Quantum meruit – What does it mean?

Quantum meruit – What does it mean?

 Definition

Quantum merit is the determination of value of the services extended based on the amount of work and the rate of work existing there for similar work, when an agreement or contract is not existing between the parties. This Latin word ‘kwahn-tuhm mare-ooh-it’ means “as much as he deserved.”

 Entitlement

 An entitlement for payment under quantum meruit usually arises in one of  two circumstances, either when a contract is silent on how work done is to be remunerated or paid or where the contract contains an express agreement to pay a fair and reasonable sum or on similar term.

 A Claim for payment under the doctrine of quantum meruit in restitution is usually presented as a claim in the alternative. It is said to be a quasi-contractual claim under where the claimant seeks to be compensated for an amount representing the reasonable sum for works he has already completed. For example:

 A)  Where the contract has been held to be discharged by frustration.

 B)  An Employer requested for works from the contractor which are not governed by any contract.

 C)  Where the parties proceed on the mistaken understanding there is an enforceable contract, but this found not to be the case.

 D)  Where the contract has been terminated by the Employer and the Contractor choose to claim for damages for breach of contract or quantum meruit in restitution for the work performed.

 Under Malaysian Standard Forms of Contract

Generally all standard forms of construction contract used in the private sector in Malaysia allow for the quantum meruit claims under the circumstances of works being executed by the contractor which are deemed varied or far exceed those contemplated by the parties.

 In the event that the Employer is in default, the Contractor can choose to claim under loss and/or expense clauses in the contract or bring legal action to recover his expenses and losses under the principle of quantum meruit. Normally such claims would be pursued through clauses relating to variations, additional expenses, loss and expense caused by variation, loss and expense, suspension, termination by contractor, loss and expense caused by NSC, fluctuations, arbitration and governing laws.

 Act 36 – Contracts Act 1950 (Malaysia)

 Claims under circumstances explained above are further supported by the content of the Malaysian Contracts Act 1950 and specifically the content of Section 71 which states:

 ‘Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.’

Case Law

ERDC Group Limited v Brunel University [2006] (TCC)

 ERDC submitted a tender for Brunel University for the works on new sports facilities in December 2001. The Contract was to take the form of the JCT Standard Form of Contract with Contractor’s Design, 1998 Edition. ERDC were appointed by Brunel but the execution of the contract documents was agreed to be deferred until after the grant of full planning permission. Brunel, therefore issued a letter of appointment on 6 February 2002, under which ERDC were to progress with the design of the works. Subsequently two further letters were issued and returned countersigned by ERDC. On 27 May 2002, ERDC commenced construction of the Works with two further letters being issued but which were not countersigned by ERDC, the final letter expiring on 1 September 2002. By November 2002 the majority of the works had been completed, but no contract had been executed, as ERDC claimed that the work content of the project had significantly changed. ERDC, therefore, sought payment on the basis of quantum meruit.

Lloyd J held that there was a clear intention to create legal relations, and that the work completed up to 1 September 2002 pursuant to the letters was to be treated and valued as if it had been carried out under the contract contemplated by the last letter. The valuation was therefore to be on the basis of the rates and prices tendered by ERDC and which would have formed part of the Contract Sum Analysis if the Contract had been executed. For works executed post 1 September 2002, whilst this was to be valued on a quantum meruit basis, this was by reference to ERDC rates and not on a cost plus basis. The reasoning being that the conditions under which the works post 1 September 2002 was undertaken was not significantly different to that relating to the rest of the work

 Renard Construction (ME) Pty Ltd v Minister of Public Works (1992) 26 NSWLR 234

 This case is considered to have been the catalyst in the subsequent development of good faith in Australian contract law.

 A construction contract contained a clause which provided that upon default, the contractor could be required to show cause as to why the contract should not be terminated. After the deadline for completion had been extended several times, at least in part because of the Employers failure to deliver required supplies. The Employer issued a letter to show cause, and the contractor responded confirming that he was willing and able to complete the contract within a reasonable time.

