Let’s Be Reasonable: Quantum Meruit and Asian Equivalents

This was a talk given to the Lighthouse Club International Construction Conference on 5 May 2006.

It is very common for judges and arbitrators to consider one of the following situations:

  1. two parties have tried to negotiate the terms of a construction contract but eventually failed to do so, whilst in the meantime, one of the parties has been doing work at the request of the other
  2. works have been carried out in contemplation of a project that does not materialise

When the works are carried out, the burning question becomes: what about payment and how is it going to be assessed?

Where a contractor carries out works at the Employer’s request in the absence of a contract, the law may impose on the Employer an obligation to pay a reasonable sum for the work done in response to that request. This is known as “quantum meruit“, a Latin phrase commonly translated as ‘the amount deserved’ or ‘what it (the work) is worth’.

It used to be thought that the basis of quantum meruit was an implied contract. However, it is now clear that the legal basis of quantum meruit rests in the law of restitution and the removal of unjust enrichment.1 In the context of this conference, the basic question to be asked in each situation is:

has the employer been unjustly enriched at the expense of the contractor?

In this paper, I will consider:

  1. the usual battlegrounds where quantum meruit arguments are raised; and
  2. the appropriate assessment for quantum meruit.

Finally, to reflect the international nature of this conference, I will also briefly touch on equivalent principles in neighbouring jurisdictions, which are Macau, the PRC, Taiwan and Thailand.

When does the Right to Quantum Meruit Arise?

The concept of restitution and the broad nature of the remedy of quantum meruit can arise in many and varied situations. In the House of Lords decision of Banque Financière de la Cité v Parc,2 Lord Steyn identified four questions arising in relation to any claim in restitution, which were:

(a) had the defendant benefited or been enriched?
(b) was the enrichment at the expense of the claimant?
(c) was the enrichment unjust?
(d) were there any defences?

If the answer to the first three questions is “yes” and the answer to the fourth question is “no”, a claim for quantum meruit will succeed. I will not attempt to analyse each and every set of facts where the concepts apply, even if that is possible. Instead, I will comment on the situations where a claim for quantum meruit commonly arises in the construction industry. Unless otherwise stated, I will generally assume that the claims involve a developer and a contractor, but obviously the issues raised apply equally at subcontractor level and to claims made by consultants. In this context, the background is that at some stage there was or was intended to be a contract between the parties. For the purposes of the analysis, I have divided the type of disputes into two groups, namely where:

1. the parties forgot to write the contract; and
2. the parties forgot to read 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. that a failure to agree on a term may not invalidate a contract unless thereby the contract becomes unworkable; and
  2. whether a term is so necessary as to be essential, whereby a failure to agree on it precludes an agreement from being binding in law or makes a contract unworkable, is a question for the parties to decide.

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 King9

So what is the test for quantum meruit claims for preparation works? Nicholas Strauss QC in the English first instance decision ofCountryside Communications Ltd v ICL Pathway Ltd 10 set out four factors to be considered by the court in deciding whether a contractor should be compensated for preparation costs. These were:

  1. whether the work carried out is or is not of a kind usually given free;
  2. the terms in which the request to perform the services was made in so far as they establish the extent of the risk (if any) which the contractor may fairly be said to have accepted that such services would be uncompensated;
  3. the nature of the benefit to the developer, ie whether there is a real benefit; and
  4. the circumstances in which the anticipated contract does not materialise and in particular where that involves ‘fault’ by the developer or alternatively whether the circumstances are outside the risk accepted by the contractor.

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.

2.1 Just a Bit Extra – Additional Works

One question which regularly arises is whether additional work or variations can be valued on a quantum meruit basis. This should not cause any problems where the contract has an appropriately written variation clause. Variations will be valued on the basis of the rates set out in the contract, or as agreed between the parties or as determined by the contract manager, acting reasonably, either expressly or impliedly. There are though two situations where difficult issues arise.

