British Steel V Cleveland Bridge Case
British Steel V Cleveland Bridge Case
British Steel V Cleveland Bridge Case
It is very common for judges and arbitrators to consider one of the following
situations:
1. two parties have tried to negotiate the terms of a construction contract but
eventually failed to do so, whilst in the meantime, one of the parties has
been doing work at the request of the other
2. works have been carried out in contemplation of a project that does not
materialise
When the works are carried out, the burning question becomes: what about
payment and how is it going to be assessed?
Where a contractor carries out works at the Employer's request in the absence of
a contract, the law may impose on the Employer an obligation to pay a
reasonable sum for the work done in response to that request. This is known as
"quantum meruit", a Latin phrase commonly translated as 'the amount
deserved' or 'what it (the work) is worth'.
It used to be thought that the basis of quantum meruit was an implied contract.
However, it is now clear that the legal basis of quantum meruit rests in the law
of restitution and the removal of unjust enrichment.1 In the context of this
conference, the basic question to be asked in each situation is:
has the employer been unjustly enriched at the expense of the contractor?
1. the usual battlegrounds where quantum meruit arguments are raised; and
Finally, to reflect the international nature of this conference, I will also briefly
touch on equivalent principles in neighbouring jurisdictions, which are Macau,
the PRC, Taiwan and Thailand.
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If the answer to the first three questions is "yes" and the answer to the
fourth question is "no", a claim for quantum meruit will succeed. I will not
attempt to analyse each and every set of facts where the concepts apply,
even if that is possible. Instead, I will comment on the situations where a
claim for quantum meruit commonly arises in the construction industry.
Unless otherwise stated, I will generally assume that the claims involve a
developer and a contractor, but obviously the issues raised apply equally at
subcontractor level and to claims made by consultants. In this context, the
background is that at some stage there was or was intended to be a contract
between the parties. For the purposes of the analysis, I have divided the
type of disputes into two groups, namely where:
The classic example of this is British Steel Corp v Cleveland Bridge and
Engineering.3 The case was nicely summarised in the judgement of Robert
Goff:
It is unwise to think that, by labelling a letter as 'a letter of intent', you are
protecting yourself from entering into a contract. If the letter of intent sets out an
agreement on all essential contractual terms and the parties then proceed with
the works on the basis that they are contractually bound, a court or an arbitrator
is more than likely to consider that a contract is in place.
Further, the fact that a letter of intent refers to an intention to execute a formal
contract does not prevent the parties from accepting the contract, as evidenced by
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the letter of intent, by conduct. So in Harvey Shop Fitters v ADI,4 the English
Court of Appeal found that the parties' intention was that the contract would be
based on an English standard form of contract as amended in the tender
documents. The letter of intent signed by the parties clearly referred to a formal
contract being prepared for signature and stated that if the contract failed to
proceed, or be formalised, the contractor would be entitled to payment on a
quantum meruit basis. However, the court found that the contract did proceed, even
if it was not formalised, and therefore the claim for quantum meruit did not arise.
If the essential terms are not agreed, and the British Steel case is an example of
such a situation where not all of the essential terms were agreed, then there can
be no contract and the contractor can claim for work done which is to the benefit
of the developer. In the British Steel case, there was no agreement on price or
timing of performance. The question then becomes, what are the essential terms
which need to be agreed? There is no single answer to that question. However,
Lloyd LJ in Pagnan SpA v Feed Products Ltd5 set out a simple test, which is:
(a) that a failure to agree on a term may not invalidate a contract unless
thereby the contract becomes unworkable; and
However, where the work done greatly exceeds the work undertaken in a normal
tendering process, the costs could be recoverable.
Employer made use of. The contractor even ordered some materials. Ultimately,
the Employer did not place a contract with the contractor and instead sold the
property. The contractor sued and the Court found that there was no contract in
place. However, the court decided that the contractor was entitled to a
reasonable sum for the work carried out on a quantum meruit basis.