 The Employers Representative who was authorised to make a decision to terminate was not made aware of the effect of the Employers non-supply of essential parts, nor that the contractor had increased the work force, was working longer hours and had brought in a new, highly experienced foreman. The Employers Representative purported to terminate the contract and take over construction.

 The contractor treated the conduct as a wrongful repudiation, asserted that it rescinded the contract, and began arbitration proceedings under the contract. The contractor argued that there was an implied duty of good faith, and that it was ”… unreasonable for the Respondent [the Employer] to allow the Claimant [the Contractor] to carry out the works of the Contract for months during which the most difficult, unprofitable and tedious part of the works were constructed and then allege an unsatisfactory rate of progress and exclude him from the site during the final weeks of the works, when it was quite evident to a reasonable person that the Claimant was willing and able to complete the works, and would do so within four to six weeks. This exclusion, which prevented him from completing that which he had bargained for, was unreasonable and lacking in ‘good faith’.”

 The Arbitrator concluded that it was unreasonable for the Employer to take over the work, and the Employers actions amounted to a repudiation of the contract. The Employer successfully appealed on the basis that there was no requirement in the contract that the Employer act reasonably. Cole J held that there was a requirement that the Employer give the response from the contractor a “bona fide, proper and due consideration”, but no more.

 Upon appeal to the Court of Appeal, Priestley JA would have held that the appeal from the arbitrator’s decision should be set aside, on the basis that the arbitration had been conducted on the basis that there was a reasonableness requirement, and there was no suggestion at the time that it should be conducted on any other basis. However, His Honour did not follow this course, as it would prejudice the potential cost awards, and continued to consider the appeal as pleaded. Considering whether a term of reasonableness was implied, Priestley JA proceeded to examine implication by fact and implication by law. In the first case, on the objective construction of the contract, His Honour concluded that:

it seems to me relatively obvious that an objective and reasonable outsider to this contract upon reading sub-clause 44.1 would assume without serious question that the Employer would have to give reasonable consideration to the question whether the contractor had failed to show cause and then, if the Employer had reasonably concluded that the contractor had failed, that reasonable consideration must be given to whether any power and if any which power should be exercised.

Priestley JA held that the requirement of reasonableness satisfied the tests for implication ad hoc. Priestley JA gave extended consideration to whether the term was required for business efficacy. His Honour concluded that a contract which allowed termination upon any default would “make the contract as a matter of business quite unworkable.” His Honour continued:

One way of explaining this view is to say that no contractor in his senses would enter into a contract under which such a thing could happen. The reasonable contractor, the reasonable Employer and the reasonable looker-on would all assume that such a result could not come about except with good reason.

Priestley JA considered that a requirement of reasonableness was implied in fact in the present contract, but considered that such a requirement would also be implied in other contracts of the same type, drawing a considerable overlap between implication by fact and implication at law. As to whether such a term satisfied the requirements of necessity, His Honour considered that necessity should not be used in the absolute sense:

In regard to classes of contract to which particular implications have been recognised as attaching, it is not possible to say that the implication was always necessary, in the sense that the contracts could not have worked without the implied term. Contracts of sale, contracts of employment, and leases are three classes of contract to which such terms have been attached. In all cases it would have been possible for the main purposes of the contracts to have been attained without the implications the judges have held they include. The rules in regard to each of them have come into existence not because in the particular cases giving rise to recognition of the implication it has been thought that it would be impossible for such contracts to be made and carried out without the implications, but because the Court decided it would be better or more appropriate or more reasonable in accordance with the contemporary thinking of the judges and parties concerned with such contracts that the term should be implied than that it should not. The idea is conveyed I think by Holmes’s phrase “The felt necessities of the time” where necessity has the sense of something required in accordance with current standards of what ought to be the case, rather than anything more absolute.

This seems to me to be the approach that should be adopted when considering implication by law, and, applying it to contracts of the class now being considered, requirements of reasonableness on the part of the principal should in my opinion be implied in sub-clause 44.1 both at the stage when the Employer is considering whether the contractor has failed to show cause within the period specified to the satisfaction of the Employer and also at the stage when the Employer, the contractor having failed to show cause etc, is considering whether to exercise one or more of the powers.

