Category: Home Building Law

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How a quantum meruit claim is to be established

Jason and Michelle Zammit trading as Zammit’s Quality Constructions v Saul Markunsky and Shereen Markunsky [2015] NSWCATCD 21 at [47],[48]

At [47] – Judgement of Bryne J. in Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221 as summarised in Dorter & Sharkey Building and Construction Contracts in Australia, Second Edition as setting out the following principles:

1.‘The courts task is not to assess damages for breach of contract, but to ascertain what is fair and reasonable compensation for the benefit of the services performed, and accepted actually or constructively by the recipient;

2.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; however, the actual cost should not be ignored;

3.Any price or commission agreed between the parties may be received as evidence of the value the parties themselves put on the services performed, even where the services have not been totally performed, but the agreed amount is not determinative of the matter.’

At [48] – Principles relevant to how a quantum meruit is assessed were also discussed by Barrett J in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd.

At [70] – paragraph 82 of Barratt J’s decision in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd justifies an approach where defective work is taken into account in the assessment of a quantum meruit claim. His honour stated:

‘The quality of the work and matters such as its correspondence with specification and fitness for its intended purpose are thus elements of the process of valuation of work for quantum meruit purposes. It follows that the referee was correct in applying a deduction for defects rectification in determining the quantum meruit sum.’

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Recovery on a quantum meruit

Jason and Michelle Zammit trading as Zammit’s Quality Constructions v Saul Markunsky and Shereen Markunsky [2015] NSWCATCD 21

 

 

Section 92 (2) of the Home Building Act states as follows:

‘A person must not demand or receive a payment under a contract for residential building work (whether as a deposit or other payment and whether or not work under the contract has commenced) from any other party to the contract unless:

(a)  a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b)  a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.’

Section 94(1) of the Act states as follows:

‘(1) If a contract of insurance required by section 92 is not in force, in the name of the person who contracted to do the work, in relation to any residential building work done under a contract (the uninsured work), the contractor who did the work:

(a)  is not entitled to damages, or to enforce any other remedy in respect of a breach of the contract committed by any other party to the contract, in relation to that work, and

(b)  is not entitled to recover money in respect of that work under any other right of action (including a quantum meruit).’

Section 94(1A) of the Act states as follows in connection with the above sections:

‘(1A) Despite section 92 (2) and subsection (1), if a court or tribunal considers it just and equitable, the contractor, despite the absence of the required contract of insurance, is entitled to recover money in respect of that work on a quantum meruit basis.’

The effect of the above sections is that builder are not entitled to recover on their claim for money due under the contracts they allege were entered into with owners. Further, builders will not be entitled to recover on a quantum meruit for the work they allege that they have carried out for owners and not been paid for unless recovery be deemed just and equitable.

Section 94(1A) of the Act was considered by Barrett J in Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273. At paragraphs 43 – 61 of his judgement his honour considered the ‘just and equitable criterion under section 94(1A)’ of the Act and the factors bearing upon the just and equitable assessment.

In considering the just and equitable criterion Barrett J. referred to a number of authorities which establish that the words just and equitable are of wide significance. His honour referred to a passage of the judgement of Sheller JA in Stephenson v State Bank of NewSouth Wales (1996) 39 NSWLR 101 where his honour quoted from a decision of the High Court in Talga v MBC International Limited(1976) 133 CLR 622.

The passage quoted was:

‘Stephen, Mason and Jacobs JJ dealing with the issue raised for the Court by the Banking Act 1974 of whether it was just and equitable that a transaction should be treated as valid, said: ‘The court will have before it an existing transaction replete with all its surrounding facts and circumstances and in their light will determine what is just and equitable. In doing so it will certainly be exercising a wide discretion that this is a commonplace of the curial process; the court will be bound to act judicially, exercising its discretion by reference only to such considerations affecting the transaction as, on an examination of the legislation, may be seen to be material to the decision which it is called on to make. Irrelevant matters, matters such as the plaintiffs instanced in the course of argument, which have no rational connection with the policy of the regulations but would be expressive only of the personal predilections of the Court, cannot be allowed by it to play any part in its decision.’

Barrett J. observed that this approach was endorsed by Campbell J in Sullman v Sullman [2002] NSWSC 169.

At paragraph 49 of his judgement Barrett J. stated in connection with section 94(1A) of the Act:

‘The inquiry directed by the statute is therefore, in effect, whether the surrounding circumstances are such as to justify the creation of a right and an obligation as to the payment of the sum separately determined to represent fair remuneration. The Act, as I see it, does not attempt to control quantification. That is left to the general principle imported by the expression “quantum meruit”. The Act is concerned with factors influencing a decision whether, in the particular circumstances in which the court finds the parties, it is fair that one receive the quantum meruit sum and the other pay it.’

