorich gave evidence about defective items and the costs that should be allowed for some but not all of the items claimed by the respondent.

The applicants did not call a quantity surveyor to contradict Mr Pitney’s evidence of the value of the work performed and did not cross-examine Mr Pitney at any length. However, they adduced evidence of the actual costs of some of the work performed, in the form of a spreadsheet prepared by Mrs Mann that set out invoices totalling $721,793.01 that were said to be attributable to the building project.

Mr Pitney reviewed Mrs Mann’s costs spreadsheet before he prepared his final report. He said that the spreadsheet did not include the costs for all of the work performed by the respondent. As a result of his review of the spreadsheet, he reduced his previous estimate of the value of the works by $32,439. Taking into account that reduction, and various other adjustments, in his final report, Mr Pitney reduced his estimate of the value of the work from $1,898,673 to $1,722,611.

In his final report, Mr Pitney also assessed the overall costs of the project in the sum of $1,580,220. In arriving at this figure, he used Mrs Mann’s costs spreadsheet as his starting point and added a number of adjustments.

It was the respondent’s case that the applicants orally requested 11 variations to unit 1 and 31 variations to unit 2 during construction.

The applicants (with minor exceptions) denied that they had requested any variations to the works. Their evidence was that the variations had been suggested and performed on the respondent’s own initiative and that, prior to 16 February 2015, the respondent had not given them any indication that the variations would involve any extra costs.

The applicants contended that they were not liable to pay for the variations because the respondent had not complied with the requirements of either ss 37 or 38 of the Act.[6]
[6]Section 37 of the Act deals with variations requested by a builder. In relation to s 38, see n 3 above.

VCAT decision

VCAT found that Mr Paterson was a truthful witness and accepted his evidence. It found that the applicants were unreliable witnesses and it doubted the truth of much of what they said.[7]
[7]VCAT decision [49], [283].

VCAT held that the respondent had not repudiated the contract, that the purported termination of the contract by the applicants constituted repudiation, and that the respondent had accepted the repudiation and validly determined the contract.[8] VCAT also found that the respondent was not responsible for the delays in the works.[9] The applicants have not sought to challenge these findings.
[8]VCAT decision [469], [507].
[9]VCAT decision [474].

In relation to the claim for variations, VCAT preferred the evidence of the respondent. It found that the applicants had requested the extra work, and that there was an arrangement between them and the respondent that there would be an adjustment at completion in respect of the costs of the variations.[10]
[10]VCAT decision [102].

VCAT found that it was unnecessary to determine whether s 38 of the Act or cl 12 of the contract applied to the variations, or the amount that should be allowed for each variation. It concluded that, as the work the subject of the variations was requested by the applicants, it properly formed part of the quantum meruit claim.[11] VCAT found that s 38(1) permitted a request for a variation to be made by an owner orally and observed that the respondent was not obliged to comply with the notice requirements of s 38 because of the nature and value of each variation and that it would not be unfair to the applicants for the respondent to recover money in respect of the variations.[12]
[11]VCAT decision [120], [284].
[12]VCAT decision [110], [116]–[117].

VCAT held that the applicants caused delays in the performance of the works. In the context of rejecting a submission by the respondent that it was entitled to delay costs at a rate allowed by the contract, VCAT attributed to Sopov v Kane Constructions Pty Ltd (No 2)[13] the proposition that ‘it is now well established that, in the case of a building contract, when one party repudiates the contract and the other party brings it to an end by accepting the repudiation, the contract is avoided ab initio’.[14]
[13](2009) 24 VR 510 (‘Sopov’).
[14]VCAT decision [525].

In relation to the quantum of the respondent’s claim, VCAT preferred the evidence of Mr Pitney to the limited evidence adduced by the applicants. VCAT stated that Mrs Mann’s costs spreadsheet was incomplete and did not cover all of the work performed by the respondent. VCAT observed that Mr Pitney’s assessment was of the value of the work performed, not the amount it cost the respondent to perform it.[15]
[15]VCAT decision [514].

Taking into account the cost of rectification of defects in the amount of $116,297.59, and Mr Pitney’s assessment of $1,722.611, VCAT found that the total value of the benefit conferred on the applicants was $1,606,313.41. Therefore, taking into account the sum of $945,787 that the applicants had paid to the respondent, VCAT ordered that the applicants pay to the respondent the sum of $660,526.41.

VCAT’s reasons for the above conclusions are described below in the context of the ground of appeal to which they relate.

Supreme Court decision

The applicants sought leave to appeal against VCAT’s decision in the Trial Division under s 148 of the Victorian Civil and Administrative Tribunal Act 1998 on 17 grounds. However, at the hearing of the application, the applicants refined those grounds to the following two ‘underlying issues’:

(a)VCAT misunderstood or misapplied the principles for valuing the respondent’s quantum meruit claim. The proper test was to determine the ‘fair and reasonable’ value of the work, which required a range of specific matters, including the contract price and Mrs Mann’s costs spreadsheet, to be taken into account. VCAT erred by accepting the evidence of Mr Pitney without taking those matters into account due to its mistaken view that this Court’s decision in Sopov required that the respondent’s acceptance of their repudiation be treated as having the effect of avoiding the contract ab initio.[16] VCAT also erred by accepting allowances made by Mr Pitney for three cost items which were not incurred by the respondent.[17]
(b)VCAT erred in allowing the respondent to recover on a quantum meruit basis for variations to the works, because it incorrectly proceeded on the basis that s 38 of the Act did not apply to a quantum meruit claim.[18]

[16]Supreme Court decision [12]. See [34] above.

[17]Supreme Court decision [23].

[18]Supreme Court decision [14].

The applicants also submitted that Sopov was wrongly decided. The judge described this as a ‘formal submission’ because it was common ground that the judge was bound by Sopov.[19]
[19]Supreme Court decision [12] n 10.

The judge made the following findings:

(a)VCAT had not misunderstood or misapplied the principles for determining the value of the respondent’s quantum meruit claim.[20] The contention that VCAT inappropriately accepted allowances for three cost items was a complaint about VCAT’s fact-finding and did not raise any question of law.[21]
(b)Where a builder makes a quantum meruit claim, it is not mandatory for VCAT to take into account the contract price or the costs actually incurred by the builder in every case regardless of the facts.[22] In any event, the applicants had failed to prove that VCAT had not considered these matters.[23] Furthermore, as the scope of the work performed by the respondent was substantially different to that set out in the contract, the contract price provided very little guidance in assessing the value of the respondent’s quantum meruit claim.[24]
(c)VCAT was entitled to prefer Mr Pitney’s evidence and had not erred in its assessment of the value of the respondent’s quantum meruit claim.[25]
(d)VCAT’s assessment of the quantum meruit amount did not result in the respondent receiving a ‘windfall’.[26]
(e)VCAT had not found that the contract was void ab initio and therefore had not erred in that regard. VCAT’s observation set out at [34] above, read in the context of VCAT’s reasons as a whole, merely sought to encapsulate what had been said in Sopov, namely, that the remedy of quantum meruit ‘rests on the fiction of the contract’s having ceased to exist ab initio’.[27]
(f)Section 38 of the Act did not prevent the respondent from recovering money for the variations on a quantum meruit basis.[28]

[20]Supreme Court decision [17].

[21]Supreme Court decision [26].

[22]Supreme Court decision [27], [36].

[23]Supreme Court decision [29], [37].

[24]Supreme Court decision [28].

[25]Supreme Court decision [37].

[26]Supreme Court decision [37], [38].

[27]Supreme Court decision [42], citing Sopov (2009) 24 VR 510, 517 [21].

[28]Supreme Court decision [58], [63], [81].

The judge’s reasons for these findings are described below in the context of the ground of appeal to which they relate.

The judge granted the application for leave to appeal and, as a consequence of a minor mathematical error, ordered that the amount to be paid by the applicants to the respondent be reduced by $7,992, to $652,534.41. He otherwise dismissed the appeal.

Grounds of appeal

The four proposed grounds on which the applicants seek leave to appeal are set out below under separate headings.

Ground 1: Assessment of value of work in a quantum meruit claim

Ground 1 is in the following terms:

(a)The trial judge erred in holding that [VCAT] had correctly understood and applied the legal test or principles that should be applied to assess the value of a quantum meruit claim in circumstances where [VCAT]:
(i)held that ‘in the case of a building contract, when one party repudiates the contract and the other party brings it to an end by accepting the repudiation, the contract is avoided ab initio’;
(ii)failed to take into account the actual costs incurred in carrying out the domestic building work when evidence of actual cost was available; and

(iii)failed to take into account the discrepancy between the contract price agreed for the domestic building work and the quantum meruit assessment to ensure that the amount of damages was fair and reasonable.

(b)The trial judge should have held that [VCAT] failed to take these matters and/or legal principles into account and by consequence of the same undertook the assessment of the quantum meruit claim without proper regard to the current legal principles.

Relevant principles

The principles relating to the valuation of building work on a quantum meruit basis were authoritatively stated by this Court in Sopov. In that case, after accepting the owner’s repudiation of the contract, the builder elected to quantify its quantum meruit claim by reference to the costs incurred plus a profit margin.[29] The owner submitted that the contract price imposed a ceiling on the amount the builder could recover. The primary judge approached the assessment of the value of the works by requiring the builder to prove the total costs it had incurred and that the amounts in question were fair and reasonable in the circumstances.[30]
[29]Sopov (2009) 24 VR 510, 519 [31], 520 [33].
[30]Sopov (2009) 24 VR 510, 519 [29].

The Court rejected the owner’s submission and held that, in the circumstances of that case, the approach the primary judge had adopted was not erroneous.[31] The Court stated the following general principles:
[31]Sopov (2009) 24 VR 510, 519 [29].

