In a previous article, we discussed the salient terms in the widely used NZS 3910 contract. However, that contract is more suited for high-value, medium to large construction projects due to terms that include the involvement of an engineer to the project and detailed processes which may not be practical or economic in respect of smaller residential projects. Given that much construction activity in New Zealand is small-scale residential construction, it is important for contractors who engage in this space to have a contract that suits their needs.
There are two main contracts that are geared towards residential contractors.
The first is from the Registered Master Builders Association and the second is from New Zealand Certified Builders (NZCB). Both are large trade associations for residential construction companies that provide, among other things, a suite of contracts for their members to use.
In this article, we will look at the salient terms in NZCB’s cost and markup building contract which was recently updated in February 2018.
Like the NZS contracts, NZCB’s cost and markup building contract contains tick box type options making it easy for members to use. It also contains various express acknowledgements by the client, clarifying whether the contractor is bound to any estimate provided. In our view, this is a useful clause that assists in avoiding a common dispute between client and contractor.
Contractor’s obligations
The contractor is required to perform the building work to the standard required in the contract documents and the relevant building consent.
The NZCB contract applies and repeats the usual warranties that are contained in the Building Act 2004 and the Consumer Guarantees Act 1993. In particular, the contractor warrants that the building work will be carried out:
In a proper and competent manner.
In accordance with the plans and specifications under the contract.
In accordance with the building consent.
With reasonable care and skill.
Be completed by the date specified in the contract or, if no date is specified, within a reasonable time.
Variations
As compared to NZS 3910, NZCB’s contract does not require the contractor to follow a strict process for variations. The contract provides a simple process whereby the contractor is allowed to carry out variations instructed or requested by the client (or the client’s agent). The terms do not require variations to be recorded in writing but recommends that variations should be recorded in writing where practicable. This clause appears to reflect a common practice in the context of residential construction where instructions are given verbally.
To a contractor, the benefit is that it does not take away a contractor’s entitlement to be paid in circumstances where a verbal instruction was given but not recorded in writing. However, this does not mean that the client is unable to dispute that a verbal instruction was given.
Cost and markup
Cost and markup building contracts do not specify a fixed price for the contracted work; the actual costs incurred by the contractor for the contracted work are passed on, plus a pre-agreed margin to account for the contractor’s profit and overheads.
This type of contract is beneficial to the contractor as it will not be required to absorb rising material and labour costs which is especially relevant in the current building market.
Parties that engage a contractor for building work may prefer a fixed-price contract to give them certainty. Certain financial institutes will also require a fixed-price contract when it comes to lending funds for the project.
Conclusion
Contact us if you are a party to a construction contract of any type, and a dispute has arisen. Our lawyers at Norling Law can review your circumstances and discuss strategies on how to progress your project as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/
In addition to the express terms of a construction contract, there are various warranties that are implied under statutes. This applies to all residential building work.
There are two main sources of implied warranties. The first is the Building Act 2004 and the second is the Consumer Guarantees Act 2003.
The Building Act 2004
The implied warranties are set out in s 362I of the Building Act. They require that:
All building work be carried out in a proper and competent manner and in accordance with plans and specifications set out in the contract; and in accordance with the relevant building consent.
All materials used will be suitable for the purpose for which they will be used; and unless otherwise stated in the contract, will be new.
The building work will be carried out in accordance with, and will comply with, all laws and legal requirements, including, without limitation, the Building Act and its regulations.
The building work will be carried out with reasonable care and skill, and completed within the time specified or a reasonable time if no time is stated.
The dwelling will be suitable for occupation at the end of the work.
If the contract states the particular purpose for which the building work is required, or the result that the owner wishes the building work to achieve, so as to show that the owner relies on the skill and judgment of the other party to the contract, that the building work and any materials used in carrying out the building work will be reasonably fit for that purpose; or be of such a nature and quality that they might reasonably be expected to achieve that result.
