Quantum Meruit

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Quantum Meruit

  1. 1. Quantum Meruit © Daniel Atkinson 12 May 2006 1. What is a Claim for Quantum Meruit? The expression quantum meruit means "the amount he deserves" or "what the job is worth". A claim for Quantum Meruit is a claim for payment for work carried out where the price has not been quantified and is usually a claim for a reasonable sum. A quantum meruit claim may be based in contract or in restitution, although the term quantum meruit is frequently used to mean a claim in restitution only. A claim for quantum meruit in contract is based on the agreement of the parties. It arises in two situations. 1. In the first situation the contract is silent on the measure of remuneration for the services provided. In such a situation in construction, contract terms of payment of a reasonable remuneration will be implied by statute. 2. In the second situation the contract contains an express agreement to pay reasonable remuneration or similar terminology. The above "Contractual Quantum Meruit" claims are in fact simply claims in contract, so that the first issue is whether or not there is a contract which applies to the situation. If so, the main issue is then the measure of the reimbursement. In the second situation above the main issue will be the interpretation of a particular term of the contract. Claims for quantum meruit in restitution seek to impose a right to payment by law arising from the circumstances of unjust enrichment by one party at the expense of another. The claim is occasionally referred to as a claim in quasi-contract. The issue in Restitutionary Quantum Meruit is whether or not there is any entitlement at all in law. If so, then the second issue is how the reimbursement is to be measured. The two types of claims are the extreme ends of a spectrum of circumstances - Serck Controls Ltd v Drake & Scull Engineering Ltd [2000] (TCC) HH Judge Hicks QC: "A quantum meruit claim may, however, arise in a wide variety of circumstances, across a spectrum which ranges at one end from an express contract to do work at an unquantified price, which expressly or by implication must then be a reasonable one, to work (at the other extreme) done by an uninvited intruder which nevertheless confers on the recipient a benefit which, for some reason, such as estoppel or acquiescence, it is unjust for him to retain without making restitution to the provider" 2. Will a Claim for Quantum Meruit Succeed if a Contract Deals with the Situation? A claim for quantum meruit will not succeed if there is an existing contract between the parties which deals with the situation. In S & W Process Engineering Ltd v Cauldron Foods Ltd [2005] EWHC 153 (TCC) HH Judge Peter Coulson QC was required to decide preliminary issues and in doing so provided a summary of the law in relation to claims for quantum meruit.
  2. 2. Coulson J considered that a claim on a quantum meruit cannot arise if there is an existing contract between the parties to pay an agreed sum and referred to The Olanda [1919] 2 KB 728 and Gilbert and Partners -v- Knight [1968] (CA) 2 ALL ER 248. In The Olanda Lord Dunedin stated the following which was referred to and applied by the Court of Appeal in Gilbert and Partners -v- Knight using a theory of justification based on implied contract, which no longer applies: "As regards quantum meruit where there are two parties who are under a contract quantum meruit must be a new contract, and in order to have a new contract you must get rid of the old contract." Coulson J referred to the general principle stated by Mason P in Court of Appeal of New South Wales in Trimis v- Mina (2000) 2TCLR 346 in relation to "Restitutionary Quantum Meruit" which recognised that a claim in restitution does not depend on an "implied contract" and cannot be sustained if a contract already governs the situation: "no action can be brought for restitution while an inconsistent contractual promise subsists between the parties in relation to the subject-matter of the claim. This is not a remnant of the now discarded implied contract theory of restitution. The proposition is not based on the inability to imply a contract, but on the fact that the benefit provided by the plaintiff to the defendant was rendered in the performance of a valid legal duty. Restitution respects the sanctity of the transaction, and the subsisting contractual regime chosen by the parties as the framework for settling disputes. This ensures that the law does not countenance two conflicting sets of legal obligations subsisting concurrently. if there is a valid and enforceable agreement governing the Claimants 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" In Mowlem plc v- Stena Line Ports Limited [2004] EWHC 2206 (TCC) His Honour Judge Richard Seymour QC expressly held that the above statement accurately stated the relevant principle of English Law. In S & W Process Engineering Ltd v Cauldron Foods Ltd [2005] EWHC 153 (TCC) HH Judge Peter Coulson QC held that S&W could not make a claim for quantum meruit in respect of the items that were incorporated within the original Contract work scope. Prima facie, any item of work within the original Contract work scope would be reimbursable at (in this case) the Target Cost figure unless a potential overspend in respect of that item had been identified and agreed in accordance with the Contract procedure. 3. Can a Letter of Intent or a Bare Agreement with No Agreed Price Create a Contract? Many situations in which the claim for quantum meruit arises involve letters of intent or limited exchanges between parties each followed by rapid commencement of the works. The issue in those cases is whether or not there is a contract and if so the meaning of the terms of payment. The claim in restitution is usually presented as an alternative claim if indeed there is no contract.
