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 .
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.
Wendy has over 20 years’ experience in civil litigation in New Zealand with a main focus on construction, insolvency and debt recovery and security enforcement.