The above warranties apply for 10 years regardless of the form of the contract. In addition to the above warranties, s 362Q provides a 12-month defect repair period in that if any defects are identified within 12 months from the completion date, the contractor has an obligation to fix them. We recommend keeping copies of your contract and all other building documentation for your own reference and for future purchasers of the property. Also, all copies of all correspondence with the contractors involved in construction.
Where there is a breach of an implied warranty and if the breach can be remedied:
The party may require the contractor to remedy the breach (including repairing or replacing defective materials supplied by the contractor or the contractor’s subcontractor).
If the contractor, after being required to remedy the breach, refuses or neglects to do so, or does not succeed in doing so within a reasonable time, the party may have the breach remedied by someone else and recover from the contractor all reasonable costs incurred in having the breach remedied, or cancel the contract.
The party may obtain from the building contractor damages for any loss or damage to the client resulting from the breach (other than loss or damage through reduction in the value of the product of the building work) that was reasonably foreseeable as liable to result from the breach.
In most cases, a breach can be resolved through negotiation. However, if the breach cannot be remedied, the party may obtain from the contractor damages in compensation for any reduction in value of the product of the building work below the price paid or is payable by the client for that work, or cancel the contract.
These warranties extend to subcontractors. This means that communication is key. Contractors should make all subcontractors aware of the required standards, especially in relation to any amendments or variations so that they may then be communicated back to the principal.
The Consumer Guarantees Act 1993
The guarantees provided under the Consumer Guarantees Act are set out in ss 28 to 30. Where building services are supplied to a consumer, they are guaranteed such that:
Services will be carried out with reasonable care and skill.
The service and any product resulting from the service will be fit for particular purpose.
Where a timeframe is not contractually agreed, services provided to a consumer will be completed within a reasonable time.
Where a price is not contractually agreed, the consumer is not liable to pay more than a reasonable price for the services.
Where services fail to comply with guarantees, and the failure can be remedied, the consumer may:
Require the supplier to remedy it within a reasonable time;
Where a supplier who has been required to remedy a failure refuses or neglects to do so, or does not succeed in doing so within a reasonable time:
I. Have the failure remedied elsewhere and recover from the supplier all reasonable costs incurred in having the failure remedied; or
II. Subject to s 35, cancel the contract for the supply of the service in accordance with s 37.
Conclusion
It is important that contractors and consumers alike are aware of the implied warranties provided by the legislation on top of the warranties explicitly provided in construction contracts.
Contact us if you are concerned about the implied warranties identified in this article following or during your construction project. Our lawyers at Norling Law can review your circumstances and discuss strategies on how to progress your project as part of our no obligation legal consultation.
New Zealand Tiny Homes (Tiny Homes) fell victim to liquidation on 15 November 2022. After its incorporation in 2020 this was a short, but most certainly not sweet, business affair for its director James Cameron of New Plymouth.
The liquidation of Tiny Homes was said to be linked to the liquidation of Tiny Town Projects Limited (Tiny Town) which was also liquidated on 15 November 2022, another of Mr Cameron’s companies incorporated in 2017.
Tiny Town and Tiny Homes were related companies. Tiny Homes held the intellectual property for the creation of building small properties in New Zealand, whereas Tiny Town was the company that actually attended to the building of these properties
The business of Tiny Homes and Tiny Town
Tiny Homes and Tiny Town were in the business of building small properties for consumers in New Zealand. The size of these properties allowed for a far more accessible fixed purchase price for home buyers.
At the time of liquidation of Tiny Homes and Tiny Town, there were a number of these homes that were virtually completed. The only hurdle being procedural matters of gaining compliance before title in the property could pass from Tiny Town to the purchaser.
It is important to note that each of these homes was customised and built on the purchaser’s instructions. A sale and purchase agreement was signed for each home and payment of the purchase price was paid to Tiny Town in instalments.
The first liquidator’s report of Tiny Town that the issues stemming from COVID-19, a spike in building costs and supply chain issues impacted the company’s ability to ‘fulfil fixed price contracts.’ This inability to fufil fixed price contracts led to both Tiny Town and Tiny Homes demise.
