Quantum Meruit: Forgetting to Write the Contract

1.1 Go Ahead! – Letters of Intent

It is very common in Hong Kong, particularly at subcontractor level, for a contractor to be given the order to start work before the contract has been finalised. No doubt, everyone in this room has experienced this situation and probably the vast majority have also experienced a situation where the relationship has subsequently gone wrong.

The classic example of this is British Steel Corp v Cleveland Bridge and Engineering.³ The case was nicely summarised in the judgement of Robert Goff:

Both parties confidently expected a contract to eventuate. In the circumstances, to expedite performance under that anticipated contract, one requested the other to commence the contract work and the other complied with that request. If, contrary to their expectation, no contract was entered into, then the performance of the work is not referable to any contract of which the terms can be ascertained, and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi-contract or, as we now say, in restitution.

It is unwise to think that, by labelling a letter as 'a letter of intent', you are protecting yourself from entering into a contract. If the letter of intent sets out an agreement on all essential contractual terms and the parties then proceed with the works on the basis that they are contractually bound, a court or an arbitrator is more than likely to consider that a contract is in place.

In these situations, it is likely that a contractor's right to payment will be determined on the basis of the price stated in the letter of intent or by reference to the schedule of rates or bill of quantities submitted with its tender rather than on a quantum meruit basis.

Further, the fact that a letter of intent refers to an intention to execute a formal contract does not prevent the parties from accepting the contract, as evidenced by the letter of intent, by conduct. So in Harvey Shop Fitters v ADI,⁴ the English Court of Appeal found that the parties' intention was that the contract would be based on an English standard form of contract as amended in the tender documents. The letter of intent signed by the parties clearly referred to a formal contract being prepared for signature and stated that if the contract failed to proceed, or be formalised, the contractor would be entitled to payment on a quantum meruit basis. However, the court found that the contract did proceed, even if it was not formalised, and therefore the claim for quantum meruit did not arise.

If the essential terms are not agreed, and the British Steel case is an example of such a situation where not all of the essential terms were agreed, then there can be no contract and the contractor can claim for work done which is to the benefit of the developer. In the British Steel case, there was no agreement on price or timing of performance. The question then becomes, what are the essential terms which need to be agreed? There is no single answer to that question. However, Lloyd LJ in Pagnan SpA v Feed Products Ltd⁵ set out a simple test, which is:

1.2 Better Luck Next Time – Tendering or More?

In ordinary circumstances, the cost to the contractor of preparing his tender, including any amended tender is not recoverable. The tender process is by its nature a speculative exercise.

However, where the work done greatly exceeds the work undertaken in a normal tendering process, the costs could be recoverable.

In William Lacey (Hounslow) v. Davis,⁶ the contractor submitted a tender for the re-building of war-damaged premises. The tender was not accepted but, in the belief that the contract would be placed with him, the contractor subsequently prepared various further estimates and schedules which the Employer made use of. The contractor even ordered some materials. Ultimately, the Employer did not place a contract with the contractor and instead sold the property. The contractor sued and the Court found that there was no contract in place. However, the court decided that the contractor was entitled to a reasonable sum for the work carried out on a quantum meruit basis.

This principle was applied in the Australian case of Sabemo Pty Ltd v North Sydney Municipal Mutual Council.⁷ In that case, a local council had invited submissions from developers for the redevelopment of land. The plaintiff's scheme was chosen but no formal contract was entered into. It was subsequently found by the court that there was no contract between the parties. However the plaintiff developer had carried out a considerable amount of work in developing plans and negotiating with relevant authorities. Ultimately, the council decided not to pursue the scheme and the developer sued for the work done. Sheppard J said that:

where two parties proceed upon the joint assumption that a contract will be entered into between them and one does work beneficial for the project and thus the interests of the two parties, which work he would not be expected, in other circumstances, to do gratuitously, he will be entitled to compensation or restitution if the other party unilaterally decides to abandon the project, not for any reason associated with bona fide disagreement concerning the terms of the contract to be entered into, but for reasons which, however valid, pertain only to his own position and do not relate at all to that other party.

Note in particular in that case that it was the 'project' that benefited and there was no need to show a benefit to the defendant. A similar argument was run in the English case of Regalian plc v London Docklands Development Corporation.⁸ The developers and the land owner were unable to agree on pricing arrangements following a fall in the local property market. The developers had incurred costs in the hope that they would obtain and perform the contract and, following the collapse of the deal, the developers claimed in quantum meruit. The court rejected the claim on the basis that the costs had been incurred by them at their own risk. In particular the judge pointed out that the parties had made it clear that their negotiations were 'subject to contract' and that either party could withdraw from the negotiations at any time. There was nothing 'inequitable' about the loss lying where it fell. A similar result was obtained in the more recent case of Stephen Donald Architects Ltd v Christopher King.⁹

So what is the test for quantum meruit claims for preparation works? Nicholas Strauss QC in the English first instance decision of Countryside Communications Ltd v ICL Pathway Ltd¹⁰ set out four factors to be considered by the court in deciding whether a contractor should be compensated for preparation costs. These were:

1.3 How Much was that Again? – A Reasonable Price

There are few legal difficulties which arise when the parties agree to the contract but fail to agree on the price. In the absence of an agreement, the contractor will be entitled to a reasonable price.¹¹ This concept is purely a question of implying a clause into the contract rather than a question of unjust enrichment.