How to Calculate Reimbursement for Quantum Meruit When Works are Not Part of a Contract?

How to Calculate Reimbursement for Quantum Meruit When Works are Not Part of a Contract?

The practical issue is usually whether the measure of reimbursement is on the basis of cost incurred with contribution for profit and overheads, or whether it is to be based on market value. Where there is a contract with prices but which does not apply or an unconcluded contract with prices, this may be taken into account in considering the reimbursement. In some cases there will be little difference in the measure between cost and market value. It might be thought that a measure based on rates would always be higher than one based on costs. This may not always be the case where the rates are based on an unconcluded contract, since there are many commercial reasons for a contractor to bid low for a contract.

In the case of an express contract to do work at an unquantified price, the measure is the reasonable remuneration of the contractor. In the case of a benefit which it is unjust to retain the measure is the value to the employer normally the market value, namely the sum that would have been agreed including profit. In between there is a borderline, the position of which is debatable Serck Controls Ltd. v Drake & Scull Engineering Ltd. [2000]. The unconcluded contract may be good evidence of the appropriate measure.

In the measure of a fair remuneration and allowance for profit, consideration had to be given to the relationship of the parties and the competitive edge that the subcontractor had by the significant advantage of having already mobilized his equipment Costain Civil Engineering Ltd v Zanen Dredging & Contracting Co [1997]

In Sanjay Lachhani v Destination Canada (UK) Ltd. [1997] Mr Recorder Colin Reese QC considered that the contractor’s offer in the unconcluded contract should act as an upper limit to the measure of the quantum meruit, even though that might lead the contractor to sustain a loss:

A building contractor should not be better off as a result of the failure to conclude a contract than he would have been if his offer had been accepted, i.e., in practical terms, in a case such as this, the price which the building contractor thought he was to get for the works (because he thought his offer had been accepted) must be the upper limit of the remuneration to which he could reasonably claim to be entitled, even if at that level of pricing the building contractor would inevitably have ended up showing an overall loss.

In ERDC Group Limited v Brunel University [2006] Brunel issued five letters of intent and the authority under the last letter expired on 1 September 2002. At that date 40% by value of the work remained to be done. The majority of the works were finished by the end of November 2002.

On being sent contract documents for signature ERDC stated in a letter of 3 December 2002, that it declined to sign and claimed (for the first time) that it would only continue work on the basis that all work carried out by it would be valued on a quantum meruit basis rather than in accordance with the Valuation Rules under the JCT Standard Form. Prior to December 2002 ERDC had submitted eight Applications for Payment based on the Contract Sum Analysis of the proposed conditions of contract and following the JCT Valuation Rules.

HH Humphrey Lloyd QC considered the valuation of work carried out after 1 September 2002, when the authority of the letters had expired. He held that there were no hard and fast rules for the assessment of a quantum meruit. All the factors had to be considered.

It was recognised that the circumstances in the instant case were unusual in that there was a move from contractual to a non-contractual basis. He held that it was not right to switch from an assessment based on ERDC’s rates to one based entirely on ERDC’s costs. The move was not marked at the time and ERDC only made its position clear at a much later stage by which time all the main elements of work were either substantially complete or heading for completion. A price or rate that was reasonable before 1 September did not become unreasonable after 1 September simply because the authority in the letter of appointment expired.

Lloyd J held that for variations, the use of the rates in ERDC’s March Tender Estimate breakdown, was sensible. Such a contractual basis was in principle fair for the purposes of a quantum meruit, especially where ERDC’s tender was not abnormally low but was close to others and the rates and prices shown in the March Tender Breakdown compared with the 2002 Spons Price Books and were objectively reasonable.

Lloyd J held that in assessing a quantum meruit by reference to rates and prices (whether contractual or conventional, such as those in Spon) it would ordinarily be right to see that something was included for the costs incurred should the execution of the works be prolonged beyond the period contemplated by the rates (taking into account the risks for which the rates must be taken to have covered for otherwise there may be duplication) and a fair allowance for time-related costs would not otherwise be achieved. Assessment by reference to actual cost would not require such an exercise.

Lloyd J held that in a cost plus valuation the overhead percentage to be used was that in the audited accounts for the year in which the work was carried out which in this case was 12.66%. For the valuation of variations a figure of 20% was to be used comprising 10% for overheads, 55% for site preliminaries and 5% for site design which was not the actual figure but the figure that would have been adopted if a contract for the whole work had been executed.

As to profit, Lloyd J held that the actual return that the contractor would have made needed to be adopted and not by reference to the profit of others, in this case 0.7%. This applied for valuing all work assessed on a quantum meruit The figure was contemplated by ERDC for the project and near enough that used by it during the work. ERDC competed for the work and Brunel should not pay more than the amount which ERDC contemplated that it would receive. The figure appeared low but it was originally the margin for risk and profit. On a costs plus basis there was no risk; the amount was now only profit so it was higher than ERDC might have received had there been a contract for the whole work.