2.1.1 No Variation Clause

Where the contract does not include a variation clause, the contractor may be able to claim for variations on a quantum meruit basis for the additional works. A recent example of this is Industrial Service (Telford) Limited v Charles Ransford & Sons Limited.12

In that case, the employer’s counter argument was that the contract was an all-inclusive contract and that no claim could be made for extras. A similar argument succeeded in Eugena Ltd v Gelande Corporation Ltd.13 In this case, a contractor tendered to carry out renovation works on a listed building in England and a letter of intent was issued to authorise the expenditure on preliminaries and specialist design works up to a value of £50,000. The contractor proceeded to carry out the design work and a contract was formed. Ultimately, the project did not proceed beyond the initial stages and the contractor claimed in quantum meruit for the cost of the work done. The court decided that there was a contract in place and as a consequence there was no room for a quantum meruit claim. It also interpreted the £50,000 as a cap on expenditure or in effect a limit of liability and the contractor could not claim any additional sums.

In passing, it is also interesting to note that the court interpreted the words ‘preliminaries’ to include ‘stripping out and demolition works’. The judge, Judge Hegarty QC admitted in the Judgment that he was not interpreting that word in the normal construction sense.

2.1.2 Beyond the Scope

Where there are clearly invalid variations and the contractor has carried out the work, it may be entitled to claim on a quantum meruit basis. Costain Civil Engineering v Zanen Dredging and Contracting Company Ltd14 is an example of this situation. This case concerned a claim by a dredging subcontractor against the main contractor in respect of the construction of a tunnel under the River Conwy in Wales. During the course of the project, the employer varied the works to turn a basin flooded specifically for the project into a permanent marina and the employer and the main contractor entered into a supplemental agreement to that effect.

The dredging subcontractor was instructed to carry out certain preparatory works in connection with the marina. The subcontractor did not accept that these works were authorised variations under the subcontract and claimed on a quantum meruit basis. The court decided that the works fell outside the scope of the variation clause and that therefore the contract did not apply to them. The subcontractor succeeded in claiming in quantum meruit.

Difficult issues arise where parties fail to comply with the procedural requirements for variations under a contract. A number of cases have dealt with variation claims where the contract required a written order as a condition precedent for payment and the courts have rejected claims for payment on breach of this condition precedent.15 The contractor could attempt to claim in quantum meruit. Given the fact-based nature of a restitutional claim, whether a claim succeeds may depend upon the facts. However cases in both England and Australia have held that claims in restitution cannot be inconsistent with the contract. As Deane J said in Pavey & Matthews:

if there is a valid and enforceable agreement governing the claimant’s rights 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.16

This principle was accepted by the English Court of Appeal in Mowlem plc v Stena Line Ports Limited.17

Whether the law of obligations in future enjoys the same relationship with the law of contract as the law of tort now enjoys remains to be seen. Certainly, one analysis could be that it would be the developer and not the contractor who would suffer the injustice if a contractor was entitled to claim in quantum meruit for a benefit which was expressly excluded by a contract.

The safest thing for a contractor to do, of course, is to ensure that the terms of the variation clause are complied with or alternatively, if the contract manager refuses to issue a written variation order, to confirm the contractor’s position in writing and request a written order.

In the absence of a condition precedent, where work is done by orders given by or for and on behalf of the owner, notwithstanding any procedural irregularity, contractors should be able to claim either on the basis of a separate contract to pay a reasonable sum or on a restitutional basis. Indeed the Counsel for a sub-subcontractor in Sun Kai Engineering Co Ltd v Tileman Asian Ltd,18 persuaded the Hong Kong court that a mere request to carry out work, without any expression that no reimbursement would be made, would be sufficient to claim quantum meruit.

2.1 ‘Just Go!’ – Repudiated Contracts

It is often thought that the appropriate method of calculating compensation following the repudiation of a contract is to use principles of quantum meruit.

In Australia, it seems clear that where the owner repudiates a contract, the contractor has a choice of remedies, which are either to claim damages for breach of contract or to claim a quantum meruit assessment for work done. One authority for this is the High Court of Australia Decision in McDonald v Dennys Lascelles.19

The Hong Kong courts reviewed the position in the recent decision of Tridant Engineering v Mansion Holdings.20 In this case, following a repudiation of the contract, Mansion claimed its costs plus overhead and profits. Tridant argued that the contract should be used to assess damages.