Meagher JA decided on the basis of interpretation of the words of the contract, holding that it was impossible for the Employer to be ‘satisfied’ where his mind “was so distorted by prejudice and misinformation that he was unable to comprehend the facts in respect to which he had to pass judgment.”

 Handley JA held that there was a requirement of reasonableness implied in the power to terminate, and concluded that “that the Employer’s decision, however honest, was objectively unreasonable and therefore an invalid exercise of the power.”

 Handley JA considered that the power was very broad:

 The power conferred on the principal by sub-clause 44.1 is to vary (“take over the whole or any part of work”) or cancel the contract. The power arises on the happening of any breach, however minor, and whenever the breach occurs. It also arises upon the contractor neglecting to comply with any direction given by the Employer, however minor, accidental or temporary that neglect might be, and regardless of the importance or otherwise of the subject matter. This express power therefore covers many cases where the principal would have no power to rescind the contract for breach under the general law.

 Handley JA considered, however, that there were “three other matters which support the existence of some restraint on their exercise apart from the normal requirement of honesty.”

 1. The existence of a show cause clause made it “clear that the power is only exercisable for “cause” and after the contractor has been given an opportunity to be heard. This is some indication that the contractor is entitled to appeal to objective considerations including questions of reasonableness in showing cause against the exercise of the powers. The very notion of showing cause seems inconsistent with the view that the Employer will be entitled to act, within the limits of honesty, on his own idiosyncratic opinion.”

 2. The power is worded to require “the satisfaction of the principal”, and the implication of reasonableness into that clause is “readily made”:

 It seems to me that sub-clause 44.1 should be construed as requiring the principal to act reasonably as well as honestly in forming the opinion that the contractor had failed to show cause to his satisfaction and thereafter in deciding whether or not to take over the whole or any part of the remaining work or to cancel the contract: see generally Amann Aviation Pty Ltd v Commonwealth of Australia (1990) & (1991)

3. The fact that the decision was subject to arbitration inferred that there must be something for the arbitrator to review, and this tended to prove that the arbitrator ought to look at the reasonableness of the decision, not just whether it had been made honestly.

Planche v Colburn (1831)

Planche had agreed to write a book on Costume and Ancient Armour for a series published by the Colburn called “The Juvenile Library”. Planche was to receive £100 on completion of the book, to which end he collected materials and wrote part of the book. Colburn then abandoned the series. Planche was HELD to be entitled to recover 50 guineas on a quantum meruit basis.

Constain Civil Engineering Ltd v Zanen Dredging & Contracting Co (1996) 85 BLR 77

This case illustrates the essential difference between valuing work which is a variation under a contract and valuing work which is outside the contract. No construction contract can give one party the power to require the other to execute any variations whatsoever. If the contract does not have an express limit on the power to require variations, the law implies a limit.

In this case, the Official Referee found that the variations clause of a subcontract cannot oblige the subcontractor to carry out works which are outside the main contractor’s obligations under the main contract. Therefore, when at the direction of the main contractor, the subcontractor carried out work outside the scope of the subcontract, the subcontractor was entitled to recover recompense on an entirely different basis, namely restitution under the doctrine of unjust enrichment.

On that basis, the subcontractor was entitled to recover not simply the cost of labour and materials provided and a percentage thereon for profit and overheads but also a portion of the large profit made by the main contractor from the subcontractor’s work.

The main contract was for a road bypass and river crossing. Tunnel elements were cast in a dry basin constructed for that purpose. At the end of the contract, the dry basin was to be filled. However, the main contractor was able to negotiate a contract with a third-party to develop the basin as a marina. The third-party paid the main contractor £2.55m for the marina. It was estimated that the main contractor made a profit of £1,459,483.

At the direction of the main contractor, the subcontractor carried out approximately one-third of the work of constructing the marina. Since the marina project was a separate contract between the main contractor and a third-party, the subcontractor’s work was not a variation under the subcontract between the main contractor and the subcontractor. Consequently, there was no agreement covering payment of the subcontractor for the work on the marina.