  3. 3. To establish a contract not only requires agreement by the parties on all the terms they consider essential, but also sufficient certainty in their dealings to satisfy the requirement of completeness. An intention to create a legally binding relationship must also be present. Letters of intent which state an intention to contract in the future frequently fail on both requirements since they are usually incomplete statements preparatory to a formal contract. In such cases a letter of intent is binding upon neither party Turiff Construction Ltd - v - Regalia Knitting Mills Ltd (1971). A contract may come into existence following a simple request to carry out work and may take one of two forms. It may be an ordinary executory contract. It may otherwise be an 'if' contract ie a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return British Steel Corporation -v- Cleveland Bridge & Engineering Co Ltd (1983). Terms may then be implied into that contract in accordance with normal principles. In Clarke & Sons v ACT Construction [2002] EWCA Civ 972 the judge at first instance held that there was no contract between the parties. He held that the parties relationship was not a contractual one, with the consequence that the value of the work carried out by ACT could be recovered and paid for, but on the basis of a quantum meruit, a reasonable sum, a restitutionary basis in fact. The Court of Appeal disagreed and held that the proper conclusion was that there was "a contractual quantum meruit". It was observed that in focusing on the essential ingredients for "a building contract of some complexity" the judge may have lost sight of the fact that even if there was no entire contract, and especially if there is no "formal" contract, there may still be an agreement to carry out work, the entire scope of which was not yet agreed, even if a price has not been agreed. It was held that provided there was an instruction to do work and an acceptance of that instruction, then there was a contract and the law would imply into it an obligation to pay a reasonable sum for that work. It was held that was the situation in the instant case. It was observed that reversing the judge on this point did not significantly advance either case. Simply carrying out work is not sufficient to create a contract, all the necessary ingredients of contract must be present. In Mowlem plc v PHI Group Limited [2004] HH Judge Gilliland QC was required to decide an appeal from the decision of an arbitrator to reject a claim based on contractual quantum meruit. Mowlem argued that it was implicit as a matter of law that in PHIs request for Mowlem to supply imported material there was a promise to pay a reasonable price. The arbitrator decided that the circumstance must clearly show that the work was not to be done gratuitously before inferring that there was a valid contract with an implied term that a reasonable remuneration would be paid. He found that in the circumstances of the case there was no necessity nor evidence of mutual understanding to support such a term. It was held that the arbitrator had not fallen into error and his conclusions were correct in law. It was held that all that happened was that Mowlem continued to supply material knowing that liability for payment was not accepted. For a contract to arise in the case of a letter of intent, the letter must contain all necessary terms. Further, it must be plain that the unilateral contract is to govern the main contract
  4. 4. work in the event that no formal contract is concluded Monk Building and Civil Engineering Ltd -v- Norwich Union Life Assurance Society (CA)(1993). Although a letter of intent may not govern the main contract works, the letter may relate to part or preparatory works and in that case may create a contract for those limited works, if all the necessary ingredients of contract are present. In Turiff Construction Ltd - v Regalia Knitting Mills Ltd (1971) the employers letter of intent was a legally binding agreement to reimburse the contractor his expenses for preliminary design work and feasibility studies for a main contract which was not in the event concluded. In ERDC Group Limited v Brunel University [2006] (TCC) HH Humphrey Lloyd QC considered five letters of intent issued over a period of time each increasing the total value of the work carried out. In December 2001 ERDC submitted a tender for the works on new sports facilities for Brunel University which were to be carried out on the basis of the JCT Standard Form of Contract With Contractors Design, 1998 Edition. Brunel decided to appoint ERDC but that the formal execution of contract documents would be deferred until after the grant of full planning permission. It was agreed that ERDC would progress with the design of the works under the terms of a letter of appointment issued on 6 February 2002. In all, three letters were issued and returned countersigned by ERDC. ERDC commenced on construction of the works on 27 May 2002. Two further letters were issued but not countersigned. Each letter offered a limited contract set by reference to value and covering a particular period. The authority under the last letter expired on 1 September 2002. Lloyd J held that there was a clear intention to create legal relations and the letters and their acceptance by ERDC were contracts, possibly of the classic if or conditional variety. He held that both their background and their terms demonstrated that Brunel was not going to contract unconditionally for the whole of the works. Instead it decided to offer ERDC a familiar limited contract which would readily ensure that, when it was able to conclude the full contract that was contemplated, that contract would take effect retroactively with the minimum of difficulties. Lloyd J held that the work done pursuant to the letter contracts prior to the expiry of the last contract on 1 September 2002 was to be treated and valued as if it had been carried out under the contract contemplated by the last letter. It was not to be valued on a quantum meruit basis. The valuation was to be made applying the relevant rates and prices. Where the contract rates or prices were not be applicable, either party was free to contend for a different and more appropriate rate or price or valuation by reference to cost, if reasonable. 4. Is there an Entitlement to Payment for Work Carried Out Beyond the Financial Limit of the Letter of Intent? If work is carried out beyond the financial limit of the letter of intent, then there will only be an entitlement if the financial limit was not intended to prevent further payment. In AC Controls Ltd v British Broadcasting Corporation [2002] EWHC 3132 (TCC) it was held that the spending cap was not intended to limit the amount that ACC could recover, but was intended to operate as a trigger entitling the BBC to terminate the contract any time after the cap was reached. ACC was required to carry on working and was entitled to payment of a reasonable value for the work done.