It is because the quantum meruit remedy rests on the fiction of the contract’s having ceased to exist ab initio that the contract can have no ‘continuing influence’ when the value of the work is being assessed on a quantum meruit. It is because this alternative remedy does ignore the bargain which the parties struck, and does ignore the rights accrued under the contract up to the date of termination, that the availability of quantum meruit in the alternative is now seen as anomalous. But, for reasons we have already given, those incongruities are as entrenched as the remedy itself. It is true that the contract price is relevant on a quantum meruit, but not because of any ‘continuing influence’ of the contract. The price is merely a piece of evidence, showing what value the parties attributed — at a particular time — to the work which the builder was agreeing to perform.
…
For reasons we have given, where the claim is made on a quantum meruit the contract price does not impose a ceiling on the amount recoverable, though it may provide a guide to the reasonableness of the remuneration claimed. The price agreed on at the time of entry into the contract is evidence — and no more — of the view of the parties at that time as to the value of the work to be performed.
The proper approach to assessment of a quantum meruit claim is, as the trial judge said, to ascertain the fair and reasonable value of the work performed. Axiomatically, the measure of the restitutionary remedy is the value of the benefit conferred on the party which received it. Once it is accepted that the quantum meruit claim is available independently of the contract, then it follows — as Meagher JA said in Renard — that it would be ‘extremely anomalous’ if the defaulting party could invoke the contract which it has repudiated to impose a ceiling on the amounts recoverable.
Nor is the contract price ‘the best evidence’ of the value of the benefit conferred. As counsel for Kane pointed out, the contract price is struck prospectively, based on the parties’ expectations of the future course of events. The quantum meruit, on the other hand, is assessed with the benefit of hindsight, on the basis of the events which actually happened.
…
[I]t is well established that the value of the work done can be proved by evidence of costs actually incurred … The (reasonable) cost of constructing a building seems a perfectly sensible measure of the value of the benefit conferred. Ex hypothesi, the owner would have incurred that cost had it undertaken the construction itself.
…
The existence of the entitlement to a profit margin seems entirely consistent with the restitutionary objective of measuring the value of the benefit conferred. The inclusion of a margin for profit and overhead means that the calculation approximates the replacement cost of the works. As we have said, it is an appropriate index of value to ascertain what it would have cost the principal to have had these works carried out by another builder in comparable circumstances. The answer to that question must necessarily include that other builder’s margin.
…
If the work the subject of the variations has been carried out — and there was no dispute here that it had been — the only question is the fair and reasonable value of the work. It is irrelevant whether or not the work fell outside the original contractual scope. All that matters is that the performance of the work has conferred a benefit on the owner, for the reasonable value of which the builder should be remunerated.[32]

[32]Sopov (2009) 24 VR 510, 517 [21], 518 [24]–[26], 519 [30], 520 [35], 521–2 [43] (emphasis in original) (underlining added for further emphasis) (citations omitted).

The statement of principle by Meagher JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works[33] from which the Court in Sopov quoted is as follows:

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. Nor is there anything anomalous in the prospect that a figure arrived at on a quantum meruit might exceed, or even far exceed, the profit which would have been made if the contract had been fully performed. Such a result would only be anomalous if there were some rule of law that the remuneration arrived at contractually was the greatest possible remuneration available, or that it was a reasonable remuneration for all work requiring to be performed. There is no such rule of law. Nor can one say that as a matter of observable fact there is any such rule. 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 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.[34]

[33](1992) 26 NSWLR 234 (‘Renard’).

[34]Renard (1992) 26 NSWLR 234, 277–8.

In Vasco Investment Managers Ltd v Morgan Stanley Australia Ltd,[35] which concerned a quantum meruit claim for the provision of services, Vickery J summarised the principles for assessing quantum in such a claim. His summary included the following propositions:

(a)The inquiry is not primarily directed to the cost to the plaintiff of performing the work, since the law is not compensating that party for loss suffered; however, the actual cost should not be ignored.
…
(h)It is well-established that the value of the services or work done can be proved by evidence of costs actually and fairly and reasonably incurred. But proof of the appropriate quantum is not confined to such evidence.[36]

[35](2014) 108 IPR 52 (‘Vasco’).

[36]Vasco (2014) 108 IPR 52, 98–9 [359(a)], [359(h)] (citations omitted).

In Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd,[37] a court-appointed referee assessed the quantum meruit amount to be paid by an owner to a builder who had accepted the owner’s repudiation of a building contract. The owner contended that the referee had erred because, in relying on the evidence of quantity surveyors, she made allowances for some items — including scaffolding and the cost of an onsite supervisor — in amounts exceeding those incurred by the builder. Barrett J found that the referee had not erred for the following reasons:

The referee’s conclusion was that the adoption of actual cost figures where they were established by the evidence was not warranted because of distortions that would introduce. As the referee observed, it would be wrong to adopt actual cost figures where they were less than the allowances made by the experts without at the same time adopting an identical approach where it could be shown that the actual cost exceeded the experts’ assessments. It was also recognised that there was a significant element of incongruity in attempting to combine some actual costs with some assessed costs.
In my opinion, the passage I have quoted from the judgment of Meagher JA in Renard Constructions (above) supports the approach the referee took in this respect and indicates that, while evidence of actual expenditure may be relevant to an assessment of what is a reasonable reward for work done and expenditure incurred, the amount of such actual expenditure as may be proved does not operate in any way as a controlling factor. The quantum meruit sum is the reasonable cost of the work done and expenditure incurred, with the assessment of reasonableness being undertaken by reference to the results produced and evidence of what it would in the ordinary course of things be necessary to outlay in order to produce those results. The fact that some actual outlays were larger and others were smaller is not relevant to the inquiry.[38]
[37][2004] NSWSC 273 (‘Eddy Lau’).
[38]Eddy Lau [2004] NSWSC 273 [74]–[75].

Decisions by VCAT and the judge on the valuation issue

To determine the value of the respondent’s quantum meruit claim, VCAT referred to the paragraphs from Sopov quoted at [46] above which we have underlined, and emphasised the phrases ‘the value of the benefit conferred on the party which received it’ and ‘the value of the benefit conferred’ that appear in those paragraphs.

VCAT’s understanding of the relevant principles and how they were to be applied to the respondent’s quantum meruit claim — including the relevance of the contract price and actual costs incurred by the respondent to the assessment of the value of its work — can be gleaned from the following observations:

Because of the conclusion that I have reached on the termination issue the [respondent’s] claim for recovery on a quantum meruit basis is established and it is entitled to an amount that reflects the value of the benefit that it has conferred upon the [applicants], which I think is the fair and reasonable value of its work. The assessment that I have to make is not the [respondent’s] entitlement according to the Contract but rather, the reasonable value of the work and materials the [applicants] have requested and the value of the benefit they have received from the [respondent].
…
Because of the conclusion that I have reached in regard to the termination issue it is unnecessary for me to determine what should be allowed for each variation. The only issue in each case is whether the work was requested by the [applicants].
…
Since I am satisfied in each case that the work which was the subject of the variation was requested by the [applicants], it forms part of the quantum meruit claim, the overall cost of which has been assessed by Mr Pitney.
…
Since I find that the Contract was brought to an end in the manner referred to below and that the [respondent] is entitled to recover the value of all of the work and materials supplied at the [applicants’ request] on a quantum meruit basis, it has not been necessary for me to separately determine any of these claims on the basis of it being either a variation or a provisional sum being exceeded because the fair and reasonable value of what has been provided at the request of the [applicants] is included in Mr Pitney’s valuation.
…
[B]ecause I find that the [applicants] repudiated the Contract and the [respondent] brought it to an end by accepting that repudiation, … claims [by the applicants based on the contract] are not available …
Insofar as [amounts paid by the applicants to suppliers and tradespeople for rectification work] are contractual claims, they cannot be brought. However insofar as they relate to defective workmanship and can be said to have reduced the value of what the [applicants] have received, as valued by Mr Pitney, they should be allowed.
…
[Counsel for the applicants] argued that a number of items allowed for in Mr Pitney’s costing were not actually supplied because of a difference in methodology. For example, safety harnesses were used for the roof and not scaffolding and a site supervisor was not employed. Mr Paterson was both builder and supervisor. However it must be borne in mind that Mr Pitney’s assessment is of the value of the work, not what it cost to perform. If the [respondent] had carried out the work using a more costly methodology it would only be able to claim its value. Conversely, if it carried it out with great economy and it cost it less than another builder might have expended, it is nonetheless entitled to the value of what it has done.
During the hearing, Mrs Mann produced a spreadsheet of the invoices discovered by the [respondent]. Those that she attributed to the construction of the units totalled $721,793.01. Mr Pitney reviewed this spreadsheet before he prepared his final report on 15 August 2016 and thereafter reduced his valuation of the work to $1,722,611.
Parts of the work were also valued by Mr Lorich but he did not cost the whole scope of works or purport to assess its value. He is a competent and well respected expert with extensive experience in pricing rectification and completion work but he is not a quantity surveyor. I cannot cherry pick items between the reports of one expert and another because the methodology adopted by each expert is not the same. I must choose which expert opinion to accept and I think on this issue I would have to prefer the evidence of the quantity surveyor.
The spreadsheet prepared by Mrs Mann is not a valuation of the whole job but rather, a setting out of most of the documents that have been discovered relating to labour and materials supplied. It appears from Mr Pitney’s evidence that invoices for some of the work are missing from the list and that other items are to be added.
It is the final conclusion of Mr Pitney that is probative.
The valuation prepared by Mr Pitney is on the basis that the work was complete and not defective. The value of the benefit conferred on the [applicants] must be the fair and reasonable value of the work performed. To arrive at that I must therefore deduct the cost of completing the work that is included in his valuation and also deduct the cost to the [applicants] of rectifying any defects in that work. I have assessed that cost at $116,297.59 as detailed above, which includes a … margin of 30% plus GST …
[Counsel for the respondent ] said that I should assess the cost of completing any incomplete work on the basis of what it would have cost the [respondent] to complete it, because its obligation to complete the various items of incomplete works ceased at the time of termination. That submission misunderstands the nature of the exercise I have to undertake. What I am assessing is the value of the benefit conferred on the [applicants] and that is properly assessed by taking into account what it will cost them to complete the work and bring it to the standard appropriate [to] its valuation. That is the value of the benefit conferred upon them by the [respondent].
[Counsel for the respondent] also said that the [respondent] ought to have had the opportunity to rectify the defects which it could have done without cost, in many cases, by calling back the relevant trades to fix their defective work. However I am assessing the value of the benefit conferred on the [applicants] and the [respondent] has no right to augment what is to be valued by carrying out further work.[39]

[39]VCAT decision [119], [282], [284], [300], [466]–[467], [514]–[521].