Deputy High Court Judge To, after a full review of the authorities from England, Australia and New Zealand, decided that quantum meruit should not be used where the parties’ rights and liabilities can be settled on the basis of a contract. The rationale for this is that the plaintiff would be unjustly enriched if, following a repudiation of the contract, it was allowed to ignore the terms of the contract and claim more than it would have been entitled to under those terms.

Once it has been established that the contractor has a right to claim on quantum meruit, one needs to consider what can actually be claimed. The courts have made it clear that there are no hard and fast rules and the method of assessment will vary depending on the circumstances of the contractor’s claim.

One usual starting point is the costs of the labour, material and plant supplied plus a reasonable profit. This was adopted by Burrell J when assessing a reasonable price under a contractual agreement in the recent Hong Kong case of Goarm Engineering Limited v Shimizu Corporation.21

However, the quantum meruit compensation does not necessarily require payment of a reasonable rate for the work done. The Australian case of Pavey & Matthews Pty Ltd v Paul22 concerned the breach of section 45 of the New South Wales Builders Licensing Act. Section 45 required all building contracts to be in writing. If the contract was not in writing, it was not enforceable.

Despite the absence of a written contract, the contractor sued and ultimately, after a judgement of the High Court of Australia, successfully recovered on a quantum meruit basis. There is a useful passage in the judgment of Deane J from that case, which is as follows:

What the concept of monetary restitution involves is the payment of an amount which constitutes, in all the relevant circumstances, fair and just compensation for the benefit or ‘enrichment’ actually or constructively accepted. Ordinarily, that will correspond to the fair value of the benefit provided (e.g. remuneration calculated at a reasonable rate for work actually done or the fair market value of materials supplied).

In some categories of case, however it would be to affront rather than to satisfy the requirements of good conscience and justice which inspire the concept or principle of restitution or unjust enrichment to determine what constitutes fair and just compensation for the benefit accepted by reference only to what would represent a fair remuneration for the work involved or a fair market value for material supplied.

In that case, Deane J gave the example of where a builder had carried out work enhancing the property and where the cost of the work done far exceeded the value of the enhanced property. Further, on the facts of that case, it could be that the owner had suffered a degree of detriment because of the failure to agree a written contract, which would be “an important factor in determining what constituted fair and just restitution” for the builder.

If quantum meruit is to be assessed in respect of work which the Court considers as having been done outside the contractual scope of works, strictly speaking of course the contractual rates and prices should not dictate the reasonable sum to be paid.

Despite this, however, often in practice quantum meruit claims seek to use rates and prices within the contract. This is particularly the case where the claim is for disputed variations. Certainly, the rates and prices in the contract are evidence of reasonableness (but probably at the lower end of reasonableness) but are not in themselves determinative.

Indeed Burrell J in Four Seas Union v Hong Kong & Macau Scent On23 said that using bill rates was artificial, particularly where the initial costs were front loaded.

Once a base rate is established, it can be adjusted. The court in the English case of Serck Controls Ltd v Drake & Scull24contains useful comments on what can be taken into account with adjustments. This can include site conditions and the other circumstances under which the claimant carries out the work including the conduct of the defendant.

The claim will include overheads and profits on top of the cost of labour and materials used. Again the percentage rate will depend upon the facts. In Four Seas Union v Hong Kong & Macau Scent On,25 a 15% rate for overhead and profit was agreed. Agreements at this sort of level are very common in Hong Kong. However in Happy Dynasty v Wai Kee,26 the Hong Kong Court of Appeal considered that the specialist subcontractor should not be limited to a 12% profit for the “unusual and no doubt skilled task” of drilling and blasting.

The following relevant factors may reduce the contractor’s entitlement to the reasonable sum assessed.