Decision of Hall J in Pender v Robwenphi Pty Limited & Anor [2008] NSWSC 1144. In that case Hall J stated, commencing at paragraph 41, in connection with the decision of Barrett J in Eddy Lau Constructions Pty Ltd vTransdevelopment Enterprise Pty Ltd:

‘In relation to the analysis undertaken by Barrett J in Eddy Lau Constructions (supra), the following propositions may be derived from the judgment:-

(1) The words “just and equitable” are of the widest significance and involve evaluations of questions of fact.

(2) In exercising the wide discretion under the provision, a Court or Tribunal is to have regard to considerations affecting the particular transaction as are material to the decision to be made. Irrelevant matters are those that have no rational connection with the policy of the statutory requirement.

(3) The statutory discretion under s.94(1A) must be exercised judicially in light of the whole of the circumstances surrounding the relevant subject matter.

(4) Inquiry is directed to ascertaining whether the surrounding circumstances are such as to justify the creation of a right and an obligation as to the payment of the sum separately determined to represent fair remuneration.

(5) The Act is concerned with factors influencing a decision whether, in the particular circumstances in which the Court finds the parties, it is fair that one receive the quantum meruit sum and the other pay it.

It is apparent from the analysis by Barrett J in Eddy Lau Constructions (supra) that the conduct of the party in breach is an important matter for consideration. In that respect, ignorance or oversight of the statutory requirement under the Act stands in marked contrast to a contravention that is wilful or deliberate.

In the present case, the determination of the Tribunal was, in effect, that the first defendant’s contravention was an inadvertent one, it being a company accustomed to undertaking commercial and industrial work and not home building or renovation work. The Tribunal accepted, as it was entitled to, the evidence given which explained the first defendant’s ignorance or inadvertence. These were matters of fact for the Tribunal’s determination.

In the circumstances of the present matter, on the evidence there was no identification of any particular form of disqualifying conduct by or on behalf of the first defendant that was material to be taken into account in determining what was “just and equitable”.

The Tribunal was also entitled to have regard, as Barrett J did in Eddy LauConstructions (supra) to the fact that, if the first defendant was not granted relief under s.94(1A), the plaintiff would receive the benefit of the work undertaken by the first defendant without having to pay for that work and for the materials supplied. I will return to this issue of “benefit” below.

Finally, there was no factor establish(ed) that resulted in any detriment flowing to the plaintiff by reason of the particular breaches or contraventions by the first defendant. Again, such matters involve a factual determination for the Tribunal.’

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Duty to mitigate loss for defective building work

The Owners – Strata Plan No 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067 at [42] to [47]

Relevant legal principles

Generally speaking, a person who suffers loss as a consequence of a breach of contract is required to act reasonably in relation to that loss in order for the loss to be recoverable. An important aspect of this general principle is that the party who has suffered a loss is under a duty to mitigate its loss. Sometimes the use of the word “duty” in this context is criticised, since there is no requirement that the plaintiff act in a particular way and no requirement that the plaintiff minimise its loss: see, eg, J Carter, E Peden and GJ Tolhurst, Contract Law in Australia, (5th ed, 2007, LexisNexis) at [35-35]. Rather, the principle is that the plaintiff is not entitled to recover losses attributable to its own unreasonable conduct. As O’Connor J explained in Hasell v Bagot, Shakes & Lewis Ltd [1911] HCA 62; (1911) 13 CLR 374 at 388:

[O]ne of the principles on which damages are assessed [is] that a party to an agreement suffering injury from the other party’s breach of its terms is bound to exercise reasonable care in mitigating the injurious consequences of the breach, and is not entitled to recover from the party in default any damage which the exercise of reasonable care on his part would have prevented from arising.