Had the subcontractor’s work been a variation, a reasonable price for the subcontractor’s work would have been £370,756 for labour and materials plus 17.5% on cost. But since the subcontractor’s work was outside the subcontract, the subcontractor was entitled to a quantum meruit under the doctrine of unjust enrichment. The subcontractor claimed 50% of the profit made by the main contractor.

The arbitrator awarded the subcontractor £370,756 plus on costs plus £386,000 being a portion of the profit made by the main contractor. The main contractor appealed, but the Official Referee dismissed the appeal.

He followed the Australian High Court in Pavey & Matthews v Paul (1986) 162 CLR 221. The Official Referee drew a distinction between a quantum meruit which arises out of an implied term for payment (e.g. a variation clause which doesn’t fix the price) and situations where the claimant is entitled to a quantum meruit because there is no contract covering payment for the work. This was the situation with respect to the work which the subcontractor carried out on the marina at the direction of the main contractor. The Official Referee referred with approval to the following passage from Hudsons Building and Engineering Contracts 11th ed. vol. 1 p. 144:

“The distinction is of great practical importance since the principle of restoration of benefit, which is at the heart of true quasi contract, means that the resulting obligation of the defendant is not to pay a reasonable price or remuneration based on cost incurred by the plaintiff, but to reimburse him for the value of the advantage, if any, received by the defendant as a result of the work done or services performed.”

The fact that the subcontractor had dredging equipment and a workforce available to do the marina work immediately meant that the subcontractor could do it more cheaply than the main contractor could have had the work done had the main contractor called tenders. Where no price had been agreed between the subcontractor and the main contractor for the marina work, it would be unjust if the subcontractor did not share in the profit derived from this saving. A quantum meruit based upon unjust enrichment takes into account the value of the benefit received by the defendant not simply the cost to the plaintiff of providing the benefit.

British Steel v Cleveland Bridge (1981) 24 BLR 94, Robert Goff J.

British Steel supplied a quantity of cast steel nodes to Cleveland Bridge pursuant to a Letter of Intent which read:

 We are pleased to advise you that it is the intention of Cleveland Bridge & Engineering Co Ltd to enter into a sub-contract with your Company for the supply and delivery of the steel castings which form the roof nodes on this project. The price will be as quoted in your telex dated 9th February ’79… The form of sub-contract to be entered into will be our standard form of sub-contract for use in conjunction with the ICE General Conditions of Contract, a copy of which is enclosed for your consideration…and we request that you proceed immediately with the works pending the preparation and issuing to you of the official form of sub-contract

The parties negotiated about the terms of the sub-contract but a formal contract was never agreed. British Steel supplied the steel nodes but for various reasons delivery was delayed. British Steel claimed what it alleged was the contract price of the steel nodes. Alternatively, it claimed the same sum as a quantum meruit. Cleveland Bridge counterclaimed a far greater sum as damages for British Steel’s alleged breach of contract in delivering the steel nodes late and out of sequence.

At trial Cleveland Bridge’s case was that there was a concluded contract between the parties with the result that they were entitled to claim damages for breach of contract. British Steel’s case was that no contract existed and that they were entitled to the sum claimed as a quantum meruit.

Robert Goff J held that the contract (if any) which may come into existence following a letter of intent may take one of two forms – either there may be an ordinary executory contract or there may be what is sometimes called 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. He held that there was no binding executory contract since the defendants’ letter of intent asked the plaintiffs to proceed immediately with the work pending the preparation and issuing of a form of sub-contract, being a sub-contract which was plainly in a state of negotiation, not least on the issues of price, delivery dates, and the applicable terms and conditions. Since the parties were still in a state of negotiation, it was impossible to say what the material terms of the contract would be, and by starting work the plaintiffs did not bind themselves to complete the work. He held that there was no “if” contract when, in a case such as the present one, the parties were still in the state of negotiation; it was impossible to predicate what liability (if any) would be assumed by the seller for, e.g. defective goods or late deliver if a formal contract should be entered into.