  1. Partial performance and incomplete works: the contractor should not be able to claim for works which are not done. In the Serck Controls case, the court said that the whole conduct of the claimant needs to be reviewed including inefficient working and whether the claimant had excessive tea breaks.
  2. Defective or inefficient work: In Slater v Duguemin Ltd,27 on a claim on an interim certificate following a wrongful termination, the Court allowed an employer a right to abate the costs of defects.
  3. Again, in the Serck Controls case, the court said that deductions should be based on a legal duty. The first question to be asked then is what duty is owed to the defendant by the claimant in the absence of the contract. There can be for instance no duty to comply with a programme in the absence of a contract.

1. Macau

The Macau legal system is based on Portuguese law and in particular on the Portuguese Civil Code. This includes the concept of undue enrichment.

Article 473 of the Portuguese Civil Code provides that a contractor who has carried out work without the support of a contract, or the scope of which falls outside the contract, may be entitled to compensation provided that the employer or recipient of the works benefited from them.

The contractor’s right to restitution under the principle of undue enrichment will be subject to the requirement of good faith.28

When assessing the contractor’s entitlement, all necessary costs and expenses reasonably incurred by the Contractor will be taken into account.

2. People’s Republic of China

The PRC Contract is comprehensive in the manner in which it deals with unclear contract conditions. Where there is no initial agreement, Article 61 of the PRC Contract Law allows the parties to agree the price through supplemental terms. In the absence of any agreement, then the price shall be:

(a) the market price at the place of performance; or

(b) the state or government directed price.

Large cities have set prices for various activities. As I understand it, there are no nationwide tariffs.

Where there is no agreement on price, it is possible to use the general principles of both Civil Law and the PRC Contract Law to construct an argument that the Contractor should be paid its costs and expenses. This argument is based on Article 4 of the Civil Law which states that:

In civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed

A similar provision is set out in Article 5 of the Contract Law. This states that the parties shall abide by the principle of fairness in defining the rights and obligations of each party.

3. Taiwan

The ROC Civil Code contains a number of useful principles and guidelines on unjust enrichment that would enable contractors to claim on quantum meruit in the event that work has been carried out but no formal agreement has been signed.

In the absence of a contract, the contractor will be able to obtain restitution under the principle of unjust enrichment and the Civil Code distinguishes between two specific types of contract:

1. the contract for hire of services; and

2. the contract for work.

It is worth mentioning that, as in other civil law jurisdictions, there is no right to restitution if, at the time the obligation was performed, the party performing it knew that it was under no obligation to perform or if the claim relates to an unlawful cause and the claimant was involved in the illegality.29

Arguably therefore if works are carried out or services are rendered as part of a speculative exercise and contractors or consultants know that there is no obligation for them to incur such costs, the principle seems to be that no restitution is due.

(a) Contracts of services:

Remuneration is deemed to have been agreed upon if, according to the circumstances, the service or completion of the works were not to take place without remuneration.30

In a similar manner to the PRC law, payment is made according to a tariff and, if there is no tariff, according to custom.

(b) Contracts for work:

Article 491 provides that remuneration is deemed to be agreed if, according to the circumstances, the completion of the work is not to take place without remuneration. The value of materials is presumed to be part of the remuneration.

Further, and as a matter of principle, the contractor is entitled to remuneration as long as it is established that the work carried out was of benefit or value to the Employer.31

4. Thailand

Where there is no contract, assistance to the contractor is provided by the Thailand Civil & Commercial Code. Quantum Meruit is recognised as a legal principle and is included in respect of contracts for “Hire of Work”32 and “Hire of Services”.33 “Hire of Work” is defined as a contract where one person agrees to perform a definite item of work for another “for remuneration”.34 In respect of “Hire of Services”, a promise to pay remuneration is implied if the circumstances show the services were not to be gratuitous.35

Where the contract is repudiated or terminated by the employer, the employer is required to pay to the contractor “compensation for any injury resulting from the termination”.36 This is taken in law to include the cost of work done, amongst other heads of damage.

When assessing quantum meruit, account will be taken of the general principles of contract such as the requirement that both parties perform their obligations in good faith and in accordance with ordinary usage.37 The courts will use their discretion when making an assessment of what a reasonable remuneration should be in the circumstances of each particular case, where there was no express agreement on price or remuneration.