  5. 5. Apart from the above particular circumstances, a contractor exceeding the financial limit will have great difficulty in establishing an entitlement to payment absent a clear instruction and acceptance that additional payment would be made. In Mowlem plc v Stena Line Ports Limited [2004] EWHC 2206 (TCC) Stena was the owner and operator of the port of Holyhead in Anglesey and required the construction of a new ferry terminal called Terminal 5. Mowlem carried out the marine and offshore works under several letters of intent. The first letter was issued on 17 October 2002. Stena committed to pay Mowlem a maximum of 400,000 so that they could get on with the work. As work progressed further letters of intent were required in order to increase the limit set by Stena, each superseding the previous letter. The last letter was issued on 4 July 2004 and set the maximum at 10 million. Each letter after the first stated that it superseded its immediate predecessor. Stena stated in the last letter that the commitment would allow Mowlem to proceed with the Works in accordance with the programme until 18 July 2003. That date was significant because it was the date shown on the programme for completion. Mowlem did not complete by 18 July 2003. Stena was pressing Mowlem to complete the work because of a mistaken assumption that somehow there was a contract which required Mowlem to do just that. Mowlem continued working and indeed received instructions from Stenas consultants in the usual way. The work was eventually completed. Mowlem considered that the cost of the work had exceeded the limit of 10 million although Stena contested this. Mowlem submitted that the letter of intent only applied to work up to 18 July 2003, so they were entitled to payment for work done after that date irrespective of the limit. Mowlem also submitted that since it had carried out work in excess of the limit it was in any event entitled to be paid for it. The limit only applied until the limit was reached they said. His Honour Judge Seymour held that from 4 July 2003 the relationship between Mowlem and Stena was governed by the letter of 4 July 2003 and the obligation to make payment continued until the letter was rescinded or a contract was executed. It made no commercial sense, he held, to have a financial limit on Stenas obligation to make payment which could be avoided by simply carrying on to work after the date of 18 July 2003. The letter of intent was not limited to work before 18 July 2003. It was bizarre commercially if the limit could be avoided by simply exceeding it. Mowlem also raised a number of common arguments in such cases. Stena had acted in such a way that led Mowlem to believe that Stena would not insist on the limit, Mowlem said. This was rejected on the facts. It was argued that there was a common assumption of Mowlem and Stena that Mowlem would be paid a reasonable sum. It was held that the evidence was against any such assumption. 5. Is There an Entitlement to Payment for Work "Outside the Contract"? In order to establish an entitlement to payment for work outside the contract the necessary ingredients of either a collateral contract or restitution must be present. This may be difficult if the reason for the extra work not falling within the existing contract is the lack of a request for the work to be carried out or agreement to payment for the work. In Parkinson -v- Commissioners of Works (1949) 2 KB 632 the contractor agreed under a varied contract to carry out certain work to be ordered by the Commissioners on a cost
  6. 6. plus profit basis subject to a limitation as to the total amount of profit. The Commissioners ordered work to a total value of 6,600,000 but it was held that on its true construction the varied contract only gave the Commissioners authority to order work to the value of 5,000,000. It was held that the work that had been executed by the contractors included more than was covered, on its true construction, by the variation deed, and that the cost of the uncovenanted addition had therefore to be paid for by a quantum meruit. In Costain Civil Engineering Ltd v Zanen Dredging & Contracting Co [1997] 85 BLR 77 the instructions purported to be given under the sub-contract did not constitute authorized variations of the subcontract works because the instructions required work to be done outside the scope of the subcontractors obligations under the sub-contract. The sub-contractor was therefore entitled to payment on a quantum meruit. In measuring a fair remuneration an allowance was to be made for profit and consideration had to be given to the relationship of the parties and the competitive edge that the subcontractor had by the significant advantage of having already mobilized his equipment. In S & W Process Engineering Ltd v Cauldron Foods Ltd [2005] EWHC 153 (TCC) HH Judge Peter Coulson QC considered that where there is a contract for specified work but the contractor does work outside the contract at the employers request, the contractor may be entitled to be paid a reasonable sum for the work outside the contract: Thorne -vLondon Corp (1876) 1 Ap. Cas. 120 and Parkinson and Co -v- Commissioners of Works [1949] 2 KB 632. He observed that this will always turn on what is meant in any particular instance by "outside the Contract". Coulson J held in the particular case before him that prima facie S&W would not be able to make an alternative claim for a quantum meruit in respect of an item of allegedly varied or additional work if they had already failed to demonstrate, under the Contract, that that item of varied or additional work had been instructed and/or requested and/or authorised by Cauldron. If the claim under the Contract for that item of allegedly varied or additional work failed because the necessary instruction or request or authorisation could not be proved, then, at least prima facie, such an omission would also be fatal to any alternative claim for a quantum meruit. He also held that leaving aside the difficulty created by the existence of the contract itself, S & Ws alternative claim would have to demonstrate that, in some way, Cauldron freely accepted services in circumstances where they should have known that S & W would expect to be paid for them. He considered that might be difficult where the item of extra work in dispute was not clearly requested or instructed or authorised. Coulson J did however recognise the possibility for a quantum meruit claim in the situation where S&W could show that an increase in the scope of supply had been authorised by Cauldron as a matter of principle (because, for instance, there was a clear minute to that effect), but where the amount of expenditure had never been agreed or expressly authorised by Cauldron. He considered that in those circumstances, it would depend on the facts as to whether a claim was allowable under the Contract, given that a situation where work was done before the expenditure was known or agreed would, prima facie, comprise a breach by S & W of the contract procedure identified. Judge Coulson observed that there may be circumstances in which such a claim might be sustained, although, that would depend each time on the facts and the potential arguments put forward by S&W.