In the context of rejecting a submission by the respondent that it was entitled to delay costs at the rate allowed by the contract, VCAT stated:

Generally at common law, termination of a contract will not affect rights that have accrued under it before termination ...
However, as was pointed out in [Sopov], it is now well established that, in the case of a building contract, when one party repudiates the contract and the other party brings it to an end by accepting the repudiation, the contract is avoided ab initio. The situation might be thought illogical but, as the Court of Appeal said, this apparently anomalous situation can only be remedied now by the High Court. A claim under the Contract for delay costs cannot be maintained for the same reason that the [respondent] is now entitled to claim a quantum meruit for the work that it has done.[40]

[40]VCAT decision [524]–[525] (citations omitted).

VCAT held that the respondent was not entitled to interest pursuant to the contract because its ‘primary claim, which was successful, was not brought in contract but as a quantum meruit’.[41] VCAT went on to state:

I might add that, by succeeding in a claim for a quantum meruit, the [respondent] has recovered considerably more than it might have recovered had the claim been confined to the Contract.[42]

[41]VCAT decision [529].

[42]VCAT decision [533].

As already mentioned, the judge concluded that VCAT had properly applied the principles for valuation of work on a quantum meruit basis as set out in Sopov. The judge expressed his conclusion in the following terms:

Since, in relation to a quantum meruit claim in a building case, the object of the exercise is to work out the ‘value of the benefit conferred on the party which received it’, and since an ‘appropriate index of value’ is to ascertain ‘what it would have cost the principal to have had these tasks carried out by another builder in comparable circumstances’, there cannot be any objection in such a case to the receipt of competent evidence on that topic from a properly qualified quantity surveyor …
…
Turning to the complaints to the effect that there was a great discrepancy in relation to the contract price, in my view, [VCAT] was not required, as a matter of law, to ask [itself] the postulated question or questions. Senior Counsel [for the applicants] did not cite any authority to the effect that the law stipulates or requires that the contract price be taken into account and weighed up in every case. In my view it would not necessarily, or even usually, be wrong for a decision-maker to take the contract price into account, whereas it would always, or at least usually, be wrong for the decision-maker to treat the contract price as determinative or as a ceiling on the amount recoverable. In the language of administrative law, the contract price will often be a relevant consideration in the sense of a permissible consideration, but it will not always be — indeed, perhaps it may never be — something the decision-maker is bound to take into account. In other words, the contract price is not, or at least will not always be, a mandatory relevant consideration.
…
Even if, in this case, the comparison between the value of the work as assessed by VCAT and the contract price, or any of the other comparisons relied on by the [applicants], was a mandatory relevant consideration, the [applicants] have not satisfied me that [VCAT] failed to take the same into account. These comparisons were much pressed by the [applicants] during the case at VCAT. It is unlikely that [VCAT] ignored them. It is much more likely that [VCAT] took the view that they were quite unpersuasive, because of the major differences between, on the one hand, the work as originally contracted for and, on the other, the actual course of the building work and the actual benefit conferred on the [applicants]. In any event, for the reasons already mentioned, and for the additional reasons to be mentioned below, [VCAT] was entitled simply to prefer the approach of adopting Mr Pitney’s assessment as a quantity surveyor.

…
What the Court of Appeal relevantly said in paragraphs 29 and 30 of its judgment in Sopov … was that the value of work done can be proved by evidence of costs actually incurred, not that it must be proved in that way. In Sopov … it happened that the builder had sought to prove the value of the work in that way, but that was a choice it made as a litigant. As [the respondent] points out, Kane was a substantial building company with staff and resources. By contrast, [the respondent] (in effect, Mr Paterson) was a small, hands on builder attempting to juggle everything under very trying circumstances (which, as VCAT apparently accepted, explained the absence of some records). In any event, as [the respondent] submits, it is clear from Sopov … that using costs actually incurred is not the only available method to prove a quantum meruit claim.
…
In my view, [the authorities do not establish] that actual costs are a mandatory relevant consideration in every case regardless of the facts …
[A] quantum meruit is concerned with the reasonable value of the benefit conferred on the party who receives the benefit (here, the [applicants]). There was no windfall. VCAT awarded [the respondent] the reasonable value of the work it had performed. Contrary to the [applicants’] assertions, VCAT did not ignore their argument about actual costs. Rather, as it was entitled to do, VCAT chose to calculate the fair and reasonable value of the task performed using an ‘index of value’ that the Court of Appeal has said is appropriate and by reference to probative independent expert evidence on this issue, which VCAT was entitled to prefer and did prefer. Insofar as the [applicants] still seek to attack Mr Pitney’s evidence, any such attack is inappropriate, because Mr Pitney was cross-examined only briefly during the lengthy hearing (which included several conclaves of experts, in each of which he participated) and was essentially unchallenged on his methodology. VCAT clearly and cogently explained why it preferred Mr Pitney’s evidence over the limited evidence of Mr Lorich on discrete issues and on the purported ‘actual cost’ spreadsheet prepared by Mrs Mann.[43]
[43]Supreme Court decision [21], [27], [29], [33], [36]–[37] (emphasis in original) (citations omitted).

Parties’ submissions

The applicants submitted that the important considerations in a quantum meruit assessment are all of the relevant circumstances, and what is fair and just compensation for the benefit actually accepted. They contended that ‘fair and just’ compensation is ordinarily to be calculated at a reasonable rate for the work performed. They relied on the following statement of Deane J in Pavey & Matthews Pty Ltd v Paul:[44]

What the concept of monetary restitution involves is the payment of an amount which constitutes, in all the relevant circumstances, fair and just compensation for the benefit or ‘enrichment’ actually or constructively accepted. Ordinarily, that will correspond to the fair value of the benefit provided (e.g. remuneration calculated at a reasonable rate for work actually done or the fair market value of materials supplied).[45]

[44](1987) 162 CLR 221 (‘Pavey & Matthews’).

[45]Pavey & Matthews (1987) 162 CLR 221, 263.

The applicants also relied on this Court’s statements in Sopov that ‘[t]he proper approach to assessment of a quantum meruit claim is … to ascertain the fair and reasonable value of the work performed’[46] and that ‘it is well established that the value of the work done can be proved by evidence of costs actually incurred’.[47] They contended that proposition (a) of the principles summarised by Vickery J in Vasco, which is set out at [48] above, is consistent with this approach.
[46]Sopov (2009) 24 VR 510, 518 [25]. See [46] above.
[47]Sopov (2009) 24 VR 510, 519 [30]. See [46] above.

The applicants also referred to the statement in Sopov that ‘the contract price is struck prospectively, based on the parties’ expectations of the future course of events’ whereas ‘quantum meruit … is assessed with the benefit of hindsight, on the basis of the events which actually happened’.[48] They submitted that, as the value of work performed must be assessed with the benefit of hindsight, where evidence of the actual costs incurred is available, those costs must be used in making the assessment rather than allowances which have no relationship to those costs.
[48]Sopov (2009) 24 VR 510, 518 [26]. See [46] above.

The applicants argued that VCAT did not apply the above principles because it adopted the value placed on the respondent’s work by Mr Pitney and treated the actual costs incurred by the respondent in performing that work as irrelevant. The applicants contended that VCAT adopted this wrong approach because of its misconception that when a party to a building contract accepts a repudiation by the other party, ‘the contract is avoided ab initio’.[49] According to the applicants, VCAT’s approach resulted in a large discrepancy between the value assessed by Mr Pitney, and the contract price and the actual costs incurred by the respondent, resulting in a windfall gain for the respondent. The outcome was said not to represent a fair and reasonable quantum meruit amount.
[49]See [34] above.

In support of their submission that VCAT’s approach conferred a windfall gain to the respondent, the applicants emphasised three cost items for which allowances were made by Mr Pitney but which were said not to have been incurred by the respondent. Those items were sums for the hire of certain equipment already owned by the respondent, a sum for scaffolding which was said not to have been hired or used by the respondent and a sum for an independent site foreman who was said not to have been engaged or used by the respondent.

The applicants sought to distinguish Eddy Lau on the basis that the statement set out at [49] above was relevant where a builder incurs a cost (such as hiring fees for scaffolding) and a quantity surveyor assesses that cost at an amount that exceeds the sum actually paid by the builder, but was not relevant where the builder does not incur that cost at all (such as where the builder does not hire scaffolding). In this regard, they relied on the statement by Ball J in Home Site Pty Ltd v ACN 124 452 786 Pty Ltd[50] that, in relation to items supplied to a builder by third parties, he could not see why the builder should be able to recover more than the actual cost plus a reasonable builder’s margin regardless of what might otherwise be a reasonable allowance.[51]
[50][2017] NSWSC 698 (‘Home Site’).
[51]Home Site [2017] NSWSC 698 [96].

The applicants also relied on the following statement of Byrne J in Brenner v First Artists’ Management Pty Ltd:[52]

[T]his is a claim arising out of services performed. If different principles apply to different restitution claims such as those for the recovery of money paid or the value of goods delivered, I am not concerned with them. Furthermore, it may be that even within that class of restitution claims which are for recompense for services performed, different principles will apply, or principles will apply differently, to different types of case. …
…
Where the services have been performed at the request of a defendant or under an ineffective contract, the fair value of the work of the party will ordinarily be the remuneration calculated at a reasonable rate for the work actually done, for the defendant having obtained the benefit of a plaintiff’s work ought not be permitted to enjoy this work without having paid for it. The assessment, then, must have regard to what the defendant would have had to pay had the benefits been conferred under a normal commercial arrangement. The enquiry is not primarily directed to the cost to the plaintiff of performing the work since the law is not compensating that party for loss suffered. … But this is not to ignore these costs for the reasonable remuneration for work must have some regard to the cost of its performance.[53]

[52][1993] 2 VR 221 (‘Brenner’).

