Can Works under a Letter of Intent with No Agreed Price be reimbursed under Quantum Meruit?

Can Works under a Letter of Intent with No Agreed Price be reimbursed under Quantum Meruit?

Many situations in which the claim for quantum meruit arises involve letters of intent or limited exchanges between parties each followed by rapid commencement of the works. The issue in those cases is whether or not there is a contract and if so the meaning of the terms of payment. The claim in restitution is usually presented as an alternative claim if indeed there is no contract.

To establish a contract not only requires agreement by the parties on all the terms they consider essential, but also sufficient certainty in their dealings to satisfy the requirement of completeness. An intention to create a legally binding relationship must also be present.

Letters of intent which state an intention to contract in the future frequently fail on both requirements since they are usually incomplete statements preparatory to a formal contract. In such cases a letter of intent is binding upon neither party Turiff Construction Ltd v Regalia Knitting Mills Ltd [1971].

A contract may come into existence following a simple request to carry out work and may take one of two forms. It may be an ordinary executory contract. It may otherwise be an ‘if’ contract i.e. a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1983]. Terms may then be implied into that contract in accordance with normal principles.

In Clarke & Sons v ACT Construction [2002] the judge at first instance held that there was no contract between the parties. He held that the parties’ relationship was not a contractual one, with the consequence that the value of the work carried out by ACT could be recovered and paid for, but on the basis of a quantum meruit, a reasonable sum, a restitutionary basis in fact.

The Court of Appeal disagreed and held that the proper conclusion was that there was “a contractual quantum meruit”. It was observed that in focusing on the essential ingredients for “a building contract of some complexity” the judge may have lost sight of the fact that even if there was no entire contract, and especially if there is no “formal” contract, there may still be an agreement to carry out work, the entire scope of which was not yet agreed, even if a price has not been agreed. It was held that provided there was an instruction to do work and an acceptance of that instruction, then there was a contract and the law would imply into it an obligation to pay a reasonable sum for that work. It was held that was the situation in the instant case. It was observed that reversing the judge on this point did not significantly advance either case.

Simply carrying out work is not sufficient to create a contract; all the necessary ingredients of contract must be present. In Mowlem PLC v PHI Group Limited [2004] HH Judge Gilliland QC was required to decide an appeal from the decision of an arbitrator to reject a claim based on contractual quantum meruit.

Mowlem argued that it was implicit as a matter of law that in PHI’s request for Mowlem to supply imported material there was a promise to pay a reasonable price. The arbitrator decided that the circumstance must clearly show that the work was not to be done gratuitously before inferring that there was a valid contract with an implied term that a reasonable remuneration would be paid. He found that in the circumstances of the case there was no necessity nor evidence of mutual understanding to support such a term. It was held that the arbitrator had not fallen into error and his conclusions were correct in law. It was held that all that happened was that Mowlem continued to supply material knowing that liability for payment was not accepted.

For a contract to arise in the case of a letter of intent, the letter must contain all necessary terms. Further, it must be plain that the unilateral contract is to govern the main contract work in the event that no formal contract is concluded Monk Building and Civil Engineering Ltd v Norwich Union Life Assurance Society [1993].

Although a letter of intent may not govern the main contract works, the letter may relate to part or preparatory works and in that case may create a contract for those limited works, if all the necessary ingredients of contract are present. In Turiff Construction Ltd v Regalia Knitting Mills Ltd [1971] the employer’s letter of intent was a legally binding agreement to reimburse the contractor his expenses for preliminary design work and feasibility studies for a main contract which was not in the event concluded.

In ERDC Group Limited v Brunel University [2006] HH Humphrey Lloyd QC considered five letters of intent issued over a period of time each increasing the total value of the work carried out.

In December 2001 ERDC submitted a tender for the works on new sports facilities for Brunel University which were to be carried out on the basis of the JCT Standard Form of Contract with Contractor’s Design, 1998 Edition. Brunel decided to appoint ERDC but that the formal execution of contract documents would be deferred until after the grant of full planning permission. It was agreed that ERDC would progress with the design of the works under the terms of a letter of appointment issued on 6 February 2002. In all, three letters were issued and returned countersigned by ERDC. ERDC commenced on construction of the works on 27 May 2002. Two further letters were issued but not countersigned. Each letter offered a limited contract set by reference to value and covering a particular period. The authority under the last letter expired on 1 September 2002.

Lloyd J held that there was a clear intention to create legal relations and the letters and their acceptance by ERDC were contracts, possibly of the classic “if” or “conditional” variety. He held that both their background and their terms demonstrated that Brunel was not going to contract unconditionally for the whole of the works. Instead it decided to offer ERDC a familiar limited contract which would readily ensure that, when it was able to conclude the full contract that was contemplated, that contract would take effect retroactively with the minimum of difficulties.

Lloyd J held that the work done pursuant to the letter contracts prior to the expiry of the last contract on 1 September 2002 was to be treated and valued as if it had been carried out under the contract contemplated by the last letter. It was not to be valued on a quantum meruit basis. The valuation was to be made applying the relevant rates and prices. Where the “contract” rates or prices were not be applicable, either party was free to contend for a different and more appropriate rate or price or valuation by reference to cost, if reasonable.