  7. 7. 6. Is There an Entitlement to Reimbursement for Requested Work Carried Out Without a Contract? A claim for quantum meruit in restitution may arise in the following situations: 1. Where the parties proceed on the mistaken basis that there is an enforceable contract, but there is no contract. 2. One party requests services from the other which are not governed by a contract. 3. Where the contract is frustrated. 4. Where before completion the contractor accepts a repudiation by the employer as terminating the contract. The contractor can elect to sue for damages for breach of contract or quantum meruit in restitution for the work performed. In Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 Lord Steyn identified four questions which arose in relation to any claim in restitution: 1. 2. 3. 4. Had the defendant benefited or been enriched? Was the enrichment at the expense of the claimant? Was the enrichment unjust? Were there any defences? All the circumstances need to be considered. In Mowlem plc v PHI Group Limited [2004] HH Judge Gilliland QC considered on appeal from an arbitrator an alternative claim for payment on restitutionary principles. The arbitrator found that the parties had acted together for their mutual benefit. It was held that if the supply of material benefited Mowlem because it meant it would not be at risk of being in breach of its own contract, that was a material factor to take into account when concluding that no entitlement to restitutionary benefit arose in the circumstances. If there has been a total failure of consideration in a contract the injured part can then make a claim in restitution. So, for instance, if the subcontractor has not performed at all, the contractor can claim for the return of monies paid. If the subcontractor has been overpaid and has failed to complete, the contractor can recover the overpayment even if it has managed to have the work completed without, in fact, incurring any loss despite the overpayment. Estoppel by convention can operate to prevent a claim to restitution of payment by mistake. If the money is spent in good faith, in reliance on the representation that there was an entitlement to it, then the order for repayment will create the detriment sufficient to found the estoppel. 7. Are There Any Situations Where Speculative Work Can Be Reimbursed? If the parties enter upon a speculative venture then it will be difficult to succeed in a claim in restitution for reimbursement of the expense incurred if the venture fails, absent express agreement to payment. The reasons for the failure are highly relevant as is the nature of the risk that that was accepted. In Easat Antennas Ltd v Racal Defence Electronics Ltd [2000] (ChD) Racal succeeded in a bid in which Easat agreed to and carried out considerable work, but did not award Easat the subcontract.