[53]Brenner [1993] 2 VR 221, 256, 263.

The applicants contended that, in the light of the above authorities, the judge had erred in concluding that:

(a)‘actual costs’ and ‘windfalls’ to the respondent were ‘irrelevant’;[54]
(b)actual costs are not a ‘mandatory relevant consideration’;[55]
(c)the value of the work as assessed by Mr Pitney was the relevant consideration in assessing the quantum of restitution; and
(d)if the respondent performed the work economically, such that its actual costs were less than the costs another builder may have incurred, the respondent was nevertheless entitled to the value of the work done.

[54]Supreme Court decision [38]. The judge’s precise statement was that he accepted the respondent’s ‘primary submissions that the [applicants’] assertions about “actual costs” and “windfalls” are irrelevant’.

[55]Supreme Court decision [36]. As appears from [54] above, the judge did not accept the proposition that actual costs are a mandatory relevant consideration in every case regardless of the facts.

In response to questions from the Bench during the hearing of the application for leave to appeal, senior counsel for the applicants clarified that, where there is evidence before VCAT of a builder’s actual costs for work performed, it was their contention that VCAT must take the evidence into account in assessing a quantum meruit amount and that VCAT would commit an error of law if it disregards that evidence. However, senior counsel conceded that VCAT would not be bound to base its assessment on those costs and, in some cases, a different methodology could be used to make that assessment.

The respondent submitted that the judge was correct to find that VCAT had not misunderstood or misapplied the legal principles relevant to assessing the value of work in a quantum meruit claim. It contended that, consistent with Deane J’s statement in Pavey & Matthews, the value in such a claim must be assessed in ‘all the relevant circumstances’,[56] and that while Deane J provided an example of how quantum meruit may be calculated, in Sopov, this Court stated that another such method was ‘to ascertain what it would have cost the [owners] to have had these works carried out by another builder in comparable circumstances’.[57] The respondent argued that this method, by way of Mr Pitney’s evidence, was how it had proved its quantum meruit claim at VCAT.
[56]See [55] above.
[57]Sopov (2009) 24 VR 510, 520 [35].

In response to questions from the Bench, counsel for the respondent conceded that evidence of actual costs incurred by a builder is relevant and admissible where a builder accepts an owner’s repudiation and seeks a quantum meruit amount, and forms part of the evidence to which VCAT may — but not must — have regard in assessing that amount. Counsel also conceded that the weight to be given to evidence of actual costs will depend on the circumstances of each case. However, counsel emphasised that while it would be wrong to treat actual costs as irrelevant, VCAT is not bound to assess a quantum meruit amount on the basis of actual costs, as such an approach would inappropriately treat actual costs as being determinative.

In relation to the windfall alleged by the applicants, the respondent noted that, in his final report, Mr Pitney had assessed the overall cost of the project at $1,580,200 and the value of the work on a quantum meruit basis at $1,722,611, a difference of $142,411. The respondent noted that VCAT did not allow interest on the quantum meruit amount but would have been obliged to allow interest on the costs amount, which would have added approximately $75,000. On that basis, so it was said, the difference of approximately $67,411 between the quantum meruit amount and the costs amount plus interest could not be described as a windfall.

In relation to the three cost items which were said by the applicants not to have been incurred, the respondent referred to evidence before the judge, which he had accepted, that some scaffolding had in fact been used. It also referred to the unchallenged evidence of Mr Paterson that in his role as site supervisor he worked many hours in addition to his standard 45 hours. Regarding the mechanical equipment it already owned, the respondent referred to Mr Pitney’s final report, in which he stated:

It is usual practice for Contractors to include in quotations the commercial hire costs for plant and machinery even though the equipment is owned. To be [economical], the capital, financing, operating, insurance and storage costs of the equipment needs to be apportioned over many [projects].

Decision

In our opinion, ground 1 is not made out.

As the authorities to which we have referred make clear, 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. VCAT’s assessment of the fair and reasonable value in a particular case must depend on all the evidence before it.

Where, as in the present case, the builder relies on the evidence of a quantity surveyor and the owner relies on evidence of the contract price and actual costs incurred by the builder, VCAT must have regard to all of this evidence. However, the weight to be given to particular items or categories of evidence will depend on the circumstances of each case, including VCAT’s assessment of the reliability of the evidence.

In some cases, the actual work performed is so radically different from the scope of work in the contract that little, if any, weight can be accorded to the contract price. Similarly, where a quantity surveyor’s evidence is comprehensive and unchallenged but the evidence of the actual costs incurred by the builder is incomplete and unreliable and does not contain anything that calls into question the accuracy of the quantity surveyor’s assessment, VCAT would be entitled to prefer that assessment.

On the other hand, if there is competing evidence by quantity surveyors called by both parties and evidence of actual costs is complete and comprehensive, the latter evidence may be highly relevant in deciding whether to accept the assessment of one quantity surveyor over that of the other. Further, in such a case, depending on the circumstances, VCAT might be justified in assessing the quantum meruit amount on the basis of the evidence of actual costs rather than the evidence of either of the quantity surveyors.

It is clear from the authorities that, as a matter of law, in a quantum meruit claim, the actual costs incurred are not determinative and do not impose a ceiling on the amount that can be recovered.

It follows from the above analysis that the administrative law distinction between permissible considerations and mandatory considerations on which the judge relied is not entirely apt when applied to conflicting evidence in a quantum meruit case. As we have said, evidence of the contract price and actual costs incurred by a builder is relevant and admissible but the weight to be given to it may vary depending on the circumstances of each case.

It also follows from the above analysis that, contrary to the applicants’ submissions, it is not necessarily inappropriate for a quantity surveyor to include in his or her assessment of the value of work performed an item of cost which was not actually incurred by the builder, or to assess the value of that item in a sum that differs from the sum paid by the builder. The propriety of such an approach, where the evidence supports it, has been recognised in Eddy Lau. The statement in Sopov that a quantum meruit claim is assessed with the benefit of hindsight is not inconsistent with this approach.

That approach is consistent with the underlying purpose of providing restitutionary relief by way of an amount assessed on a quantum meruit basis. As we have said, what is being assessed is the fair and reasonable value of the benefit conferred on the owner by the work performed by the builder. The overall benefit, whether in the form of a complete or incomplete structure, will be made up of discrete items of work that contributed to the construction of that structure. For example, in the case of a contract to build a house, the painting of external surfaces contributes to the overall benefit conferred on the owner. If a fair and reasonable cost of the paintwork is, say, $20,000, which incorporates an allowance for scaffolding but a builder manages to complete the paintwork for, say, $10,000 by using ladders, then, depending on all the other circumstances of the case, it might be appropriate for the quantity surveyor to allow the higher amount on a quantum meruit basis.

This analysis is consistent with the observations of Barrett J in Eddy Lau which are set out at [49] above. We reject the applicants’ contention that, while those observations are applicable where a cost is incurred but is assessed at a higher amount, they do not apply where that cost is not incurred at all. The passage from the judgment of Deane J in Pavey & Matthews set out at [55] above, on which the applicants relied, was not purporting to decide this issue. Further, we are not persuaded by the observation of Ball J in Home Site on which the applicants relied,[58] as it is at odds with established doctrine. Further, the observations of Byrne J in Brenner on which the applicants relied concerned the provision of services.[59] In any event, Brenner preceded Sopov and does not provide any assistance in the present case.
[58]See [60] above.
[59]See [61] above.

We now turn to consider whether the judge erred in finding that VCAT did not misapply the principles set out above.

For the reasons we have already given, VCAT would have erred if it had held that evidence of actual costs incurred by the respondent was irrelevant and could be ignored without any consideration being given to it. However, VCAT did not adopt that approach. A fair reading of its reasons on this issue, as set out at [51] above, indicates that it was aware of the principles set out in Sopov for assessing a quantum meruit claim, and did not act inconsistently with those principles. It had regard to the incomplete evidence of the actual costs incurred by the respondent, in the form of Mrs Mann’s costs spreadsheet, and decided to prefer the comprehensive evidence of Mr Pitney. Further, VCAT was aware of Mr Pitney’s assessment of the overall costs of the project and the quantum meruit amount in his final report and ultimately decided to accept the latter assessment.

In the circumstances of the present case, it was open to VCAT to assess the quantum meruit amount to be awarded to the respondent on the basis of Mr Pitney’s evidence for the following reasons.

First, Mr Pitney’s evidence was not seriously challenged in cross-examination and there was no contrary evidence from any other quantity surveyor. Mr Lorich was a general building expert rather than a quantity surveyor and he did not purport to value all of the work performed by the respondent.

Secondly, as VCAT rejected Mrs Mann’s evidence regarding actual costs, there was no comprehensive and reliable evidence of actual costs that would have enabled VCAT to assess the quantum meruit amount on the basis of such costs.

Thirdly, such evidence of actual costs as was before VCAT was insufficient to cast any serious doubt on the appropriateness of the methodology adopted by Mr Pitney or the accuracy of his calculations. We accept the respondent’s submissions summarised at [66] above that the difference between Mr Pitney’s estimate of overall costs ($1,580,220) and his quantum meruit assessment ($1,722,611) was not disproportionate, particularly when interest is taken into account. We reject the applicants’ submission that VCAT’s decision has resulted in the respondent receiving a windfall gain.

Fourthly, as VCAT found that the scope of work performed by the respondent substantially differed from the scope of work in the contract, VCAT was justified in not relying on the contract price in assessing the quantum meruit amount.