I will conclude this paper with a few practical comments.

1. Avoidance

The best way to ensure that a quantum meruit claim does not arise is to ensure that contracts are fully, clearly and properly prepared. To ensure that the variation clause is included within the contract even in situations where you think it may be unlikely that variations are required.

If you wish to issue a letter of intent and do not want the letter of intent to be binding, head the letter of intent “subject to contract”.

Alternatively, if you intend the subcontractor to act on the letter of intent, then ensure that you are protected by referring to your standard form conditions of contract in the letter of intent and all other relevant contract documents.

2. Claims

Claims in quantum meruit will not necessarily save a contractor from entering into a bad bargain. The difficulty with any claim for quantum meruit is that it is fact based. Any claimant needs evidence to support not only the rates it intends to claim but also the amount of work done. Further, any claim for adjustment of the rate also needs evidence.

1. Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 (See also Pavey v Matthews (1987) 162) CLR 221
2. Banque Financière de la Cité v. Parc (Battersea) Ltd and Others [1999] 1 AC 221
3. British Steel Cor v. Cleveland Bridge and Engineering Co. [1984] 1 All E.R. 504 applied in Hong Kong by Burrell J in Four Seas Union (Holdings) Ltd v Hong Kong & Macau Scent On Engineering & Construction Limited (21 February 2003)
4. Harvey Shop Fitters v. ADI, TCC [2003] EWCA Civ. 1757 A1/2003/0616
5. Pagnan SpA v. Feed Products Ltd [1987] 2 Lloyd’s Rep. 601, CA
6. William Lacey (Hounslow) v. Davis [1957] 1 W.L.R. 932; 101 S.J. 629
7. Sabemo Pty Ltd v. North Sydney Municipal Mutual Council [1977] 2 N.S.W.L.R. 880
8. Regalian plc v. London Docklands Development Corporation [1995] 1 W.L.R. 212
9. Stephen Donald Architects Ltd v. Christopher King TCC [2003] CILL 2027
10. Countryside Communications Ltd v. ICL Pathway Ltd [2000] CLC 324
11. Way v. Latilla [1937] 3 All E R 759; Stephen Donald Architects Ltd v King [2003] EWHC 1867
12. Industrial Service (Telford) Limited v. Charles Ransford & Sons Limited C.A. [2005] ALL E.R. (D) 311 (Apr)/EWCA Cir 662
13. Unreported, October 2004
14. Constain Civil Engineering v. Zanen Dredging and Contracting Company Ltd (1995) 12 Const.L.J.129
15. Nixon v. the Taff Vale Railway (1848) 7 hare 136
16. (1987) 162 CLR 221
17. [2004] EWHC 2206
18. Hong Kong Court of First Instance – 6 March 2000
19. McDonald v. Dennys Lascelles (1933) 48 CLR 457
20. Tridant Engineering Co Ltd v. Mansion Holdings Limited [2001] 1 HK LRD 783
21. 4 December 2002, HCCT 21 of 1999
22. Pavey Matthews Pty v. Paul [1987] HCA 5
23. Four Seas Union (Holdings) Ltd v Hong Kong & Macau Scent On Engineering & Construction Limited (21 February 2003)
24. Serck Controls Ltd v Drake & Scull Engineering Ltd [2000] 73 Con LR 100
25. Four Seas Union Construction Co. Ltd v. Hong Kong & Macau Scent On Engineering & Construction Ltd [2003] 1 HKLRD 653
26. Happy Dynasty Limited v Wai Kee (Zens) Construction and Transportation Co Ltd – Hong Kong Court of Appeal (16 December 1998)
27. Slater v. Duguemin Ltd (1992) 29 Con. L.R. 24
28. Article 475 of the Portuguese Civil Code
29. Article 180(3)
30. Articles 483 and 491
31. Article 512 para. 2
32. (TCCC, Title VII)
33. (TCCC, Title VI)
34. (TCCC, article 587)
35. (TCCC, article 576)
36. (TCCC, article 605)
37. (TCCC, Title II, section 368)