  8. 8. HH Mr Justice Hart held that the work undertaken in order to obtain a contract does not give rise to a restitutionary remedy. The party providing the services is taken to have run the risk that the contract will not eventuate and he will not therefore be paid. In this case there was no dispute that Racal had received a benefit as a result of the services. It was argued that Easat could have no restitutionary claim unless it could show that, had their agreement with Racal been enforceable, it would have been awarded the sub-contract or entitled to claim damages for breach. Justice Hart accepted that the Easat only had an expectation of being rewarded for its work in the event of the bid succeeding and the conditions for placing the subcontract then being satisfied. However while Easat was prepared to take the risk that Racals bid would fail, it was not prepared to run the risk that, if Racals bid succeeded, as it did, that it would not be rewarded. It was held that that was the whole purpose and underlying assumption of the agreement. On that basis the claim by Easat was held to be a good one. In Countrywide Communications Ltd v ICL Pathway Ltd [2000] CLC 324 a consortium assembled to make a bid involved the members in considerable work. When the bid was successful the consortium excluded one of the members. Mr Nicholas Strauss QC considered whether the excluded member had a claim in restitution. He held that appropriate weight was to be given to a number of considerations: 1. Whether the services were of a kind which would normally be given free of charge. 2. The terms in which the request to perform the services was made may be important in establishing the extent of any risk (if any) which the plaintiffs may fairly be said to have taken that such service would in the end be uncompensated. It may be important whether the parties are simply negotiating, expressly or impliedly subject to contract, or whether one party has given some kind of assurance or indication that he will not withdraw, or that he will not withdraw except in certain circumstances. 3. The nature of the benefit which has resulted to the defendant and in particular whether such benefit is real (either realised or realisable) or a fiction. There was more inclination to impose an obligation to pay for a real benefit, since otherwise the abortive negotiations would leave the defendant with a windfall and the plaintiff out of pocket. The performance of services requested may of itself amount to a benefit or enrichment. 4. The circumstances in which the anticipated contract does not materialise and in particular whether they can be said to involve fault on the part of the defendant, or to be outside the scope of the risk undertaken by the plaintiff at the outset may be decisive. Mr Nicholas Strauss QC held that justice required that Countrywide should be appropriately recompensed. Countrywide had been induced to provide its services free of charge by an assurance that Pathway would negotiate a sub-contract with Countrywide if the bid succeeded. Countrywide's services had provided Pathway with a benefit. Countrywide had accepted the risk that its services would not be accepted for submission with the bid or that the bid might fail or that negotiations might fail. It had not accepted the risk that it would be dismissed after the final bid had been submitted because Pathway changed personnel. The measure for repayment was time spent with associated costs.
  9. 9. In Stephen Donald Architects Limited v Christopher King [2003] EWHC 1867 (TCC) the parties were friends and King did not have the means to pay fees for redevelopment of the property until completion of the project. HH Judge Seymour QC held that the parties never entered into a legally binding agreement and then examined an alternative claim for quantum meruit. Seymour J observed that the claim for quantum meruit was conceptually a claim in restitution. He considered that the nature and extent of the risk assumed by the party claiming payment on a quantum meruit basis in relation to the abortive transaction was a material consideration in determining whether an enrichment has been unjust. There was nothing unjust about being visited with the consequences of a risk which one has consciously run. He held that there was probably a benefit to King from the activities of the Architects even though the redevelopment in accordance with the designs did not proceed. The benefit was obtained at the expense of the Architects. The profit was expected to be payment upon successful completion of the project in cash or in kind of compensation for the architectural work. The venture failed for want of finance for the design prepared. It was held that the venture having failed for that reason there was nothing unjust in King retaining the modest benefit without paying compensation in addition to the amount already paid. The Architects took on the risk that King might decide not to proceed, either for insufficient funds or on terms perceived by King to be unsatisfactory. That was the risk that eventuated. 8. What is the Measure of Reimbursement for Quantum Meruit Under Contract? In the situation where there is a contract, then the issue in a Contractual Quantum Meruit claim is either the measure of the reasonable sum or the interpretation of similarly wide express terms. The issue is whether the measure is on the basis of cost or market price. There appears to be no hard and fast rule. In the case of an express contract to do work at an unquantified price, the measure is the reasonable remuneration of the contractor Serck Controls Ltd. v Drake & Scull Engineering Ltd. (2000). In the case where there was a contract, the assessment of a quantum meruit was usually based on actual cost which would include on and off site overheads provided that it was reasonable and was reasonably and not unnecessarily incurred, plus an appropriate addition for profit ERDC Group Limited v Brunel University [2006] (TCC). Judge Bowsher QC in Laserbore Ltd -v- Morrison Biggs Wall Ltd (1992) had to decide the meaning of the term "Fair and reasonable payments for all works executed". He considered that the costs plus basis was wrong in principle even though in some instances it may produce the right result. The appropriate approach was to adopt general market rates. In Clarke & Sons v ACT Construction [2002] EWCA Civ 972 ACT was engaged to carry out an extensive redevelopment of a former cold store in Kangley Bridge Road, Sydenham, SE26, so as to convert it into a 24-hour coach depot for Clarke.