We do not accept the applicants’ submission that VCAT’s analysis was flawed as it was based on a misconception that, where a party to a building contract accepts a repudiation by the other party, the contract is avoided ab initio. We agree with the judge that, read in context, VCAT’s observation was intended to refer to the statement in Sopov that the well-established right of a builder to make a quantum meruit claim upon acceptance of an owner’s repudiation was based on the fiction that the contract was void ab initio. In any event, even if VCAT had misconstrued the statement in Sopov, such an error would not have affected the correctness of VCAT’s ultimate conclusions as to the respondent’s entitlements. Accordingly, it would not have been an operative or vitiating error.

We also do not accept the applicants’ submission that VCAT failed to take into account the discrepancy between the contract price and the quantum meruit assessment and thus failed to ensure that the amount awarded by it was fair and reasonable. VCAT’s statements, which are set out at [51] above, make it clear that it appreciated that its task was to assess the fair and reasonable value of the benefit conferred on the applicants by the work that the respondent performed. It accepted Mr Pitney’s evidence and made appropriate adjustments to his assessment to arrive at the fair and reasonable value because it found that his evidence was more reliable than the evidence adduced by the applicants.

Moreover, VCAT had regard to Mr Pitney’s assessment of the overall cost of the project as well as the quantum meruit amount and observed that the respondent ‘has recovered considerably more than it might have recovered had [its] claim been confined to the Contract’.[60] Accordingly, it cannot be said that VCAT did not take into account the discrepancy between the contract price and actual costs on the one hand and the quantum meruit assessment on the other hand.
[60]See [53] above.

It follows from the above analysis that VCAT did not misapply the principles for assessing the quantum meruit amount to be awarded to the respondent and the judge was correct to find that VCAT had not made an error of law in assessing that amount.

Ground 2: Availability of quantum meruit as a remedy

Ground 2 is in the following terms:

The trial judge erred in holding that [VCAT] was entitled in law to hold that consequent upon the termination of the major domestic building contract following a repudiation of the contract, the Respondent was entitled at law to sue on a quantum meruit for the work carried out by it in accordance with the principles set out by the Court of Appeal in Sopov … whereas the trial judge and [VCAT] should have held that remedy should have been unavailable.

Relevant case law

The availability of quantum meruit as an alternative to contract damages where a builder accepts a repudiation of a building contract by an owner has been recognised by the Privy Council in Lodder v Slowey,[61] the Full Court of the Supreme Court of Victoria in Brooks Robinson Pty Ltd v Rothfield,[62] the New South Wales Court of Appeal in Renard and the Queensland Court of Appeal in Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd.[63]
[61][1904] AC 442, 453.
[62][1951] VLR 405, 409.
[63][1995] 2 Qd R 350, 353 (‘Iezzi’).

The High Court, comprising Deane, Dawson and McHugh JJ, refused special leave to appeal against the decision in Renard. Deane J said the following:

An appeal in this case would give rise to the question whether the Court of Appeal was in error in failing to hold that, as a matter of law, it was simply not open to the arbitrator to award an amount to the respondent which, when added to amounts paid under the contract, resulted in the respondent being paid more than if it had carried out the contract.
In a context where the conclusion had been reached that the contract had been repudiated by the applicant and that that repudiation had been accepted by the respondent, the Court does not think that the decision of the Court of Appeal on that particular question of law is attended by sufficient doubt to warrant a grant of special leave to appeal to this Court. In that regard, we are conscious of the fact that Justice Meagher recognized in the Court of Appeal:
that the amount contractually agreed is evidence of the reasonableness of the remuneration claimed on a quantum meruit; strong evidence perhaps, but certainly not conclusive evidence.[64]

[64]Transcript of Proceedings, Minister for Public Works v Renard Constructions (ME) Pty Ltd (High Court of Australia, 1992/S44, Deane, Dawson and McHugh JJ, 2 October 1992) 24.

In Sopov, this Court stated the following about the availability of the remedy of quantum meruit to a builder who accepts an owner’s repudiation of a building contract:

Since 1994, there has been a growing chorus of criticism — judicial as well as academic — of the availability of quantum meruit as an alternative to contract damages where a repudiation is accepted. The criticism rests on the following propositions:
1When a contract is terminated at common law by the acceptance of a repudiation, both parties are discharged from the further performance of the contract, but rights which have already been unconditionally acquired are not divested or discharged unless the contract provides to the contrary.
2If there is a valid and enforceable agreement governing the claimant’s right to payment, there is ‘neither occasion nor legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration’.
3Accordingly, there is no room for a restitutionary remedy since the builder’s claim to payment is governed by the contract under which the work was carried out up to the point of repudiation.

The decisions in Lodder v Slowey and in Brooks Robinson can be seen to have been founded on the ‘rescission fallacy’, that is, the notion that the acceptance of a repudiation had the effect of rescinding the contract ab initio. On that view, there was no ‘valid and enforceable agreement’ governing the claim for work and labour done up to the time of acceptance of the repudiation. That fallacy was dispelled by the High Court in 1933 in McDonald, though it persisted in Brooks Robinson, which was decided much later. According to the critics, rejection of the rescission analysis should have led — and should certainly now lead — to a recognition that it is an error of principle to permit recovery on a quantum meruit in these circumstances.
In our respectful view, these criticisms are very powerful. Unconstrained by authority, we might well have upheld the principal’s argument that Kane’s only remedy in these circumstances was to sue on the contract. But we are heavily constrained by authority, as explained earlier. What was said in 1994 to be ‘too well settled by authority to be shaken’ is all the more so 15 years later. We regard the High Court’s refusal of special leave to appeal from the decision in Renard as of particular significance, notwithstanding that the point at issue there was whether the contract price placed a ceiling on the quantum meruit claim, not whether such a claim was available in the first place. As we have seen, the New South Wales Court of Appeal in Renard had affirmed the availability of quantum meruit in a repudiation case, despite acknowledging expressly that the rescission theory of repudiation had long since been viewed as ‘heretical’.
The right of a builder to sue on a quantum meruit following a repudiation of the contract has been part of the common law of Australia for more than a century. It is supported by decisions of intermediate courts of appeal in three States, all of which postdate McDonald and two of which postdate Pavey & Matthews. If that remedy is now to be declared to be unavailable as a matter of law, that is a step which the High Court alone can take.[65]

[65]Sopov (2009) 24 VR 510, 514–15 [9]–[12] (citations omitted).

The High Court comprising Kiefel and Bell JJ refused special leave to appeal against the decision in Sopov. Kiefel J said that, in the circumstances of that case, ‘the interests of justice [did] not require the grant of special leave’.[66]
[66]Transcript of Proceedings, Sopov v Kane Constructions Pty Ltd [2009] HCATrans 338 (11 December 2009) 335.

In Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd,[67] the High Court dealt with the validity of a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW). The Court stated that that Act is not ‘concerned to provide security for payment of an amount which, according to prevailing authority, might be claimed as an alternative to damages by way of restitution for work carried out … in the event of [a] construction contract terminating on acceptance of repudiation’.[68] In a footnote, the Court cited Sopov as that ‘prevailing authority’.[69]
[67](2016) 260 CLR 340 (‘Southern Han’).
[68]Southern Han (2016) 260 CLR 340, 362 [66].
[69]Southern Han (2016) 260 CLR 340, 362 [66] n 38.

Parties’ submissions

The applicants submitted that the availability of quantum meruit in a case such as the present has been the subject of criticism and referred to the observations in Sopov set out at [92] above. They contended that, although the judge was bound by Sopov, their application for leave to appeal now presents this Court with ‘a particularly good opportunity for the controversy as to the appropriateness of the availability of quantum meruit upon the termination [of a building contract] to be further considered judicially’.

The respondent submitted that this Court should not reopen the issue of the availability of quantum meruit to a builder after the acceptance of repudiation of a contract. It contended that this Court’s statement in Sopov, set out at [92] above, that quantum meruit had been available to a builder in such circumstances for more than a century, and that any change to that position would be a matter for the High Court, is as apt today as it was when Sopov was decided in 2009.

Decision

In the absence of a submission by the applicants that Sopov, Renard and Iezzi are plainly wrong, no occasion arises for us to consider the correctness of those decisions. We would add, however, that we endorse the observations made by this Court in Sopov set out at [92] above. Nothing has transpired in the nine years since those observations were made which lessens their force.

Grounds 3 and 4: Effect of s 38 on variations in a quantum meruit claim

Grounds 3 and 4 are in the following terms:

Ground Three
(a)The trial judge erred in holding that section 38 of the [Act] did not apply to the Respondent’s claim in restitution for the domestic building work carried out by the Respondent in circumstances where such domestic building work arose out of the variation of the plans or specifications by the building owner.
(b)… His Honour should have concluded that s 38 applied to the Respondent’s variation claims, being domestic building work, notwithstanding there was repudiation of the major domestic building contract and termination of the said contract.

Ground Four
(a)The trial judge erred in holding that in respect of s 38 of the Act that as there was no definition of ‘variation’ in the Act, the meaning of ‘variation’ as used in the context of s 38 of the Act ‘tends to favour the meaning of a change in the terms of the contract rather than a change in the work’.
(b)… His Honour should have held that s 38 of the Act applied to works carried out under a major domestic building contract arising out of a change to the plans or specifications, and not to a change in the terms of the contract.

Relevant legislation

Section 38 of the Act provides as follows:

38 Variation of plans or specifications—by building owner
(1)A building owner who wishes to vary the plans or specifications set out in a major domestic building contract must give the builder a notice outlining the variation the building owner wishes to make.
(2)If the builder reasonably believes the variation will not require a variation to any permit and will not cause any delay and will not add more than 2% to the original contract price stated in the contract, the builder may carry out the variation.
(3)In any other case, the builder must give the building owner either—
(a) a notice that—
(i)states what effect the variation will have on the work as a whole being carried out under the contract and whether a variation to any permit will be required; and
(ii)if the variation will result in any delays, states the builder’s reasonable estimate as to how long those delays will be; and
(iii)states the cost of the variation and the effect it will have on the contract price; or

(b)a notice that states that the builder refuses, or is unable, to carry out the variation and that states the reason for the refusal or inability.

