Deep in quantum meruit

"Letter of Intent" and "Quantum Meruit" are two of the best known phrases in construction law, but what do they mean? If there were a simple answer to that many lawyers would be out of work.

Cases involving one or other of the two pop up from time to time but both found their way into the Technology and Construction Court in a case reported at the end of March. ERDC Group Ltd vs Brunel University was all about the construction of an athletics track in Uxbridge, west London.

ERDC had tendered for the works in December 2001 and the university decided to give it the job in February 2002. Planning permission was not entirely sorted out, though, and so a letter of intent was issued. Brunel University went to a lot of trouble to get the letter right. ERDC was authorised to get on with the work. Brunel agreed to pay for any work that was done, valued on the JCT normal valuation rules (which were to apply to the contract when signed). The letter was strictly limited in value and time. If the proper contract had not been signed by 1 April, the authority to proceed was to terminate.

The contract was not signed by 1 April, but the university issued another similar letter. It did it again in May. And again in June. And again in July. The last letter of intent expired on 1 September. There was still no contract. Nevertheless ERDC carried on working, finishing most of the works in November.

The university eventually sent the JCT contract for signature in December. ERDC declined to sign. It argued that it had been working without a contract (the last letter of intent having expired) and was entitled to be paid on a quantum meruit basis, which (surprise surprise) was going to be rather more than a valuation based on its tender. Curiously, that thought had not occurred to it when making applications for payment up to then. They had all been based on the tender rates and JCT rules.

Work done prior to September had all been on the authority of the series of letters of intent. Is a letter of intent a contract or not? Judge Humphrey Lloyd said in his judgment in the case "Letters of intent come in all sorts of forms … The phrase ‘letter of intent' is not a term of art. Its meaning and effect depend on the circumstances of each case." If the usual requirements for a contract are there (intention to create a legal relationship, certainty, and so on) then there is a contract. The judge thought they had all been there until 1 September, and so there had been a contract until then. ERDC was to be paid on the basis specified in the letters of intent - JCT rules.

Letters of intent can seem an attractive solution at times but they are some of the riskiest documents in the industry

After 1 September it was a different matter. As the last letter had expired ERDC was not working on the basis of a contract, and so was entitled to a quantum meruit (payment for work outside the contract "for what it's worth"). But what does that actually mean?

There is no easy answer to that one either. ERDC said it meant that it should be paid on a cost-plus basis. In some circumstances that would be what quantum meruit meant, but not here. ERDC had been prepared to do the work for the tendered rates, and what was a fair price a few months before didn't become unfair because the letters of intent had lapsed. There had to be some marginal additions but essentially the JCT valuation rules and ERDC tendered rates would be applied. So, although ERDC successfully argued that it was entitled to quantum meruit, things didn't quite turn out as it expected.

Letters of intent often seem an attractive solution to the difficult problem of getting a contractor working before all the formalities are sorted so that a contract can be signed, but they must be drafted with care. Even then, they are some of the riskiest documents in the construction industry, and a full contract should be signed as soon as possible.

When things go wrong and you cannot find a contract to rely on, you'll have to grapple with a quantum meruit. That might mean cost plus in which case you will have to argue about the meaning of "cost" and "plus", and neither of those are straightforward. Or "cost plus" may have nothing to do with it. As ERDC found, it all depends.