  10. 10. ACTs commenced proceedings for the recovery of the sum of 208,608.28 being the difference between the cost of the work calculated by ACT to be 1,485,312.88 and 1,276,704.60 paid by Clarke. Clarke counterclaimed monies said to have been overpaid and claimed damages both for the failure to complete the work within a reasonable time and for defective work. ACT asserted that an express or implied term of that contract was that the price to be paid for the work was to be calculated on a time and materials basis, i.e. at the cost of labour, plant and materials, subcontractors, professional fees, etc., with the markups ranging from 25% to 10% on those elements of the cost. The Court of Appeal agreed with the judge at first instance that the previous work carried out by ACT for Clarke did not show a course of dealing which led to the implication of a time and materials basis for payment. Each of the jobs was carried out under very different bases of working and pricing. The issue then was the assessment of the reasonable remuneration. The judge at first instance decided that it was cost plus 15%. The judge found that it was slightly higher than the bracket of 5%-12% advanced by Clarkes expert but that that bracket was based on defined building contracts whereas dayworks were being charged for with higher uplifts in 1992/1994. He also took account of the higher percentages charged out and paid for pursuant to the earlier invoices. The Court of Appeal held that there was no reason why the prices actually paid should not be factors to take into account in the instant case. Averaged out the uplift was about 20%. That was a fact of the case. Although an increase from 8% (Clarkes figure) to nearly double that at 15% could hardly be described as being slightly higher or a modest uplift, it was held that there was enough material before the judge to enable him to settle on 15%. The Court of Appeal stated that it should be very slow indeed to interfere with a judgment on such an issue made by an experienced judge in a specialist tribunal and upheld his finding that the uplift was 15%. The next issue was whether the uplift was to be applied only to the last two applications for payment, as the judge held, or to all applications submitted for work done in and after April 1992. The judge at first instance concluded that it was not appropriate to re-open the settled and not previously challenged invoices. He held that payments were being made overall by reference to the invoices and that each payment was in the nature of a compromise or agreed settlement on analysis of the work carried out in the preceding period to which it related. The Court of Appeal held that there was nothing to support the judges view that the accounts were settled or agreed. They were called interim applications. They were capable of being treated as interim payments on account. ACT seemed to have treated them in that way themselves. The Court of Appeal held that the earlier applications for payment represented about the best estimate of the value of the work being done at that time, that ACT reserved the right and exercised the right to review the whole operation of the account at the conclusion of the work. It was held that the judge was wrong to limit Clarkes case in that way. All costs from April 1992 were subject to a 15% uplift on the finding of the judge
  11. 11. that that was the reasonable markup. It was 15% whether ACT charged 25% or 20% or 10%. The Court of Appeal therefore allowed the appeal in this respect and remitted that matter back to the court below for the calculations to be made in default of agreement. In Robertson Group (Construction) Limited v Amey-Miller (Edingburgh) Joint Venture) [2005] CSIH89 the Inner House of the Court of Session considered the meaning of the critical phrase all direct costs and directly incurred losses shall be underwritten and reimbursed in a letter of intent. In July 2001 Robertson submitted a tender to the joint venture Amey-Miller for works at the Royal High School, Edinburgh. It was intended that that contract would be for a specific lump sum and be subject to amended JCT 1998 conditions. By the necessary start date of mid-October 2001 the formal contract had not been entered into because of financing delays between Amey-Miller and its employer (Edinburgh Schools Partnership). Amey-Miller issued a letter dated 12 October 2001 to allow work to commence on site. Robertson accepted the terms of the letter and commenced work. In the event no formal contract was ever entered into. The letter referred to the terms of the intended contract and a spending limit of 500,000. That limit was subsequently increased on a number of occasions, the last authorisation, contained in a letter of 12 September 2002 from AmeyMiller to Robertson, specifying a limit of 5m. As the work proceeded interim payments were made to Robertson by Amey-Miller. By October 2002 it became apparent that the parties would be unable to reach agreement on the terms of a formal contract. By that time the spending limit of 5m had been reached. Towards the end of October 2002 work on site ceased. It was observed that a building contract based on the standard JCT form would be expected to include a condition entitling the contractor in certain circumstances to payment from the employer of "direct loss and/or expense". That phrase was familiar and had been the subject of judicial interpretation and application in the cases cited. In particular the adjective "direct" in that context has been interpreted as being concerned with remoteness of damage. Loss of profit and head office overheads could, in appropriate circumstances, be recovered under such a condition; recovery would not be restricted to outlays. It was held that parties prospectively entering into a contract subject to JCT conditions could be expected to be familiar with the traditional loss and expense clause and the interpretation judicially placed on it. The phraseology used in the instant arrangement was different but similar. The adjective "direct" qualified the word "costs" and the phrase "directly incurred" the word "losses". In the event (which occurred) of a formal contract not being entered into, Amey-Miller undertook that all direct costs and directly incurred losses" would be "underwritten and reimbursed. It was held that the first of the two verbs used ("underwritten") was, in its familiar sense of "guaranteed", clearly wide enough to embrace elements beyond actual outlays. It was held that while the second verb ("reimbursed") might tend to suggest the making good of something expended, the phrase read as a whole did not have that restricted sense. It was held in addition that the critical phrase had to be read in the wider context of the whole letter of instruction, including the provisions which related to the setting of a spending limit but clearly envisage that Amey-Miller would, subject to that limit, meet "any losses incurred", such losses expressly including "loss of profit".