(4)The builder must comply with subsection (3) within a reasonable time of receiving a notice under subsection (1).
(5)A builder must not give effect to any variation asked for by a building owner unless—
(a)the building owner gives the builder a signed request for the variation attached to a copy of the notice required by subsection (3)(a); or

(b)       subsection (2) applies.
(6)A builder is not entitled to recover any money in respect of a variation asked for by a building owner unless—
(a)       the builder has complied with this section; or
(b)       [VCAT] is satisfied—
(i)that there are exceptional circumstances or that the builder would suffer a significant or exceptional hardship by the operation of paragraph (a); and
(ii)that it would not be unfair to the building owner for the builder to recover the money.

(7)If subsection (6) applies, the builder is entitled to recover the cost of carrying out the variation plus a reasonable profit.
(8)This section does not apply to contractual terms dealing with prime cost items or provisional sums.

Other provisions of the Act which may inform the proper construction of s 38 are as follows:

16 Builder must not seek more than the contract price
(1)A builder who enters into a domestic building contract must not demand, recover or retain from the building owner an amount of money under the contract in excess of the contract price unless authorised to do so by this Act.
Penalty: 100 penalty units.
(2)Subsection (1) does not apply to any amount that is demanded, recovered or retained in respect of the contract as a result of a cause of action the builder may have that does not involve a claim made under the contract.

…
53       Settlement of building disputes
(1)[VCAT] may make any order it considers fair to resolve a domestic building dispute.
(2)Without limiting this power, [VCAT] may do one or more of the following—
(a)       refer a dispute to a mediator appointed by [VCAT];
(b)       order the payment of a sum of money—
(i)found to be owing by one party to another party;
(ii)by way of damages (including exemplary damages and damages in the nature of interest);

(iii) by way of restitution;

…

…
133 Effect of failure to comply with a requirement of this Act
A failure by a builder to comply with any requirement in this Act in relation to a domestic building contract does not make the contract illegal, void or unenforceable, unless the contrary intention appears in this Act.

Clause 12 of the contract

Clause 12 of the contract deals with variations requested by the owner. Clause 12.1 reflects s 38(1) of the Act, save that it requires the owner to provide a written notice of the requested variation. Clauses 12.2 and 12.3 reflect ss 38(2) and (3) of the Act. Clauses 12.4 and 12.8 provide as follows:

12.4     Builder not to commence variation until certain matters satisfied
The Builder will not commence any variation requested by the Owner unless either:
·     the Owner has given to the Builder a signed written request for the variation and that written request is attached to the notice required by the Builder under Clause 12.3;
OR
·     the Builder reasonably believes that the variation requested by the Owner:
(i)will not require any amendment to any permit; AND
(ii)will not cause any delay in reaching Completion; AND
(iii)will not add more than 2% to the Original Contract Price.

…
12.8     Owner’s obligation to pay for variation
Whenever the Builder has, under clause 12.4 or 13.2, accepted an obligation to carry out a variation then the Owner hereby agrees to PAY to the Builder:
·     the agreed variation price
OR
·     if the variation falls within clause 12.2 and no price had been agreed for the variation, the documented cost of carrying out the variation plus 15% of that cost for the Builder’s margin
LESS
·     any deposit that the Owner may have already paid in respect of that variation under Clause 12.6
The Builder may include in its payment claims amounts of money in respect of all additional work completed [and related materials and services provided] to the date of the claim.

Decisions of VCAT and judge on s 38 issues

VCAT said the following about the inclusion of amounts for variations in the respondent’s quantum meruit claim and whether s 38 of the Act applied to that part of the claim:

The total cost of all variations was very large indeed. In these circumstances, it would be most unfair to the [respondent] not to allow [it] to recover a reasonable price for the additional work the [applicants] asked [it] to do and it would not be unfair to the [applicants] to allow it.
…
Most of the variations claimed would not have required an amendment to the building permit and would not have caused any delay to the work. Moreover, none of them added more than 2% to the original Contract price stated in the Contract. In such a case, where the [applicants] had requested the work, the [respondent] was able to carry out the variation, even though the [applicants] did not give it a signed request pursuant to subsection 5.
In any case, since the [applicants] requested the variations and have had the benefit of the work it would not be unfair to order them to pay that sum plus ‘a reasonable profit’ as provided in subsection 7. In the present case, Mr Pitney has assessed a reasonable margin as being 20%.
…
Because of the conclusion that I have reached on the termination issue the [respondent’s] claim for recovery on a quantum meruit basis is established and it is entitled to an amount that reflects the value of the benefit that it has conferred upon the [applicants], which I think is the fair and reasonable value of its work. The assessment that I have to make is not the [respondent’s] entitlement according to the Contract but rather, the reasonable value of the work and materials the [applicants] have requested and the value of the benefit they have received from the [respondent].
Accordingly, it is unnecessary for me to determine whether section 38 or the equivalent provision in the Contract document applies. If I find that the work that was done was requested by the [applicants], the [respondent] is entitled to its fair and reasonable value which might be quite different from the claim that it has made or what it might have been entitled to under the terms of the Contract. Consequently, in regard to each variation I only need to determine whether or not the work was requested and whether or not it has been included in the valuation that Mr Pitney has made.

…
It would seem the variations are taken into account in the assessment of a quantum meruit claim and indeed, that will be necessary if the full value of the benefit conferred is to be ascertained. In this regard, [in Sopov] the Court [of Appeal] said at paragraph 43:
If the work the subject of the variations has been carried out — and there was no dispute here that it had been — the only question is the fair and reasonable value of the work. It is irrelevant whether or not the work fell outside the original contractual scope. All that matters is that the performance of the work has conferred a benefit on the owner, for the reasonable value of which the Builder should be remunerated.[70]

[70]VCAT decision [115]–[117], [119]–[120], [511], [519]–[520].

The judge held that VCAT’s conclusions in relation to s 38 did not disclose any error of law. He held that s 38 does not apply to the recovery of money by a builder on a quantum meruit basis for two reasons.[71] First, as a matter of construction, the word ‘variation’ in s 38 meant ‘a change in the terms of the contract rather than a change in the work’.[72] Secondly, this interpretation based on ‘contextual indications’ is ‘strengthened by the principle of legality’.[73]
[71]Supreme Court decision [58], [63], [81].
[72]Supreme Court decision [72].
[73]Supreme Court decision [68].

In relation to the principle of legality, the judge relied on the following statement in CMF Projects Pty Ltd v Riggall:[74]

The … presumption of statutory interpretation against abrogation or curtailment of common law rights … requires that a legislative intention to take away a common law right be clearly expressed. The degree of clarity of expression of such an intention that is required has been described in slightly differing ways by justices of the High Court. In Sargood Brothers v The Commonwealth, O’Connor J said at 279 that ‘an Act will never be construed as taking away an existing right unless its language is reasonably capable of no other construction’. To similar effect, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ in Berowra Holdings Pty Ltd v Gordon restated the position thus:
The approach of the courts has consistently been to require very clear legislative intent before treating a statutory provision as taking away common law rights of a plaintiff, where there is an alternative construction available.

The legislative intention to take away a common law right may be expressly stated or it may arise by necessary implication. Here, an intention to abrogate the restitutionary right to claim quantum meruit has not been expressly articulated. The question is whether a clear legislative intention to that effect is necessarily implied in the provisions of the [Domestic Building Contracts Act 2000 (Qld)].[75]

[74][2016] 1 Qd R 187 (‘Riggall’).

[75]Riggall [2016] 1 Qd 187, 197–8 [34]–[35] (citations omitted).

The judge referred to the decision of Beach J in Sevastopoulos v Spanos[76] which dealt with s 19(1) of the House Contracts Guarantee Act 1987 (‘HCG Act’). That section prohibited a builder from recovering the cost of any work performed or materials supplied under a variation ‘unless the variation is in writing and signed by the builder and the building owner …’. Beach J held that s 19(1) of the HCG Act made it clear that a builder could not recover the cost of any work or materials supplied under a variation which did not comply with the section and added that ‘it does not matter whether any claim by a builder in respect of such cost is brought in contract in indebitatus assumpsit or otherwise’.[77] Finally, in relation to the builder’s alternative claim based on equitable estoppel, Beach J did not reject the claim on the basis that equitable estoppel is not available but rather on the basis that its elements were not satisfied in that case.[78]
[76][1991] 2 VR 194 (‘Sevastopoulos’).
[77]Sevastopoulos [1991] 2 VR 194, 205.
[78]Sevastopoulos [1991] 2 VR 194, 205.

The judge in the present case distinguished Sevastopoulos on five bases. First, as Sevastopoulos involved a claim in contract, Beach J’s observations about claims in ‘indebitatus assumpsit or otherwise’ were obiter. Secondly, Beach J’s views were strongly influenced by his understanding of the effect of certain standard form contractual restrictions on recovery for undocumented variations. Thirdly, there are significant differences between the HCG Act and the Act: s 19(1) of the HCG Act was targeted directly against recovery of ‘the cost of any work performed or materials supplied’ under a variation whereas s 38(6) of the Act prohibits the recovery of ‘any money in respect of a variation’.[79] Fourthly, the HCG Act did not contain provisions equivalent to ss 16(2), 53(2)(b)(iii) or 133 of the Act. Fifthly, Sevastopoulos predates Sopov.
[79]Supreme Court decision [78].

Parties’ submissions

The applicants submitted that, on its proper construction, s 38 applies to variations to the work to be performed by a builder rather than variations to the terms of a building contract, and that the judge’s contrary finding was erroneous. They also submitted that s 38 applies to a builder’s claim for variations whether the claim is made in contract or in quantum meruit.

