Contract Trumps Unjust Enrichment – Building Dispute Escalates to High Court

11 July 2008 Topics: Litigation and dispute resolution

On 18 June 2008, the High Court delivered an important decision in Lumbers -v- W Cook Builders Pty Ltd (In Liquidation) (2008) HCA 27.

The decision is of importance in the building industry, particularly in entering into building contracts and also has wider commercial significance.

The Facts

The case involved a distinctive house and some unusual facts. The owners of the land entered into an oral contract with company A where company A agreed to build the owner’s house. The project was conducted on an informal basis where there was virtually no documentation.

The total price of the building works was never agreed by company A and the owners. Company A made oral requests for payment and the owners made ad hock, lump sum payments as requested to company A. No invoices were sent to the owners.

Unknown to the owners, company A carried out an informal reorganisation of its group of companies and as a result, a related entity company B actually carried out the building works.

During the relevant period company A and company B shared common staff. The owners were not informed that company B had taken over the works in place of company A. There was no assignment of the building contract to company B.

The owners paid to company A all amounts that were requested by company A who banked the cheques and, by journal entry, the payments were credited to company B.

Company B subsequently went into liquidation and years after the event, the liquidator of company B made a claim against company A and the owners asserting that company B was still owed monies for the building works.

The proceedings against company A were stayed, however, company B proceeded with the claim against the owners, seeking payment of the building costs on the grounds of unjust enrichment.

Company B sought to recover against the owners on a quantum meruit basis on the grounds of unjust enrichment because there was no contract between the owners and company B. A quantum meruit claim is a claim to be paid a reasonable recompense for work undertaken where no contractual right to payment exists.
Inexplicably, company A provided a letter to the owners saying that the owners had paid all monies owed to company A for the building works.

The Decision

The High Court unanimously rejected the claim of company B that the owners of the land were liable for unpaid building costs to company B by way of unjust enrichment.

Significantly, the High Court said the contractual position needed to be identified and could not be ignored.

The High Court said that the contractual arrangements that were made effected a certain allocation of risk; and that it was not appropriate to interfere with that allocation.

It was accepted by the owners and company B that in the ordinary case a building subcontractor does not have a restitutionary claim against a property owner, but must look to the head contractor for payment. This was said to be subject to exceptions, but the difficulty for company B was to show that the case fell within any recognised exception or within general principles justifying a new exception.

The difficulty for company B was that the building works were not performed by company B at the request of the owners, but pursuant to a contract between company A and company B. The owners were unaware of the existence or role of company B and there was no acquiescence by the owners in the provision of the building services by company B.

No benefit was requested by the owners from company B. Furthermore, the owners did not receive any “windfall” at the detriment of company B. It was said that if any party had been enriched at the expense of company B, it was company A.

Critically, the High Court said the alleged claim for unjust enrichment proceeded upon assumptions as to the respective rights and obligations of the owners, company A and company B, which were not justified.

The High Court said that the contractual relations between the owners and company A and between company A and company B could not be put to one side as an inconvenient distraction.

What it all means

The decision clearly indicates that the High Court is reluctant to expand the categories or circumstances where a claim for unjust enrichment can be made.

This is particularly important to the building industry. The High Court has clearly articulated a reluctance to interfere with the contractual relationships between parties. To impose an obligation on the owners to pay company B would have constituted a radical alteration of the bargains the parties struck and of the rights and obligations which each party assumed.

The decision is not limited to the building industry and has wider commercial relevance.

Relevance to Builders

When a builder is entering into a building contract, special care should be taken to identify the other party to the contract and to ensure that the contract protects the position of the builder.

The case also highlights a number of deficiencies in the procedures of the builder and a failure to comply with statutory requirements that should have been avoided.

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