  12. 12. It was held that once Robertson had commenced work on the basis of the letter, it was contractually obliged to proceed with the works, subject to the spending limit in force from time to time. If the critical phrase did not entitle it to recover for any loss of profit, Robertson would be obliged to carry out the works in return only for the reimbursement of its outlays, unless Amey-Miller elected to enter into a formal contract with it. It was held that a construction of the critical phrase which had that consequence would hardly make commercial sense, and could not have been intended. 9. What is the Measure of Reimbursement for Quantum Meruit When the Work is Not Part of a Contract? The practical issue is usually whether the measure of reimbursement is on the basis of cost incurred with contribution for profit and overheads, or whether it is to be based on market value. Where there is a contract with prices but which does not apply or an unconcluded contract with prices, this may be taken into account in considering the reimbursement. In some cases there will be little difference in the measure between cost and market value. It might be thought that a measure based on rates would always be higher than one based on costs. This may not always be the case where the rates are based on an unconcluded contract, since there are many commercial reasons for a contractor to bid low for a contract. In the case of an express contract to do work at an unquantified price, the measure is the reasonable remuneration of the contractor. In the case of a benefit which it is unjust to retain the measure is the value to the employer normally the market value, namely the sum that would have been agreed including profit. In between there is a borderline, the position of which is debatable Serck Controls Ltd. v. Drake & Scull Engineering Ltd. (2000). The unconcluded contract may be good evidence of the appropriate measure. In the measure of a fair remuneration and allowance for profit, consideration had to be given to the relationship of the parties and the competitive edge that the subcontractor had by the significant advantage of having already mobilized his equipment Costain Civil Engineering Ltd v Zanen Dredging & Contracting Co [1997] 85 BLR 77. In Sanjay Lachhani v Destination Canada (UK) Ltd. (1997) Mr Recorder Colin Reese QC considered that the contractors offer in the unconcluded contract should act as an upper limit to the measure of the quantum meruit, even though that might lead the contractor to sustain a loss: "A building contractor should not be better off as a result of the failure to conclude a contract than he would have been if his offer had been accepted, i.e., in practical terms, in a case such as this, the price which the building contractor thought he was to get for the works (because he thought his offer had been accepted) must be the upper limit of the remuneration to which he could reasonably claim to be entitled, even if at that level of pricing the building contractor would inevitably have ended up showing an overall loss." In ERDC Group Limited v Brunel University [2006] (TCC) Brunel issued five letters of intent and the authority under the last letter expired on 1 September 2002. At that date 40% by value of the work remained to be done. The majority of the works were finished by the end of November 2002.
  13. 13. On being sent contract documents for signature ERDC stated in a letter of 3 December 2002, that it declined to sign and claimed (for the first time) that it would only continue work on the basis that all work carried out by it would be valued on a quantum meruit basis rather than in accordance with the Valuation Rules under the JCT Standard Form. Prior to December 2002 ERDC had submitted eight Applications for Payment based on the Contract Sum Analysis of the proposed conditions of contract and following the JCT Valuation Rules. HH Humphrey Lloyd QC considered the valuation of work carried out after 1 September 2002, when the authority of the letters had expired. He held that there were no hard and fast rules for the assessment of a quantum meruit. All the factors had to be considered. It was recognised that the circumstances in the instant case were unusual in that there was a move from contractual to a non-contractual basis. He held that it was not right to switch from an assessment based on ERDCs rates to one based entirely on ERDCs costs. The move was not marked at the time and ERDC only made its position clear at a much later stage by which time all the main elements of work were either substantially complete or heading for completion. A price or rate that was reasonable before 1 September did not become unreasonable after 1 September simply because the authority in the letter of appointment expired. Lloyd J held that for variations, the use of the rates in ERDCs March Tender Estimate breakdown, was sensible. Such a contractual basis was in principle fair for the purposes of a quantum meruit, especially where ERDCs tender was not abnormally low but was close to others and the rates and prices shown in the March Tender Breakdown compared with the 2002 Spons Price Books and were objectively reasonable. Lloyd J held that in assessing a quantum meruit by reference to rates and prices (whether contractual or conventional, such as those in Spon) it would ordinarily be right to see that something was included for the costs incurred should the execution of the works be prolonged beyond the period contemplated by the rates (taking into account the risks for which the rates must be taken to have covered for otherwise there may be duplication) and a fair allowance for time-related costs would not otherwise be achieved. Assessment by reference to actual cost would not require such an exercise. Lloyd J held that in a cost plus valuation the overhead percentage to be used was that in the audited accounts for the year in which the work was carried out which in this case was 12.66%. For the valuation of variations a figure of 20% was to be used comprising 10% for overheads, 55% for site preliminaries and 5% for site design which was not the actual figure but the figure that would have been adopted if a contract for the whole work had been executed. As to profit, Lloyd J held that the actual return that the contractor would have made needed to be adopted and not by reference to the profit of others, in this case 0.7%. This applied for valuing all work assessed on a quantum meruit The figure was contemplated by ERDC for the project and near enough that used by it during the work. ERDC competed for the work and Brunel should not pay more than the amount which ERDC contemplated that it would receive. The figure appeared low but it was originally the margin for risk and profit. On a costs plus basis there was no risk; the amount was now only profit so it was higher than ERDC might have received had there been a contract for the whole work.