The applicants contended that s 38 ‘covers the field’ in relation to owner-requested variations. They argued that, in contract and in quantum meruit, s 38 has the following effect:

(a) If a builder has complied with the notice requirements of s 38, the builder is only entitled to recover the cost of carrying out a variation plus a reasonable profit in accordance with s 38(7). Section 38(7) is a statutory quantum meruit entitlement which excludes general law principles for assessing a quantum meruit claim. Section 38(7) also excludes any price for a variation that has been agreed by the parties in accordance with the building contract.

(b) If a builder has not complied with the notice requirements of s 38 but s 38(2) or s 38(6) applies, then the builder’s entitlement is as set out in (a) above, that is, the entitlement is confined to the cost of carrying out a variation plus a reasonable profit in accordance with s 38(7).

(c) If a builder has not complied with the notice requirements of s 38 and neither s 38(2) nor s 38(6) applies, the builder is prohibited from recovering any money in respect of a variation in accordance with s 38(6).

The applicants submitted that the judge erred in finding that s 38 had no application to the respondent’s claim in circumstances where the respondent had accepted their repudiation and sued in quantum meruit. They argued that s 38 did apply and that s 38(6) would prevent the respondent from recovering payment for any variations if it did not comply with s 38 or, alternatively, if s 38(2) or s 38(6)(b) applied, the respondent would be limited to the relief set out in s 38(7).

The applicants contended that the judge’s interpretation of s 38 was incorrect for two reasons. First, unlike s 16(2), s 38 does not state that its provisions do not apply to a builder’s non-contractual claim. Accordingly, so it was said, ss 38(6) and (7) apply to such a claim. Secondly, the judge’s interpretation was based on the flawed premise that, upon acceptance of repudiation and termination of a contract, the parties do not retain the legal rights that had accrued prior to termination.[80] Accordingly, the applicants argued that insofar as the respondent had any accrued right to seek payment pursuant to s 38(7) prior to termination, that right subsisted after the termination. This meant, so it was said, that the respondent would be entitled to recover the cost of carrying out the variations plus a reasonable profit and that VCAT erred in ignoring this method of valuation and adopting Mr Pitney’s method.
[80]The applicants relied on McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 476–7.

The applicants relied on the analysis of s 19(1) of the HCG Act by Beach J in Sevastopoulos and suggested that it should inform the construction of s 38 of the Act. However, the applicants’ submissions did not engage with the reasons of the judge in the present case for distinguishing Sevastopoulos.

The respondent submitted that it was open to the judge to find that s 38, read in context, does not demonstrate a clear intention to remove a builder’s right to make a claim in quantum meruit in circumstances where a contract has been repudiated. It contended that in the light of this Court’s statement in Sopov that ‘[t]he right of a builder to sue on a quantum meruit following a repudiation of the contract has been part of the common law of Australia for more than a century’,[81] the principle of legality required that there be clear words in s 38 for it to have the effect of abrogating that right. The respondent also contended that, to the contrary, ss 16, 53 and 133 of the Act strongly suggest that Parliament did not intend to interfere with this fundamental common law right. Accordingly, it submitted that the judge was correct in his analysis that s 38 did not affect its ability to claim restitution on a quantum meruit basis.
[81]Sopov (2009) 24 VR 510, 515 [12]. See [92] above.

The respondent argued that the construction of s 38 contended for by the applicants would give rise to significant evidentiary problems and involve an element of artificiality because VCAT would have to assess the agreed scope of work on general restitutionary principles and the variations on the basis set out in s 38(7).

The respondent submitted that, at VCAT, the applicants’ reliance on s 38 was directed to its contractual claim rather than its quantum meruit claim and that it is prejudiced by their reliance on s 38 on the latter claim before this Court. According to the respondent, had the applicants relied on s 38 in relation to its quantum meruit claim, it would have sought a finding by VCAT under s 38(6)(b) and would have adduced evidence to support such a finding. The respondent contended that paras 115–117 of VCAT’s reasons, which are set out at [102] above, indicate that VCAT would have made such a finding. The respondent also submitted that, if the applicants had relied on s 38 as a statutory prohibition to the recovery of quantum meruit relief, it would have raised an equitable estoppel argument and adduced evidence to support that argument.

Decision

In our opinion, grounds 3 and 4 are not made out.

These grounds raise an important question of construction in relation to s 38, namely, whether the section applies only to claims for variations made in contract, or also to claims for variations in quantum meruit where a builder has accepted an owner’s repudiation of the contract. We have called this the ‘overarching construction question’. This is a difficult question because s 38 is not clearly drafted.

Before considering the overarching construction question, it is necessary to analyse the meaning of key words and phrases in s 38 and the interrelationship between its sub-sections, as this analysis will assist in the resolution of the overarching question.

The word ‘variation’ is central to s 38. The issue that arises in relation to it is whether the judge was correct to conclude that it means a variation to the terms of a building contract rather than a variation to the work to be performed.

With respect, the two competing meanings are not necessarily mutually exclusive. The ‘plans or specifications’ to which s 38 refers form part of the contract[82] and define the scope of the work to be performed in accordance with the contract. As the scope of work forms part of the subject matter of the contract, any variation to the scope of work involves a variation to the contract. Likewise, and self-evidently, any variation to the plans and specifications — or to any term of the contract that deals with the scope of work — involves a variation to the work to be performed.
[82]Clause 1.0 of the contract defines ‘Contract’ to mean ‘this document, the Plans, Specifications, and other documents annexed to or incorporated by reference in the Contract’. Section 31(1) of the Act sets out mandatory requirements for a major domestic building contract, two of which are that it ‘has a detailed description of the work to be carried out under the contract’ and that it ‘includes the plans and specifications for the work’.

There are many indications in s 38 that variations to a contract fall outside the section unless they have a bearing on the scope of work as described in the plans or specifications or other contractual provisions which deal with the scope of work. Those indications include the phrases ‘vary the plans or specifications’, ‘the variation … will not cause any delay’, ‘the builder may carry out the variation’, ‘states what effect the variation will have on the work as a whole being carried out under the contract’, ‘states that the builder refuses, or is unable, to carry out the variation’ and ‘the builder is entitled to recover the cost of carrying out the variation’. We also note that s 39 refers to the ‘plans or specifications set out in a major domestic building contract’ being ‘varied in accordance with section 37 or 38’.

It follows that s 38 applies to a variation to the scope of work.

While s 38 contemplates that a request for a variation by an owner will be in writing, s 38(2) is wide enough to accommodate an oral request for a variation where the requirements of that provision are satisfied.

The phrases ‘[a] builder is not entitled to recover any money’ and ‘for the builder to recover the money’ in s 38(6) are also very significant to the scope of s 38.

The phrase ‘any money’ is very wide and, read literally, can extend to all claims by a builder for payment for variations whether based in contract or in quantum meruit. If the phrase is construed in this manner, a builder would only be able to recover payment for variations in accordance with s 38. On this basis, s 38 would be treated as an exclusive code for the recovery of such payments.

The alternative construction of the phrase ‘any money’ is that it means the agreed contractual price for a variation. On this basis, s 38(6) prohibits a builder from recovering the agreed contractual price for a variation unless one of three exceptions applies. First, where the builder has complied with the notice requirements of s 38. Secondly, where the notice requirements do not apply because s 38(2) applies. Thirdly, where VCAT is satisfied of the matters set out in s 38(6)(b). Where these exceptions do not apply, the builder is entitled to recover an amount calculated on the ‘cost plus profit’ basis set out in s 38(7).

That construction treats ‘any money’ in the opening words of s 38(6) and ‘the money’ in s 38(6)(b)(ii) as referring to the money claimed by a builder for a variation in accordance with the contract, but not to money claimed other than under the contract. This more limited scope for s 38(6) would, as explained below, have a correspondingly limiting effect on the applicability of the ‘cost plus profit’ provision in s 38(7).

This brings us to a key issue that affects the scope of s 38, namely, the meaning of the phrase ‘[i]f subsection (6) applies’ in s 38(7). Two alternative constructions of the phrase are open. The first is that the phrase refers to the prohibition against recovery of ‘any money’ in s 38(6). The second is that it refers to the situation where one of the exceptions to the prohibition in s 38(6) is satisfied. The key difference between the two interpretations is that, on the first interpretation, a builder would be entitled to payment on the ‘cost plus profit’ basis in s 38(7) only where the prohibition operates whereas, on the second interpretation, a builder would be entitled to payment on that basis only where an exception is satisfied. By implication, on the second approach, there would be no entitlement to payment under s 38 if no exception in s 38(6) was satisfied.

In our view, the phrase ‘[i]f subsection (6) applies’ in s 38(7) refers to a situation where the prohibition in s 38(6) applies. Where an exception to the prohibition applies and the parties have agreed to a contractual price for a variation, there is no need for s 38 to confer on a builder an entitlement to be paid on a ‘cost plus profit’ basis. It would be surprising if s 38 were to have such an operation, which would displace the builder’s statement under s 38(3)(a)(iii) of the cost of the variation and the effect it would have on the contract price. Such an anomaly should be avoided.[83] But the alternative construction makes commercial sense so that, where the prohibition in s 38(6) does operate, s 38(7) serves to fill a gap by stipulating the builder’s entitlement to payment.
[83]It is a well-established principle of statutory interpretation that, where alternative interpretations are open, one of which would lead to absurd, unreasonable or anomalous consequences, that interpretation should not be preferred: Commissioner of State Revenue v EHL Burgess Properties Pty Ltd (2015) 209 LGERA 314, 333 [70].

In summary, where a builder carries out a variation to the building work at the request of an owner, s 38 has the following effect:

(d) If the builder has complied with the notice requirements of s 38, the builder is entitled to recover the agreed contractual price for a variation.

