Quantum meruit and substantial breach of contract: zero dollars to the Builder?

The unlawful termination of a building contract can have serious consequences for a builder. This is particularly the case when regard is given to the practical realities of construction work. Construction often features onsite disputes, delays and directions and demands that builders and tradespeople must navigate each day.  Such issues often become magnified in the event that either of the parties to a construction contract terminate or purport to terminate the construction contract.

It is well accepted within the construction industry that, in the event of termination or purported termination of a construction contract that a builder may claim payment of a fair and reasonable value for unpaid works under the equitable doctrine of quantum meruit.[1]

In the case of Singh v Ozzie Homes Building & Construction Pty Ltd [2026] VSCA 25, the Supreme Court of Victoria, Court of Appeal reiterated that if parties seek relief such as quantum meruit that, for such relief to be granted, parties must strictly comply with both the law and the terms of the building contract.  

Following the Court of Appeal’s decision, it has been clarified that a builder’s entitlement to payment for construction work under quantum meruit is qualified by an assessment of the builder’s conduct irrespective of whether or not the works for which payment is claimed were undertaken. 

Background

The parties in this proceeding, Sukhvinder Singh and Rupinder Kaur (Owners) and Ozzie Homes Building & Construction Pty Ltd (Builder), entered into a domestic building contract for the construction of a new dwelling. The building contract allowed the Builder to claim, and required the Owners to pay, progress payments upon completion of defined stages or milestones of the building works.  These stages relevantly included a lock-up stage as defined in section 40 of the Domestic Building Contracts Act 1995 (Vic) (DBC Act).

On 1 May 2022, the Builder issued an invoice for $169,750 for works said to represent completion of the lock‑up stage under the building contract. This invoice was accompanied by a building inspection report in which an inspector stated that the lock-up stage of the works had been completed but that noted that the door from the garage to the house was missing at the time of inspection.

The Owners refused to pay the invoice on the grounds that the works for the fixing stage were not complete. There had been significant correspondence between the parties’ lawyers on allegedly incomplete and defective works and the RBS had issued written directions to fix requiring the builder to fix various items of building work.  This resulted in a period of inactivity at site whilst the parties exchanged correspondence and were at a loggerhead.

On 28 June 2022 the Owner’s inspector attended the site and issued a report in which he stated that the lock-up stage had not been reached.

On 26 July 2022, the Builder’s lawyer sent a notice of intention to terminate the building contract and that demanded payment for the lock-up stage within 10 days.  The Owners responded to this notice and demanded rectification of defective works, compliance with the RBS’s directions to fix and other compensation.  

On 8 August 2022, the Builder served a notice that purported to terminate the building contract under clause 42 or alternatively under the common law. The grounds in the notice were that the Owners were in substantial breach of the building contract because they had failed to pay the invoice for the lock-up stage and that such conduct amounted to repudiation of the building contract by the Owners. 

The Builder subsequently issued proceedings in the County Court and sought payment of the sum claimed in the lockup stage invoice, or alternatively payment on a quantum meruit basis. By counterclaim, the Owners alleged that the Builder had repudiated the contract, which they said they had accepted, and the Owners claimed delay and other damages.

Decision at Trial 

At trial, Judge Burchell held that the lock up stage was complete notwithstanding that incomplete items existed of around 5% of the lock up stage and noting that defective works are not a relevant consideration for determining whether works have achieved lock-up stage. The trial judge awarded damages to the Builder on the basis of Builder’s accrued right under the building contract for the lock-up stage and alternatively damages under the equitable remedy of quantum meruit for the same amount. The trial judge dismissed the Owners’ counterclaim. 

Decision on Appeal

In this case, the Owners appealed the decision at first instance on the grounds that the trial judge erred in: 

(a)    finding that the Builder was entitled to payment for the lockup stage (ground 1)
(b)    finding that the Builder validly terminated the contract (ground 2);
(c)    finding in the alternative that the parties mutually abandoned the contract or agreed to its termination, or that the Builder accepted the owners’ offer to terminate the contract (ground 2A(a));
(d)    finding that the Builder was entitled to payment on a quantum meruit (ground 2A(b)); and
(e)    failing to award damages to the owners (ground 3). 

The appeal was be upheld on grounds 1, 2 and 2A(b) and part of ground 3. Specifically, ground 2A(b) concerned the Builder’s entitlement to payment on a quantum meruit basis. This claim arose as an alternative in circumstances where the Builder was not contractually entitled to payment for the lock‑up stage under the building contract. 

The central issue on the question of quantum meruit was whether non‑conformity with the contractual requirements for the stage precluded the completion of that stage. The contractual terms for progress payments in the building contract adopted section 40 of the DBC Act.  

Section 40(2) of the DBC Act provides that under a major domestic building contract to build all stages, a builder must not demand, recover or retain more than the percentages of the contract price set out in that section at the completion of each of the nominated stages (base, frame, lock‑up and fixing).  

Relevantly, ‘lockup’ stage under section 40 of the DBC Act means the stage when a home’s external wall cladding and roof covering is fixed, the flooring is laid and external doors and external windows are fixed (even if those doors or windows are only temporary).  