  14. 14. 10. If Work is not Part of a Contract Can Delays and Defects be taken into Account in the Measure of Reimbursement for Quantum Meruit? Some allowance must be made for work which is defective or work carried out inefficiently. The issue then is the standard to be adopted to establish the defect or inefficiency and the duty owed by the contractor for performance (if any in the absence of a contract). Since restitution is not based on implied contract theory there is no scope for reducing the measure by something like a set-off or cross-claim equal to the costs of putting the work right, except perhaps where as a result of the contractors performance there is no benefit or value. In Sanjay Lachhani v Destination Canada (UK) Ltd. (1997) Mr Recorder Colin Reese QC recognized that a fair value should include a reasonable or normal profit margin over and above the costs reasonably and necessarily incurred in properly carrying out the works and likely to have been incurred by a reasonably efficient contractor. He stated that there must be adjustment for inefficiency and defective work at completion: "If the building contractor works inefficiently and/or if the building contractor leaves defective work then, quite obviously, the actual costs incurred by the building contract must be appropriately adjusted and/or abated to ensure that the owner will not be required to pay more than the goods and services provided are truly (objectively) worth." In Serck Controls Ltd. v. Drake & Scull Engineering Ltd. (2000) 73 Con LR 100 Judge Hicks QC considered that the performance of the contractor in terms of inefficiency and defects at completion, was a factor to be considered in the measure of quantum meruit. "The site conditions and other circumstances in which the work was carried out, including the conduct of the other party, are relevant to the assessment of reasonable remuneration. The conduct of the party carrying out the work may be relevant. If the value is being assessed on a costs plus basis then deduction should be made for time spent in repairing or repeating defective work or for inefficient working. If the value is being assessed by reference to quantities, such matters are irrelevant to the basic valuation. A deduction should be made on either basis for defects remaining at completion because the work handed over at completion is thereby worth less." Hicks J considered that there was no duty to adhere to any particular contractual programme, for there was no contract. In the instant case it was precisely the inability to agree upon a programme which was one of the reasons for failure to enter into a contract. Nonetheless, Hicks J held that a firm working on a quantum meruit basis on a complex construction site could not wholly ignore the desirability of cooperation with others at work on the site. There was a duty at least not to unreasonably interfere with the carrying out of other works and more positively an obligation to be aware of the progress of other trades and, so far as consistent with the firms own legitimate commercial interests, to cooperate in efficient working practices. It was held that there was no breach by Serck of the qualified duty of cooperation to disentitle Serck from having its work valued on the basis of the circumstances in which they were carried out. In ERDC Group Limited v Brunel University [2006] (TCC) Lloyd J held that whether the assessment is made by reference to cost or to rates and prices, the party paying for the benefit was not to be required to pay for delay or inefficiency. Accordingly in arriving at the
  15. 15. total payable by reference to rates and prices it is necessary to look at what the contractor should have recovered by the use of those rates and prices. He held that Brunel could not maintain a claim for breach of the contract since the defects were in the work after the expiry of authority of the last letter of intent There was no contract at that stage. There could therefore be no counterclaim in the classic sense. Lloyd J then addressed the standard to be adopted in defining defective work. If the remedy being granted was restitutionary then the standard would be that attaching to the request. By complying with the request there was accession to that standard. If the remedy was contractual then the standard would be that set by the agreement. He considered that in practical terms there was no material difference between the two approaches and none at all on the facts of the instant case where the standards were the contractual standards that had applied prior to 1 September 2002 and which continued to be applied thereafter. In the case of additional work the standard was set by the instruction or request. In the absence of a specification the usual standards would apply the design and work would have to be a reasonably good quality and, in the case of work designed by ERDC, reasonably fit for its purpose. Lloyd J then dealt with the measure of work that was defective dismissed a downward adjustment based on cost of rectification: "In my judgment it would be strange if a defendant had to pay more than the true value of the benefit realised or realisable. . In assessing what is an appropriate quantum meruit for the whole or any part of the work done after 1 September 2002, Brunel cannot in my view reduce what ERDC might otherwise have received by something like a set-off or crossclaim equal to the costs of putting the work right, except perhaps where as a result of what ERDC did or did not do, there is no benefit or value. Hence professional fees, e.g. on the cost of the work, could never be taken into account. Even so, in such circumstances, there can be no negative result. ERDC cannot have to pay Brunel or forego what it would otherwise have received. However since the benefit has to be assessed overall, if, for example, work which was otherwise up to standard cannot be used because other work was not done or was not up to standard then the value must reflect that result." Lloyd J dismissed the concept of mitigation as relevant to the valuation of a restitutionary claim: "The net benefit to Brunel cannot be affected by whether ERDC was not or was given chance of putting the work right or an investigation as to whether it was willing to do so."

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