The duty to mitigate, however, is not the only example of the application of the general principle. Another is the principle that a plaintiff whose property is damaged or defective as a consequence of the defendant’s breach is generally entitled to recover the costs of reinstating the property so that it corresponds to the contractual promise, except to the extent that it is unreasonable to insist on reinstatement: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 at 618-9.
In the case of building contracts, it is also generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects. Often, of course, the building contract itself requires the owner to repair defects or sets out a procedure by which defects are to be made good: see, eg, Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302; (2010) 26 BCL 335. But, even if it does not, the owner is required to give the builder an opportunity to minimise the damages it must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs: see J Bailey, Construction Law, (Vol II, 2011, Informa Law) at [14.109]; Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159 (reversed on other grounds in Cassidy v Engwirda Construction Co (No 2) [1968] QWN 47 (HC); (1968) 42 ALJR 168). That obligation may be an aspect of the duty to mitigate, since it may be less expensive for the builder rather than a third party to rectify the defects, particularly if the builder is still on site. But the obligation is not simply an aspect of the duty to mitigate. The cost to the builder of undertaking the repairs is likely to be less than the amount that a third party would charge the owner for the same work. In that case, the owner is not mitigating its loss, but rather the builder’s damages.
The question of what is reasonable depends on all the circumstances of the particular case. One relevant factor is what attempts the builder has made to repair the defects in the past and whether, in the light of the builder’s conduct, the owner has reasonably lost confidence in the willingness and ability of the builder to do the work: see A Chambers, Hudson’s Building and Engineering Contracts, (12th ed, 2010, Sweet & Maxwell) at [4-144]; Eribo v Odinaiya [2010] EWHC 301 (TCC) at [70].
It is for the defendant to prove that the plaintiff has acted unreasonably. It is not for the plaintiff to prove that it acted reasonably: TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd [1963] HCA 57; (1963) 180 CLR 130 at 138; Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 at 673 per Brennan J; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158 per Hope JA (with whom Priestley and Meagher JJA agreed); Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] per Giles JA (with whom Handley and Stein JJA agreed).
The obligation not to act unreasonably does not come to an end once court proceedings have commenced. But the existence of court proceedings is relevant to the content of the obligation. Once there is a dispute concerning whether a plaintiff has failed to mitigate its loss, or failed to act reasonably in some other respect, the plaintiff is entitled to have that question tested in court; and the mere fact that it does so is not itself evidence that it has failed to act reasonably. As Oliver J explained in Radford v de Froberville [1978] 1 All ER 33; [1977] 1 WLR 1262 at 1287E-F:

[O]nce proceedings have been commenced and are defended, I do not think that the defendant can complain that it is unreasonable for the plaintiff to delay carrying out the work for himself before the damages have been assessed, more particularly where his right to any damages at all is being contested, for he may never recoup the cost. If, therefore, the proceedings are conducted with due expedition, there seems to me to be no injustice if, by reason of the time that it takes for them to come to trial, the result of inflation is to increase the pecuniary amount of the defendant’s ultimate liability…

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Why is Home Building insurance important?

The Home Building Act 1989 provides that a person must not do residential building work unless certain insurance is obtained to protect the owner (not the builder) against the risk of loss resulting from non-completion or the risk of being unable to recover compensation for a breach of a statutory warranty or have the contractor rectify such a breach.

The statutory warranties are set out in Part 2C of the Home Building Act, which provides:

18B Warranties as to residential building work

The following warranties by the holder of a licence, or a person required to hold a licence before entering into a contract, are implied in every contract to do residential building work:

(a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract,

(b) a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new,

(c) a warranty that the work will be done in accordance with, and will comply with, this or any other law,

(d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,

(e) a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling,

(f) a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the licence or person required to hold a licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

18C Warranties as to work by others

A person who is the immediate successor in title to an owner-builder, a holder of a licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a licence and had done the work under a contract with that successor in title to do the work.

18D Extension of statutory warranties

A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person’s predecessor in title in respect of the statutory warranty, except for work and materials in respect of which the person’s predecessor has enforced the warranty.

18E Duration of warranties

Proceedings for a breach of a statutory warranty must be commenced within 7 years after:

(a) the completion of the work to which it relates, or

(b) if the work is not completed:

(i) the date for completion of the work specified or determined in accordance with the contract, or

(ii) if there is no such date, the date of the contract.

18F Defence

In proceedings for a breach of a statutory warranty, it is a defence for the defendant to prove that the deficiencies of which the plaintiff complains arise from instructions given by the person for whom the work was done contrary to the advice in writing of the defendant or person who did the work.

18G Warranties may not be excluded

A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.

The scheme of insurance is contained in Part 6 of the Home Building Act 1989. In the Second Reading Speech given in relation to Part 6, the Minister for Fair Trading referred to the introduction of private home building insurance, in contrast to the government-operated system that was previously in place, as a fundamental reform that would benefit consumers. The Minister said (Hansard, Legislative Assembly, 30 October 1996, 5540 at 5541):

The system we have had in New South Wales has lacked the incentives to encourage competent and efficient contractors and has treated all licence holders in the same way. There have been no rewards for the good builder, nor any incentives for others to lift their game. The same insurance premium is charged, irrespective of the risks which different builders pose or the quality of work they provide. Good builders have not been rewarded by lower premiums. Until recently all builders and contractors had gold licences. That raised the expectations of consumers and created a false sense of security. It was only after a problem arose that many consumers learnt, to their surprise, that there were no silver or bronze licences. As one consumer remarked to me, “If this is the work of a gold licence holder, God help the others.”

