Quantum Meruit Where There Is No Construction Contract
In construction relationships where an agreement is not formally executed and there is only verbal, sometimes implied by conduct, and other times without any formal contract at all, there can be problems in recovering payment for works or services provided. Typically this occurs when one party makes a promise, the other party acts on it and the promisor later backs out.
Without a formal contract, enforcing such promises can be challenging. The legal principle of promissory estoppel can provide a remedy by preventing parties from reneging on promises that others have relied upon to their detriment.
Where an informal arrangement does meet the elements of a contract, it may be enforceable, and that is covered in our guide on whether oral contracts are enforceable. In this article we discuss a more difficult situation harder case, where there was no enforceable contract, but a promise was made and relied on.
Understanding Promissory Estoppel in Construction
Promissory estoppel is a doctrine that goes to fairness and equity. It is designed to prevent injustice where one party makes a clear promise, the other party relies on that promise and suffers harm or loss when the promise is not fulfilled. Unlike a traditional contract, where mutual agreement and consideration are required, promissory estoppel can sometimes enforce a promise even in the absence of a formal contract.
Walton Stores v Maher and Promissory Estoppel Development
The landmark High Court case of Walton Stores v Maher significantly expanded the scope of promissory estoppel in Australian law. It is directly relevant to construction, because it turned on building work started before a deal was signed.
The Facts
Walton Stores sent Maher a draft lease agreement for a property. In reliance on Walton Stores’ promise to lease the property, Maher demolished an existing building and began constructing a new one, even before signing the lease. Walton Stores later withdrew their offer, refusing to sign the lease. Maher suffered significant financial loss.
Summary of the Decision
The High Court held that Walton Stores could be estopped from denying the existence of a lease because Maher had relied on their promise to his detriment. This case set out the modern elements of promissory estoppel.
Assumption of a Legal Relationship
The promisee, Maher, believed there was or would be a legal relationship. The promisor, Walton Stores, made a clear promise or representation. The promisee acted in reliance on that promise. The promisee suffered a detriment or loss due to the reliance.
It would be unfair or unjust to allow the promisor to renege on the promise.
The position in New South Wales
How far promissory estoppel can be used as an independent basis for a claim, rather than as a defence, is treated more conservatively in NSW than in some other jurisdictions and depends on the specific facts of the matter. Legal advice should be obtained on whether it is available to you in NSW before relying on it.
Example: Mobilising Without a Signed Subcontract
Consider the following example of how promissory estoppel might operate on a construction project.
A head contractor tells a subcontractor that the subcontract is “as good as done” and asks them to mobilise so the program is not delayed. Trusting that assurance, the subcontractor orders materials, schedules crews and turns down other work, all before any subcontract is signed. The head contractor then awards the package elsewhere and refuses to pay for what the subcontractor has already committed.
Why Promissory Estoppel Applies
Promise: The head contractor’s clear assurance that the subcontract would proceed.
Reliance: The subcontractor mobilised, ordered materials and forwent other jobs.
Detriment: The subcontractor faces financial loss from costs and lost opportunities.
No formal contract: There is no signed subcontract to sue on for breach.
Under promissory estoppel, the head contractor may be prevented from denying the commitment, giving the subcontractor grounds to recover losses despite the absence of a signed subcontract.
Quantum Meruit
In addition to or as an alternative to promissory estoppel, a party may seek compensation under the equitable remedy of “quantum meruit”, which may be interpreted to “what the job is worth.” This principle allows a person to recover payment for goods or services provided, even in the absence of a formal contract, so long as the work was performed with the expectation of payment and the recipient accepted or benefited from it.
Using the scenario above, if promissory estoppel is unavailable or insufficient, the subcontractor could bring a claim in quantum meruit. Having supplied materials, commenced work, incurred costs on the head contractor’s instructions, and provided a benefit the head contractor accepted or was prepared to accept before withdrawing, the subcontractor may be entitled to recover the reasonable value of the work completed and materials supplied up to the point of repudiation.
Unlike a contractual claim, which seeks payment based on agreed terms, quantum meruit is concerned with fair value. Courts assess how much the work or services were objectively worth, rather than relying on any agreed price.
Security of Payment
On many construction projects, the Building and Construction Industry Security of Payment Act 1999 (NSW) provides a statutory process for recovering progress payments for work carried out. It is frequently the faster option to being paid and can be available even where the arrangement was never reduced to writing.
Whether a payment claim under that Act, a quantum meruit claim, or an estoppel argument is the right path depends on the facts, the timing and documentation available. These should be assessed together at the outset, because the Security of Payment process runs to strict deadlines and missing them can close off the quickest avenue to payment. However, there are strict requirements before you can make a claim under this Act and it is important that you get legal advice before you do any Works where you will late seek payment for.
Limitations in Residential Building Contracts
While promissory estoppel offers a valuable protection mechanism, its use in the context of residential building contracts is generally limited. This is because the Home Building Act 1989 (NSW) imposes specific statutory requirements on residential building contracts, including written contracts above a set threshold. At the time of writing any works exceeding $5,000 must be in writing and include the parties’ names, signatures, the builder’s licence number, a clear description of the work, and a quality of construction clause.
Fore larger Jobs exceeding $20,000 you must provide a Contract that includes such things as a 5-business-day cooling-off period, a progress payment schedule tied to completed milestones, statutory warranties, and a checklist.
Failure to comply with these statutory requirements can render a contract unenforceable. It may also affect your building license
Practical Tip before doing any Work.
While equitable remedies like promissory estoppel and quantum meruit provide valuable backstops, they should never be relied on in substitution of a valid, written contract, especially in the construction industry where laws are strict and documentation is key., such as in residential building work.
To safeguard your rights and ensure payment, always engage in formal, written agreements that comply with the Home Building Act and relevant regulations.
Why Seek Professional Advice?
Given the requirements surrounding construction contracts and the varying legal standards across jurisdictions, it is important to have contracts carefully drafted and reviewed by construction lawyers. At Citilawyers, our building and construction team acts for builders, subcontractors, suppliers and developers recovering payment where work proceeded without a signed contract, and offers contract review tailored to construction projects.
Call (02) 9233 7737 for a free initial phone consultation, or contact us today.