The liquidation
In November 2022, Tiny Town was placed into liquidation. At the point of liquidation there were 6 homes that were partially completed. Of the 6 purchasers of these homes, 3 had paid the full purchase price of their respective homes and were awaiting small changes to be made to be issued a code of compliance before the homes could be delivered. The remaining 3 purchasers had homes that were 40%-50% complete.
The first liquidators report for Tiny Town showed the company had very few assets, bar the 6 homes in question.
The liquidators filed proceedings in the High Court seeking directions on how to best deal with the 6 homes.
The proceedings
The case of Manginness v Tiny Town Projects Limited (In Liquidation) [2023] NZHC 494 (the Proceeding) was heard before Venning J on 20 February 2023 with the judgment being delivered on 14 March 2023.
One of the issues to be decided in the Proceeding was whether the 3 fully paid purchasers were entitled to take ownership of the homes, or whether they belonged to Tiny Town. There were also issues raised in relation to the Personal Property Securities Act 1993 (PPSA) as to whether an equitable lien was granted over all 6 homes.
When does property pass?
The first issue was whether property in the homes had passed to the 3 fully paid purchasers. Counsel for the purchasers argued that as the purchase price had been paid in full, the homes should pass to the purchasers. Counsel argued the compliance certificate should not be the decisive factor as in the liquidator’s evidence it was accepted delivery of the homes would occur when full payment was made, not when the compliance certificate was issued.
Venning J rejected this argument, stating that, property will only pass when the homes are ‘in a deliverable state.’ Venning J defined the deliverable state as when the compliance certificate was issued.
It was concluded on the first issue that property in the homes had not passed to the purchasers.
An equitable lien
Counsel for the purchasers argued that even though there was uncertainty on the property passing, that under section 53 of the PPSA the purchasers had an interest in the homes, whether by way of an equitable lien or a constructive trust.
An equitable lien is a form of equity which the Court can grant to give an indemnity or priority over other creditors. On the other hand, a constructive trust is a trust created whereby one person holds property for the benefit of another, it prevents someone holding property from unjustly benefitting from the holding of that property.
Venning J considered that section 53 of the PPSA did not apply here. However, His Honour’s view was different on the topic of an equitable lien. It was argued by counsel for the purchasers that an equitable lien should be granted to all purchasers over the homes based on the extent of money paid to Tiny Town by them.
A key argument is that these homes were identifiable to each purchaser, and had been built to their specifications. Counsel for the purchasers argued that “the purchasers’ equitable lien confirmed their in rem rights in the tiny homes that trumped any competing claim in the liquidation.”
Venning J submitted this was a difficult issue to ascertain based on the facts of this case. His Honour laid weight on the fact these homes were specified to each purchaser and could not reasonably have been sold by the liquidators to other parties. Venning J concluded there was an equitable lien over the 6 homes.
The next issue was whether the lien was subject to the PPSA, to which Venning J referred to it as being excluded under section 23(b) of the PPSA. His Honour’s full conclusion was “I conclude that the individual purchasers are entitled to equitable liens for the extent of the value of the purchase moneys paid by them and that their equitable liens sit outside and are not affected by the provisions of the PPSA.”
The result of the judgment was that the purchasers of the 6 homes were entitled to an equitable lien against the homes to the extent of the purchase moneys paid by them.
Summary
This judgment has been described as ‘ground-breaking’ and that certainly is the case. This judgment will change the way assets in liquidation are dealt with. The judgment gives rights to the purchasers in a situation where in the normal course of the liquidation it would be common for them to lose their assets.
This decision plays on the fairness of the justice system and emphasises the importance of natural justice in a situation where typically there really are no winners. Although it is arguable this ruling is to the disadvantage of other unsecured creditors in the liquidation, it is weighed on the balance of taking away homes from 6 individuals who in some cases may have been left homeless without this judgment.