Privately run insurance has the potential and the means to change all of this. Bad builders will be able to be excluded. They will not get insurance and therefore will not work in the residential building industry. Good builders will be rewarded with lower premiums. Private sector insurers will be able to manage the risks far better than a government scheme. The Government will, however, continue to play a key role by setting the minimum conditions of the insurance scheme and by closely monitoring its operation. The conditions set by the Government for the private scheme will also give New South Wales home owners significantly improved cover compared to those which operated in the past…

[added emphasis]

The following provisions of the Home Building Act 1989 (NSW) in Part 6 are relevant.

92 Contract work must be insured

(1) A person must not do residential building work under a contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

Maximum penalty: 200 penalty units.

(2) Except as provided by section 94 (1A), a person must not demand or receive a payment under a contract for residential building work (whether as a deposit or other payment and whether or not work under the contract has commenced) from any other party to the contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

Maximum penalty: 200 penalty units.

(3) This section does not apply if the contract price does not exceed $5,000 or (if the contract price is not known) the reasonable market cost of the labour and materials involved does not exceed $5,000.

(4) If the same parties enter into two or more contracts to carry out work in stages, the contract price for the purposes of subsection (3) is taken to be the sum of the contract prices under

each of the contracts.

(5) The regulations may prescribe another amount for the purposes of subsection (3) and an amount so prescribed is to apply in the place of the amount referred to in that subsection.

(6) To avoid doubt, this section extends to residential building work that is also owner-builder work.

99 Requirements for insurance for residential building work

(1) A contract of insurance in relation to residential building work required by section 92 must insure:

(a) a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, and

(b) a person on whose behalf the work is being done and the person’s successors in title against the risk of being unable, because of the insolvency, death or disappearance of the contractor:

(i) to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or

(ii) to have the contractor rectify any such breach.

(2) Subsection (1) does not require the following to be insured:

(a) a developer on whose behalf residential building work is being done,

(b) any other person belonging to a class of persons prescribed by the regulations for the purposes of this section.

102 General requirements for insurance

(1) This section applies to all contracts of insurance required to be entered into by or under this Part.

(2) The insurance must be of a kind approved by the Minister and be provided by an insurer approved by the Minister.

(3) The contract of insurance must provide for cover of not less than $200,000 in relation to each dwelling to which the insurance relates, or such other amount as may be prescribed by the regulations.

(4) Any limitations on liability under the contract of insurance must comply with any requirements of the regulations.

(5) The contract of insurance must comply with any other requirements of the regulations.

(6) A contract of insurance may provide that the insurer is not liable for such amount (not exceeding $500) of each claim as is specified in the contract.

(7) The regulations may make provision for or with respect to requiring the retention, at a place prescribed by the regulations, of copies of contracts of insurance required to be entered into by or under this Part.

In Tudor Developments Pty Ltd v Makeig [2008] NSWCA 263, Basten JA (with whom Beazley JA agreed) at [17] affirmed that the purpose of section 92 was “to ensure that purchasers of residential properties enjoy a degree of protection against inadequate construction work in cases where the developer is insolvent or no longer in the business when defects become apparent and is therefore not able to undertake rectification work or compensate the owner for the loss incurred as a result of the defective building work”.

In Vero Insurance v The Owners of Strata Plan 69352 [2011] NSWCA 138; (2011) 81 NSWLR 227, the Court was concerned with insurance policies issued in respect of 201 units and a claim by the owners corporation regarding defective building work to common property. Sackville AJA (Allsop P and Basten JA agreeing) held at 241-242 that:

The statutory scheme, in my view, clearly contemplates that an owners corporation in a residential strata scheme is entitled, in its own right, to make a claim on the statutory home insurance policy in respect of the risks identified in s 99(1) of the HB Act. In particular, the scheme contemplates that an owners corporation will be entitled to make a claim in respect of loss arising from the breach of a statutory warranty in respect of defective work on the common property. The owners corporation’s entitlement flows both from s 227(2) of the SSM Act and, more simply, from its status as the registered proprietor of the common property and as the successor in title to the person on whose behalf the residential building work was carried out.

…

The effect of s 99(1)(b) of the HB Act is that the contract of insurance issued by the Insurer had to insure the Owners Corporation, as Meriton’s successor in title to the common property, against the specified risks. The statutory requirement was not conditional upon the Insurer issuing a certificate of insurance to the Owners Corporation. Nor was it in any way dependent on the terms of any certificate issued by the Insurer in respect of lots in the strata scheme.