Accordingly there was simply an obligation on the part of Cleveland Bridge to pay a reasonable price for the work done and materials delivered. The counterclaim accordingly failed.

Ayer Itam Tin Dredging Malaysia Berhad v YC Chin Enterprise Sdn Bhd [1994]

In this case the learned Judge in deciding whether there was a concluded contract between the parties, dealt with both the nature of letters of intent and quantum meruit. He held that arrangement made ‘subject to contract’ or ‘subject to the preparation and approval of a formal contract’, or in similar terms, would mean that the parties were still negotiating and did not intend to be bound until a formal contract was made. ‘Subject to contract clause’ terms would not prevent the formation of a contract in exceptional circumstances. In the learned Judge’s view, with the several essential matters still remaining to be settled between the parties, the letter of intent did not constitute a binding contract at law but was only a record terms agreed by the parties as basis for a contract negotiation. As for the question of compensation for work done prior to the dispute, the learned Judge held that a claim on a quantum meruit basis for the preliminary works carried out on the site was successful but was subject to a maximum limit of RM300,000.

Laserbore Ltd v Morrison Biggs Wall Ltd (1993)

The Contractor issued the subcontractor a letter of intent in which it stated that the subcontractor would be paid fair and reasonable payments for all works executed.

The Contractor had argued that fair and reasonable payments should be based on the actual costs of the subcontract plus amounts to cover overheads and profit.

The learned Judge in deciding the meaning of the term ‘Fair and reasonable payments for all works executed’, considered that costs plus basis was wrong in principle even though it may sometimes produce the right result. The learned Judge held that in assessing quantum meruit claim the appropriate approach was to adopt general market rates or fair commercial rates.

Parkinson v Commissioners of Works (1949)

This case stands for the principle that where the work is fundamentally different from that contracted or far exceeds the extent contemplated, but the contractor undertakes it as directed, the contractor may be able to assert that he or she is entitled to be paid upon a quantum meruit basis.

Sir Lindsay Parkinson & Co Ltd (‘Parkinson’), as Contractor, entered into a Contract with the Commissioners of His Majesty’s Works and Public Buildings (‘Commissioners of Works’), as Principal, for the construction of an ordnance factory. Under the contract the Principal had been given absolute power to order alterations or additions to the works, and it was the duty of the Contractor to comply with such instructions.

The Principal ordered works far in excess of the amount so contemplated (originally GBP 3,500,000.00 with GBP 500,000.00 in bill of quantities and the actual cost was GBP 6,683,056.00), although not different in character, and as a result the work was not completed until a year beyond the anticipated date. The Contractor and Principal in this case entered into a deed of variation (for acceleration of the works) and Principal estimated a cost of GBP 5,000,000.00.

The Contractor notified the Principal that it was being called on to execute more work in excess of that contemplated by the varied contract and claimed extra payments for work in excess of that contemplated. The Contractor proceeded with the works at the request of the Principal, and the issue was to be resolved through arbitration.

The question for decision was whether there was an entitlement to additional remuneration where the work was nominally at least performed pursuant to the contract but was of such a nature as to render the contract something different from that originally contemplated by the parties.

The Court commented that it was absurd to suppose that such a large increase as in fact occurred was within the contemplation of the parties. The Court found that the work actually performed was similar in kind to that required pursuant to the contract.

However, the Court implied a term into the Contract that the Principal should not be entitled to require work materially in excess of the GBP 5,000,000.00 estimated. That is, the Court construed the Contract in such a way to place an intended monetary limit upon the value of such extra work to be performed. Thus, there was either an implied term limiting the amount of extra work to a fixed value or an ascertained limitation by reference to the proper construction of the contract. Therefore, the Court held that such excess work having been done by the Contractor at the request of the Principal, the Principal is liable to pay the Contractor’s reasonable remuneration. The Court based its decision upon a construction of the contract and held that the construction must be such as to exclude the extra work performed from its ambit thus leaving the extra work to be recovered pursuant to quantum meruit.

MALCONLAW