The judgment will cast a positive light on the prospects of recovery in liquidations for some creditors, showing them the law of equity can assist in certain circumstances. However, it also results in some doubt for secured creditors whose position is ultimately worsened if equity prevails.
In this case it seems as If on the balance the correct decision was made, however this may not always be the case. If you require assistance on your position as a creditor in a liquidation or want some further information on your rights please do not hesitate to contact us for a free no obligation discussion.
Our lawyers at Norling Law can discuss the outcome of this case as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link
Practical completion is a term that is commonly misunderstood by many. Generally, practical completion is achieved when all building work is completed except for minor outstanding works and defects which do not prevent the property from being used for its intended purpose. In other words, if the unfinished items prevent occupation, then practical completion is not achieved.
There are various definitions of practical completion depending on the type of contract that is used. Depending on the project, the principal could ask for additional conditions to be fulfilled before practical completion can be achieved. For more complex projects, it is common for practical completion to be defined so as to include the involvement of the engineer or architect.
How practical completion is defined in a contract is important as it is frequently linked to other clauses such as the accrual of liquidated damages, final payment, payment of retentions, possession by the principal, and commencement of the defects liability period.
Sample clauses
For example, Standards New Zealand (NZS) contracts define practical completion as:
Practical Completion is that stage in the execution of the work under the Contract when the Contract Works or any Separable Portion are complete except for minor omissions and minor defects:
Which in the opinion of the Engineer, the Contractor has reasonable grounds for not promptly correcting;
Which do not prevent the Contract Works or Separable Portion from being used for their intended purpose; and
Rectification of which will not prejudice the convenient use of the Contract Works or any Separable Portion.
The New Zealand Institute of Architects (NZIA) contracts define practical completion as:
Practical Completion means that the Contract Works or a Separate Section of them attain Practical Completion when:
They are able to be used for their intended purpose without material inconvenience;
They have generally been built in accordance with the Contract documents;
They are complete except for:
Minor defects and minor omissions for completion during the Defects Liability Period;
Omissions and defects which the Architect becomes aware of during the Defects Liability Period;
Any undiscovered, latent or other defect or omission which the Architect could not have reasonably discovered;
Work which the Architect and the Contractor have agreed to defer for completion during the Defects Liability Period, or such later date as agreed between the parties.
In the context of smaller residential projects, the New Zealand Certified Builders’ contract defines practical completion as:
“Practical Completion” means both the point in time, and the stage in the progression of the Building Work, when the Building Work is so far advanced that the Building can effectively be used by the Owner for its intended purpose, notwithstanding that certain non-critical or aesthetic features are yet to be completed or minor omissions or defects are yet to be rectified.
Relationship with code compliance certificate
Unless the contract states otherwise, practical completion is not contingent upon issuance of a code compliance certificate (CCC) from a local authority. CCC is a certificate issued by a local authority confirming that it is satisfied on reasonable grounds that all building work has been completed in accordance with the building consent issued for the project. The principal is not likely to receive CCC unless practical completion has been reached. However, achieving practical completion does not necessarily mean that CCC will be issued.
Frequently, there is confusion over payments at the practical completion stage as it is common for the principal to wish to withhold some or all of the final payment until all minor outstanding works and defects are completed, or until issuance of CCC. If the principal withholds payment despite the contract stating that that the contractor is entitled to payment upon practical completion, withholding payment may be a breach of contract.
Given that payment is the fundamental obligation of the principal, non-payment would entitle the contractor to terminate the contract and seek damages from the principal.
Conclusion
Practical completion is an important stage of the building process. For principals, they must understand that while the building can be used for its intended purpose, the entire project will not be completed at that time and there will likely be incomplete works for the contractor to perform.
Typically, most contracts would state when the contractor is entitled to be paid its final invoice. If so, principals are unable to withhold payment on the basis that there are minor works to be completed. However, the defects liability period should provide some comfort to the principal in that the principal is able to require the contractor to rectify any defects that become apparent within a certain period after practical completion. This is in addition to the warranties and guarantees provided by the contractor to the principal.