The trial judge addressed several items said to be incomplete or defective by reference to the SJE report prepared by the parties’ single joint expert: 

1. In relation to the front door, the trial judge concluded that lock‑up stage had been reached because (among other reasons) the plywood in lieu of the front door had the effect that the house was locked up which was ‘the statutory purpose of that stage’, citing the reasoning in Cardona v Brown [2010] VSC 368 (Carodna). The court in Cardona observed that the expression ‘lock‑up stage’ conveyed the achievement of some degree of security. 
2. Regarding the garage door, the trial judge accepted the unchallenged evidence of the Builder that it was not possible to install the garage door until after the plastering had been completed. As with the front door, the trial judge found that the use of plywood sheeting satisfied the statutory purpose of the lock‑up stage. 

When is a Stage Complete? 

The Court of Appeal held that whether a stage is complete or not will turn on factors such as: 

(a)    the terms of the contract including the contractual definition of the stage;
(b)    the specifications and plans in the building contract that define the works that must be performed under the contract;
(c)    the absence of a specific item of works;
(d)    deficiencies in the works of such significance that the works for the stage cannot be objectively described as complete; and
(e)    this determination ‘may entail assessments of degree.’[2]

The Court of Appeal overturned the trial judge’s conclusions, adopting a different view of the facts and as to the proper meaning of ‘lockup stage’. The Court of Appeal held that the trial judge’s reasoning that ‘defective works were not a relevant consideration in determining whether works have reached locked up stage’ was wrong.[3]  The Court also held that lock-up stage had not been achieved by the Builder due to the absence of a door to the main garage entrance and the absence of a door to the front entrance of the house.[4] It followed, that the Builder was not entitled to be paid for the lock-up stage as the works for that stage had not been completed. 

As a result of these findings, the Court of Appeal held that the Builder’s suspension of the works was unlawful (as the basis for the suspension was non-payment of the lock up stage progress claim) and the Builder’s suspension of the works was a substantial breach of the building contract. It followed that the Builder was not entitled to terminate the building contract. 

On the issue of quantum meruit, the Court of Appeal held that the Builder was not entitled to damages on a quantum meruit basis for the value of unpaid work. The Court of Appeal observed that ‘there is (without more) nothing unjust or unconscionable in the Owners retaining the benefit of the work without payment for its value.’[5]  The Court of Appeal emphasised that the Builder had not been prevented by the Owners’ conduct from completing the works and receiving payment under the building contract.  The Court of Appeal found that the Builder was not an innocent party who accepted repudiation of the building contract by the Owners.  In the circumstances the Builder failed to demonstrate that it would be unconscionable for the Owners to retain the benefit of the incomplete works without paying for them.[6]

Key Lessons 

There are several lessons from this case:  

1.  Builders must strictly comply with both the law and the building contract. Unlawfully terminating or suspending a building contract may result in the builder not being regarded as an innocent party. If so, this may have significant consequences in any subsequent dispute or in litigation.
2. A builder who does not achieve completion of a contractual stage may not be entitled to payment under the DBC Act and under the terms of the building contract for the works comprising that stage.
3. Where a building contract is terminated before a stage is completed, it was previously assumed that a builder could still claim payment for the fair and reasonable value of the work completed and for which the builder had not yet been paid. This assumption was previously qualified in Mann v Paterson Constructions Pty Ltd [2019] HCA 32 (Mann), in which the High Court held that a contractor who terminated a domestic building contract by accepting the principal’s repudiation:
   (a)    was not entitled to recover a quantum meruit (being a claim for the reasonable value of work done) for work carried out before termination and for which a contractual right to payment had accrued at the time of termination. The contractor’s rights in relation to that work were limited to damages for breach of contract or debt for recovery of the amounts accrued; and
   (b)    was entitled to recover a quantum meruit for work carried out before termination but for which no contractual right to payment had accrued at the time of termination. However, in that event, the price stipulated in the contract limited the value of the claim in quantum meruit.
4. Unlike in Mann, where the High Court held that section 38 of the DBC Act prevented a contractor from recovering an amount in restitution for variations not approved under that section and outside the contract price, the Court of Appeal in this case declined to allow the Builder to recover payment under the contract price on a quantum meruit basis. In essence, this was because the Builder was not an innocent party, having unlawfully suspended the works and terminated the contract without lawful justification. As a result, the Owners simply received what they had no choice but to accept (i.e. the works on their land).  Equity and principles of unconscionability did not require that the Builder be paid. It is also relevant that the Owners were left with a partially constructed home and had to carry the significant additional costs of engaging another builder to complete the works. 

Queries

Please contact the authors, or any member of our Building & Construction team, should you have any questions about this article, or if wish to discuss how we may be able to assist your business and/or projects.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action. 

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[1] For more information please see our previous article: https://www.cornwalls.com.au/quantum-meruit-limited-by-the-high-court/ 

[2] At Paragraph 87 of Singh v Ozzie Homes Building & Construction Pty Ltd [2026] VSCA 25 (Singh v Ozzie) per McLeish JA; Lyons JA and Nichols AJA.

[3] At Paragraph 90 of Singh v Ozzie per McLeish JA; Lyons JA and Nichols AJA.

[4] At Paragraph 92 of Singh v Ozzie per McLeish JA; Lyons JA and Nichols AJA.

[5] At Paragraph 152 of Singh v Ozzie per McLeish JA; Lyons JA and Nichols AJA.

[6] At Paragraph 7 of Singh v Ozzie per McLeish JA; Lyons JA and Nichols AJA.