(e) If the builder has not complied with the notice requirements of s 38 but s 38(2) or s 38(6)(b) applies, s 38(6) does not ‘apply’ within the meaning of s 38(7) and:

(i) if the parties have agreed to a contractual price for a variation, the builder is entitled to recover the agreed price;

(ii) but if the parties have not agreed to a contractual price for a variation, the builder is not entitled to recover on the ‘cost plus profit’ basis in s 38(7).[84]

(c) If the builder has not complied with the notice requirements of s 38 and neither s 38(2) nor s 38(6)(b) applies, s 38(6) ‘applies’ within the meaning of s 38(7), and so the builder is entitled to recover on the ‘cost plus profit’ basis in s 38(7), and not under the contract, irrespective of whether the parties have agreed to a contractual price for a variation.

[84]As discussed at [145] below, in this situation, the builder would be entitled to recover payment for the variation on a quantum meruit basis.

The question that remains is whether the above analysis applies only to claims under contract or whether ‘any money’ extends to claims in quantum meruit. This is the overarching construction question. There is no doubt that s 38 applies to a builder’s claims for variations made under a building contract. What is in contention is whether the section also extends to a builder’s claims made in quantum meruit where the builder has accepted an owner’s repudiation of the contract. That issue must be resolved by applying ordinary principles of statutory interpretation. Although, in accordance with those principles, primacy must be given to the text of s 38, the context in which s 38 appears in the Act and its purpose must be considered.[85] Legislative history and extrinsic materials may also be of assistance in resolving any ambiguities.[86]
[85]Reardon v Magistrates’ Court of Victoria [2018] VSCA 76 [75]–[83] (‘Reardon’).
[86]Reardon [2018] VSCA 76 [83]. See also s 35(b) of the Interpretation of Legislation Act1984 which permits courts to have regard to extrinsic materials that are relevant to interpretation of a statutory provision.

There is nothing in the text of s 38 that gives any indication as to whether the section is confined to contractual claims for variations. The language of s 38 is broad enough to cover contractual claims as well as claims in quantum meruit where a builder has accepted an owner’s repudiation of the contract. On this broad view, s 38 would be treated as an exclusive code dealing with variations and the only right that a builder would have to be paid on a quantum meruit basis where the builder has accepted an owner’s repudiation of the contract would be in accordance with the provisions of s 38.

On the other hand, as the above analysis of the key provisions of s 38 has demonstrated, it would not be inconsistent with the language of s 38 to construe the section as being confined to contractual claims for variations. This narrower view would not render any provision of s 38 otiose or dilute its ordinary meaning; it would merely confine the operation of the provisions to contractual claims.

We will proceed on the basis that the language of s 38 does not give rise to a single unambiguous interpretation. In our opinion, the context in which s 38 appears in the Act does not provide much assistance in resolving the overarching construction question.

Section 16(2) can be read in two ways. First, as it draws a distinction between contractual claims and non-contractual claims, and preserves a builder’s rights in respect of the latter claims, it may be said that s 38 is not intended to affect claims for variations made in quantum meruit. Secondly, it may be said that the fact that the distinction between the two types of claim is expressly recognised in s 16 but not in s 38, means that the distinction is inapplicable to s 38 and that the section applies to both types of claim.

Section 53(2)(b) confers broad jurisdiction on VCAT to grant relief ‘by way of damages’ and ‘by way of restitution’. The section recognises that restitutionary remedies are separate and distinct from contractual remedies and thus indicates that s 38 was not intended to interfere with the former remedies. On the other hand, it may be said that the fact that s 53(2)(b) enables VCAT to grant restitutionary remedies says nothing about the circumstances in which any particular provision of the Act either permits or prohibits the granting of those remedies under s 53(2)(b).

Section 133 does not advance the construction issue any further. This is because the statement that a failure by a builder to comply with a requirement in the Act does not make the contract illegal, void or unenforceable is subject to an exception where the contrary intention appears in this Act. This exception drives one back to the specific wording of the provision under consideration, in this case s 38.

Our analysis of ss 16, 53 and 133 of the Act indicates that the context in which s 38 appears in the Act is either neutral, or slightly favours the construction that s 38 does not apply to quantum meruit claims for variations consequent upon acceptance of an owner’s repudiation of a contract.

The evident purpose of s 38 is to protect owners from being liable for variations where builders do not provide sufficient information to the owners to enable them to make an informed decision whether to sign a contract or proceed with a variation. This purpose is borne out by statements made in Parliament prior to the enactment of the Act and its predecessor, the HCG Act. Those statements referred to an unscrupulous practice by some builders of underquoting building work and seeking to recover the difference by subsequent variations, the need for which was not readily apparent to the owners at the time they signed the building contract.[87] Section 19 of the HCG Act and s 38 of the Act were enacted to prevent owners from being financially disadvantaged by additional costs concealed in subsequent undocumented and unsigned variations.[88]
[87]Victoria, Parliamentary Debates, Legislative Assembly, 24 October 1995, 696 (Jan Wade); Victoria, Parliamentary Debates, Legislative Council, 23 November 1995, 755–6 (Gerald Ashman); Victoria, Parliamentary Debates, Legislative Council, 30 April 1987, 1360.
[88]See n 87 above.

The need for consumer protection provisions such as s 38 to prevent the wrongful conduct of builders causing financial harm to owners is readily understandable. However, the consumer protection purpose of s 38 does not necessarily require that it be construed as extending to claims in quantum meruit, consequent upon a builder’s acceptance of an owner’s repudiation, as well as contractual claims. This is because in the case of such a quantum meruit claim, it is the owner who has engaged in wrongful conduct by repudiating the contract without having a legal basis for doing so. In such a case, restitutionary principles seek to prevent the owner from taking the benefit of work performed at the owner’s request without paying a fair and reasonable price for it. Accordingly, a construction of s 38 which confines it to contractual claims would not undermine the consumer protection purpose of the section because a builder who has not complied with the requirements of s 38 would only be entitled to recover the fair and reasonable value of the benefit conferred by the builder on the owner at the owner’s request.[89]
[89]It is to be noted that the introductory paragraph of the explanatory memorandum to the Domestic Building Contracts and Tribunal Bill 1995 states that the Bill, when enacted, ‘will ensure fairness to builders and consumers alike’: Explanatory Memorandum, Domestic Building Contracts and Tribunal Bill 1995 (Vic) 1.

Apart from explaining the purpose of s 19 of the HCG Act and s 38 of the Act, there is nothing in the explanatory memoranda or second reading speeches for those provisions — or in the additional extrinsic material which the parties drew to our attention — that clarifies whether s 38 was intended to be confined to contractual claims for payment of variations.

There are important differences between s 19 of the HCG Act and s 38 of the Act. Section 19 imposed a near-absolute bar to recovery of payment for variations where its requirements were not satisfied, whereas s 38 contains important exceptions.[90] This legislative history may be said to lessen the prospect that s 38 was intended to preclude recovery of the value of variations in quantum meruit where a builder terminated the contract due to an owner’s repudiation.
[90]Sections 19(2) and (3) of the HCG Act contained some narrow exceptions.

In circumstances where the text, purpose and legislative history of s 38 and the context in which it appears in the Act do not preclude it from being construed as being confined to contractual claims, the principle of legality strongly favours adoption of that construction.

The summary of that principle in Riggall set out at [104] above is sufficient for present purposes.[91]
[91]The principle is discussed in detail by the High Court in Coco v The Queen (1994) 179 CLR 427, 437–8; Momcilovic v The Queen (2011) 245 CLR 1, 46–7 [43]; Lee v New South Wales Crime Commission (2013) 251 CLR 196, 308–311 [308]–[314].

The right of a builder to sue on a quantum meruit following acceptance of an owner’s repudiation of a contract, like all rights based on restitution, seeks to achieve an equitable outcome by ensuring that the builder receives a fair and reasonable amount for the benefit the builder has conferred on the owner by performing work at the owner’s request. As this Court stated in Sopov, that right has been part of the common law in Australia for more than a century. The common law does not distinguish between work performed under the original scope of work and work performed under a variation to that scope of work. In accordance with the principle of legality, s 38 will not be construed as abrogating that right, or significantly narrowing its scope by excluding work performed under a variation, except by clear words or necessary intendment. As we have already demonstrated, there is nothing in s 38 which states that it extends to claims in quantum meruit or which necessarily requires that it be construed in that manner.

Moreover, if claims in quantum meruit were excluded by the section, an anomalous result would follow. In the situation where the prohibition in s 38(6) applies but no contractual price has been agreed for the variation, s 38(7) is not attracted, for the reasons explained above. No part of s 38 would fill the gap by giving the builder an entitlement to payment. Accordingly, if claims in quantum meruit are within the scope of s 38(6), a builder in that situation could recover nothing at all. There is no apparent reason why the provision would pursue that objective, and no language suggesting such an outcome. The construction of s 38 that we have adopted would enable a builder to recover payment for a variation on a quantum meruit basis in the situation postulated above.

Although the applicability of s 38 to a quantum meruit claim was not considered in Sopov, the Court’s observations in the last paragraph quoted at [46] above are consistent with our analysis that it does not apply.

Accordingly, the judge correctly found that s 38 does not apply to the respondent’s quantum meruit claim. The correctness of that finding is not affected by our rejection of the judge’s conclusion about the meaning of ‘variation’ in s 38.

We agree with the judge’s analysis of Sevastopoulos and his reasons for distinguishing that case.[92]
[92]It follows that we do not agree with the conclusion in PACD Pty Ltd v Depas Pty Ltd [2007] VCC 1683 [30(c)], [32] and PACD Pty Ltd v Depas Pty Ltd [2008] VCC 26 [2(b)] that the reasoning in Sevastopoulos applies to s 38 of the Act.

As we have rejected the applicants’ contention that s 38 prevents the respondent from recovering the value of work covered by variations on a quantum meruit basis, it is not necessary for us to consider the respondent’s submissions set out at [114] above.

Conclusion

As grounds 1, 3 and 4 were arguable, we will grant leave to appeal in respect of those grounds and refuse leave to appeal in respect of ground 2. In the light of our conclusions in relation to grounds 1, 3 and 4, the appeal will be dismissed.

---

[2018] VSCA 231

12 September 2018