Contact us if you have experienced delays in your construction project. Our lawyers at Norling Law can review your circumstances and discuss strategies on how to progress your project as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link.
Any undertaking to perform construction work must come with a time for such work to be completed. This obligation could be expressly stated in the contract, or it can be implied. If the contractor fails to complete its work on time, the contractor may be in breach of contract and may become liable to the principal in damages, if the principal is able to prove it has suffered losses as a consequence of the contractor’s breach.
Most standard form contracts make provision for a set date by which the work is to be completed. If the contract is not properly completed to include a start and completion date, then the contractor’s obligation would be to complete the work within a reasonable time.
Express completion date
Where the completion date is expressed in the contract, the contractor is not entitled to seek as of right an extension unless there is an extension of time clause in the contract allowing the stated time to be altered. Commonly, these clauses provide that the contractor is entitled to an extension of time due to an event that occurs which causes delay and for which the contractor is not at fault.
Most contracts express what the contractor is entitled to claim an extension of time for. This could be additional works, variations that the contractor is required to perform, or an unforeseeable event such as COVID-19, or a force majeure event such as the recent flooding New Zealand experienced. For example, the NZIA SCC 2018 contract provides that the contractor is entitled to an extension of time under the following circumstances:
A delay in the issue of a consent or approval that the principal had to obtain.
Unforeseeable physical conditions on site which materially differ from the physical conditions which an experienced contractor should have reasonably seen at the time of tender. They do not include climatic conditions on the site.
The contract works are suspended in a way allowed under the contract.
The architect does not give a direction within a reasonable time after being asked by the contractor in writing to do so.
The principal does not supply materials, work or services on time.
A separate contractor’s act or omission.
In order to claim an extension of time, contractors must ensure that they follow the process set out in the contract in seeking to extend the deadline. This may include providing relevant information to the principal to support the claim.
It is common for contractors to make claims for an extension of time late and they are often poorly documented. Contemporary evidence of matters that give rise to a delay are the best source of evidence to support a claim for an extension of time. This could include, inter alia, instructions, communications between the parties, site notes, photographs, minutes of meetings, and timesheets. Any approval should be in writing to prevent disputes.
Other instances
Where there is no express contractual right to extend time, or where the clause does not apply in the claimed circumstances, a stated time for completion would be replaced by a reasonable time for completion, if:
The parties agree.
If the principal waives the obligation to complete by the stated date.
If the principal prevents completion within the stated time by some act or omission caused by the principal.
Prevention principle
The latter is also known as the prevention principle. It is based on a common law rule that creates an implied obligation on a contracting party to not impede another contracting party from achieving a condition that some contractual outcome or benefit depends on. In the context of construction contracts, where a party to a construction contract has been prevented from fulfilling its contractual obligations as a result of the conduct of the other party, the preventing party cannot insist upon strict contractual times for performance.
If the prevention principle applies, time in the contract becomes “at large” and is replaced by whatever is reasonable in the circumstances. What is reasonable depends on the circumstances of each case such as the nature of the work, the necessary time to do the work and the ability of a reasonable contractor to perform. The prevention principle does not prohibit the contractor from seeking damages against the principal.
Additionally, if time is “at large”, the principal cannot rely on its entitlement to liquidated damages. However, the principal is able to claim for actual damage suffered if the contractor fails to achieve practical completion within a reasonable time.
Peak Constructions (Liverpool) Limited v McKinney Foundation Limited
In Peak Constructions (Liverpool) Limited v McKinney Foundation Limited (1970) 1 BLR 111, Peak was contracted to build a 14-storey block of flats. The piling works were subcontracted to McKinney. The completion date was 17 February 1966. McKinney completed the piling work in July 1964. In October 1964, defective work was discovered due to a negligent work by McKinney. The principal delayed issuing instructions to proceed with the rectification work until August 1965. Once issued, McKinney commenced rectification works promptly. Six of the 58 weeks of delay were taken by McKinney for the rectification work.
