Contractors can deliberately hold off concluding a contract in the hope of benefiting from a quantum meruit. Sometimes they end up with more than they bargained for

Contractors like “quantum meruit” claims. A recent case may encourage them even more than the current climate does already, but it should be read within the much misunderstood limits of the law in this area.

Quantum meruit means “the sum deserved”. A contractor is commonly entitled to a QM when it does work in the expectation of a contract that is never concluded. This often occurs when work is carried out under a letter of intent that lacks contractual status.

In some cases, contractors who started work without a concluded contract have deliberately avoided reaching agreement on one just so that they could benefit from a QM. These instances tend to concern lump-sum or measurement contracts. As the works progress it gets harder for the employer to replace the contractor. Without a contract, the employer lacks recourse if it replaces the contractor. Equally, while the contractor continues working, the employer has no contractual recourse for any delay to the works.

That is not to say it is advisable for a contractor to always avoid a contract. The contractor would lack the right to complete the works and obtaining interim payments may be problematic too. Also, while a QM entitles a contractor to a reasonable price for its works, the amount may be reduced to allow for any defects and inefficient working (but the employer will struggle to obtain compensation for delay).

Contractors often expect to recover by QM more than they would be paid by way of a competitive or negotiated tender price. When, as now, such prices are being pushed downwards, it may be tempting to start work then deliberately avoid concluding a contract and claim a QM. However, a less extreme result than that - which contractors expect and employers fear - usually occurs.

This is because it is hard to avoid any contract being found to exist. Even if there is no contract, the contractor’s tendered rates may have some evidential value in calculating the QM, even if they were not agreed. Failing that, comparable rates from other sources, such as Spon’s Price Book, may be used. These rates may be higher than the contractor would have gone down to in a contract, but the contractor should not expect a big windfall. However, neither should it expect a loss-making QM. This is the added temptation of the QM to contractors when a suicide bid is a real alternative.

An often overlooked bar on QM claims is that generally no QM is due when there is a concluded contract and it provides for the contractor’s entitlement. This prevents many QM claims, given how frequently a contract price is agreed and express provision is made for variations. However, even then a contractor may be entitled to a QM when work is requested and done that is beyond the scope of the contract and therefore falls outside the variations clause. This takes an unusual case though - for example, if there is a contract to refurbish a theatre and the contractor is asked to build a power station as well.

Another often overlooked limit on QM claims is that the contractor is not entitled to a QM for all of its work, only for the extra work done outside the variations clause - the power station, but not the theatre work. Insofar as relevant rates are agreed they may, however, have evidential value in the QM’s calculation.
The recent Court of Appeal case of Sykes vs Packham demonstrates another situation when a QM is due. There was a building contract, but no agreed price. The contractor had given an “estimate”, which the court said did not give rise to a fixed price, as the employer contended. Nor was it a cost plus contract, as the contractor claimed, there being no evidence as to what the “plus” could be. However, the contractor was still essentially paid a cost plus: the usual term was implied into the contract entitling the contractor to a reasonable price. While cost plus is not the only way of assessing a QM, he was given his costs and “profit” of 15%, which presumably included overheads. The employer complained about the windfall this gave the contractor.

This was an unusual case in which the court reached its decision without the aid of either party’s expert who had not expressed an opinion on a QM. Given the modest sums at stake, the court did the best it could with limited evidence. Remarkably the employer’s counsel helped the contractor while cross-examining him, saying: “What one would normally expect in a contract of this sort is that any extra work would be charged at materials plus 20% plus labour.”
Despite the limited precedent value of Sykes and the other limitations of QMs, contractors will - especially in the current climate - continue to be attracted to their bad weather friend, the QM.

Rupert Choat is head of construction disputes at CMS Cameron McKenna