The English Court of Appeal held that it was not reasonable to hold McKinney responsible in damages for the entire 58-week delay. Where acts of the principal have prevented completion, the only way to preserve the principal’s right to liquidated damages is for the contract itself to allow the date for completion to be extended for those very acts. As no extension of time had been granted for the principal’s delay, there was no date under the contract to measure McKinney’s liability to pay liquidated damages and therefore, none was payable.
Summary
The purpose of extension of time regime is to allocate risks and responsibility between the parties to the contract.
Generally, the causes of delay can be classified into one of the following categories:
Caused by the principal.
Caused by the contractor.
Caused by factors outside of the control of either party.
When negotiating the terms of a construction contract, it is important that the party best able to control the relevant risk should bear the time and cost consequences of delay. Failure to do so could result in unintended consequences.
Contact us if you have experienced delays in your construction project. Our lawyers at Norling Law can review your delay circumstances and discuss strategies on how to progress your project as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link.
What is a contractor’s entitlement to payment for variations if there is a dispute as to whether consent for particular variations was given?
The starting position in contract law is that if a contractor provides services to another party, the other party is not obliged to pay for those services unless they have agreed to do so.
However, the law recognises that there are cases where a party benefiting from services should pay because of some factor that makes it unjust to assert that the services had no value to them. In these instances, contractors might be able to bring a claim in equity.
Quantum meruit
Quantum meruit means “what one has earned”. The doctrine of quantum meruit is based on the principle that a party should be entitled to restitutionary relief for the reasonable value of work or services provided to the other party which for some reason falls outside of their contractual relationship. Quantum meruit claims have historically been linked to unjust enrichment, though that is no longer a requirement.
To succeed in a quantum meruit claim, the claimant must establish the following elements:
That services were provided by the claimant to another party.
The claimant wanted payment in exchange for these services and made that reasonably apparent to the other party.
The other party freely accepted the services or at least acquiesced to their provision.
The recipient knew or ought to have known that the claimant expects to be paid for those services.
Typical scenarios where the doctrine could apply include:
Where no specified value has been fixed for work done under an agreement.
Where work is done at the request of the principal under the contract, but the contract is later found to be void or unenforceable.
Where additional work is carried out by a contractor at the request of the principal and the work does not fall within the scope contained in the contract.
Where work has been performed in the expectation that contract would be formed, but no contract is subsequently entered into.
Where the party requesting the works wrongly terminates the contact or performs such a fundamental or serious breach as to allow the party performing the works to terminate the contract.
Quantum meruit in the courts
In Cobbe v Yeoman’s Row Management Ltd, Yeoman was the owner of land with potential for residential development. It entered negotiations with Mr Cobbe for the sale of the land to him. They reached an oral “agreement in principle” on the core terms of the sale but no written contract, or even a draft contract for discussion, was produced. There remained some terms still to be agreed.
The structure of the agreement in principle was that Mr Cobbe, at his own expense, would make an application for residential development. If the desired planning permission was obtained, Yeoman would sell the land to Mr Cobbe for an agreed up-front price, £x.
Mr Cobbe would then, again at his own expense, develop the land in accordance with the planning permission, sell off the residential units, and when the gross proceeds of sale received equalled £2x, any further gross proceeds of sale would be divided equally between the parties.
Pursuant to this agreement in principle, Mr Cobbe applied for planning permission for the residential development. He was encouraged by Yeoman to do so and spent a considerable sum of money and time on this. The application was successful and planning permission was obtained.
However, Yeoman then sought to re-negotiate the core financial terms of the sale, asking, in particular, for a substantial increase in the sum of money that would represent £x. Mr Cobbe was unwilling to commit himself to the proposed new financial terms and Yeoman was unwilling to proceed on the basis of the originally agreed financial terms.
The House of Lords considered that the property increased in value by the grant of planning permission and Yeoman had been enriched by that as it had to pay nothing. However, the Court considered that the extent of the enrichment was not the difference in value of the land, but rather, the value of Mr Cobbe’s services as Yeoman did not have to pay for them, and Mr Cobbe did not intend to provide his services gratuitously. As a result, XX.
In Mega Project Holding Limited v Orewa Developments Limited, Mega and Orewa entered into an agreement to upgrade a road jointly with the cost of the works to be shared equally. The contract stated that Orewa shall not commence works until Mega gave written approval of the estimated costs and the contractor to be engaged. Orewa did not obtain Mega’s approval (or even sought approval) and engaged a contractor to perform the works on the basis that the costs would be shared equally.
The Court held that Orewa was entitled to recover half of the cost of the work as Mega:
Knew that Orewa was carrying out the work on the basis that the costs would be shared.
Knew that a contractor was engaged and did not raise an objection.
Was provided with detailed schedules showing work carried out and how charges are made up.
Did not challenge amounts claimed by the contractor.
Did not challenge the payment schedules produced by Orewa.
What will the Court award?
Whether quantum meruit applies will depend on the facts of each individual case.
If quantum meruit is established, there is no set rule on what the Court will award. The guiding principle is the justice of the situation. In some circumstances, the contractor may be awarded only its actual costs. However, the Court has also awarded a margin for profit and overhead in the past.
In making its decision, the Court will consider several factors, including:
The commercial rate for the work;
Site conditions;
Whether the contract refers to certain prices (or formulas);
Conduct of the parties; and
Quality of the work.
In the Australian case of Sopov v Kane Constructions Pty Ltd (No. 2) [2009] VSCA 141, the principal repudiated the contract by wrongly calling on the contractor’s bank guarantee.
In response, the contractor terminated the contract and claimed damages based on quantum meruit. In order to make out its claim, the contractor was required to prove the total costs incurred in carrying out the works, and that those amounts were fair and reasonable in the circumstances. In the circumstances, it did not matter that the work performed was outside of the contract’s scope. The Court granted the contractor’s costs and also allowed the contractor a 10% margin for overhead and profit.
In Electrix v Fletcher Constrution Co Limited, Electrix completed electrical work as a subcontractor on the Christchurch Justice Precinct prior to any formal contract being agreed between the parties. Electrix brought a quantum meruit claim against Fletcher after Fletcher refused to pay its invoices. The Court held that Electrix had established a claim in quantum meruit, all that was to be decided was the value of the award.
In calculating the award, Justice Palmer took the starting point from UK sources: Electrix was to prove market value for the work completed and Fletcher was to demonstrate that it did not value the benefit in the same way. Both parties presented expert evidence to support their position. Justice Palmer preferred the evidence of one of Electrix’s experts, who sourced her cost evidence from the actual cost incurred by Electrix, as recorded in its project management software, and awarded Electrix almost $7,500,000 plus GST and interest.
Alternative equitable remedies
There are alternative remedies available to parties to a construction contract where work has been completed under an unapproved variation:
Estoppel – an equitable remedy available to contractors in scenarios where they have acted to their detriment in reliance on statements or behaviour of the principal; and
Free acceptance – where a principal has had the opportunity to accept or reject the services of a contractor, has failed to reject the services, and knows that the contractor expected payment for the services, they may be considered to have freely accepted the benefit.
If a contractor can demonstrate that the principal did accept the services or work with the knowledge that it expected to be paid, they may be required to pay the contractor for the value of the work.
Conclusion
While the ideal starting point for any construction project is a watertight contract that accurately reflects all party’s rights and obligations and all parties closely following the process for variations prior to beginning any work, the reality is that works are sometimes completed outside the scope of a contract, and the value of the works can be disputed. If you find yourself in this situation, a claim in quantum meruit, estoppel, or free acceptance might be an available option.
Contact us if you are in the middle of a project and invoices have been disputed, or if you wish to dispute an invoice. Our lawyers at Norling Law can review your contract and provide preliminary advice on the strength of a claim as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link .