This principle was applied in the Australian case of Sabemo Pty Ltd v North
Sydney Municipal Mutual Council.7 In that case, a local council had invited
submissions from developers for the redevelopment of land. The plaintiff's
scheme was chosen but no formal contract was entered into. It was subsequently
found by the court that there was no contract between the parties. However the
plaintiff developer had carried out a considerable amount of work in developing
plans and negotiating with relevant authorities. Ultimately, the council decided
not to pursue the scheme and the developer sued for the work done. Sheppard J
said that:
where two parties proceed upon the joint assumption that a contract will be
entered into between them and one does work beneficial for the project and thus
the interests of the two parties, which work he would not be expected, in other
circumstances, to do gratuitously, he will be entitled to compensation or
restitution if the other party unilaterally decides to abandon the project, not for
any reason associated with bona fide disagreement concerning the terms of the
contract to be entered into, but for reasons which, however valid, pertain only to
his own position and do not relate at all to that other party.
Note in particular in that case that it was the 'project' that benefited and there
was no need to show a benefit to the defendant. A similar argument was run in
the English case of Regalian plc v London Docklands Development
Corporation.8 The developers and the land owner were unable to agree on
pricing arrangements following a fall in the local property market. The
developers had incurred costs in the hope that they would obtain and perform
the contract and, following the collapse of the deal, the developers claimed in
quantum meruit. The court rejected the claim on the basis that the costs had been
incurred by them at their own risk. In particular the judge pointed out that the
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parties had made it clear that their negotiations were 'subject to contract' and that
either party could withdraw from the negotiations at any time. There was
nothing 'inequitable' about the loss lying where it fell. A similar result was
obtained in the more recent case of Stephen Donald Architects Ltd v
Christopher King.9
So what is the test for quantum meruit claims for preparation works? Nicholas
Strauss QC in the English first instance decision of Countryside
Communications Ltd v ICL Pathway Ltd10 set out four factors to be
considered by the court in deciding whether a contractor should be compensated
for preparation costs. These were:
1. whether the work carried out is or is not of a kind usually given free;
2. the terms in which the request to perform the services was made in so far as
they establish the extent of the risk (if any) which the contractor may fairly
be said to have accepted that such services would be uncompensated;
3. the nature of the benefit to the developer, ie whether there is a real benefit;
and
4. the circumstances in which the anticipated contract does not materialise
and in particular where that involves 'fault' by the developer or alternatively
whether the circumstances are outside the risk accepted by the contractor.
1.3 How Much was that Again? – A Reasonable Price
There are few legal difficulties which arise when the parties agree to the contract
but fail to agree on the price. In the absence of an agreement, the contractor will
be entitled to a reasonable price.11 This concept is purely a question of implying
a clause into the contract rather than a question of unjust enrichment.
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3. British Steel Cor v. Cleveland Bridge and Engineering Co. [1984] 1 All E.R. 504 applied in Hong Kong by Burrell
J in Four Seas Union (Holdings) Ltd v Hong Kong & Macau Scent On Engineering & Construction Limited (21
February 2003)
4. Harvey Shop Fitters v. ADI, TCC [2003] EWCA Civ. 1757 A1/2003/0616
5. Pagnan SpA v. Feed Products Ltd [1987] 2 Lloyd's Rep. 601, CA
6. William Lacey (Hounslow) v. Davis [1957] 1 W.L.R. 932; 101 S.J. 629
7. Sabemo Pty Ltd v. North Sydney Municipal Mutual Council [1977] 2 N.S.W.L.R. 880
8. Regalian plc v. London Docklands Development Corporation [1995] 1 W.L.R. 212
9. Stephen Donald Architects Ltd v. Christopher King TCC [2003] CILL 2027
10. Countryside Communications Ltd v. ICL Pathway Ltd [2000] CLC 324
11. Way v. Latilla [1937] 3 All E R 759; Stephen Donald Architects Ltd v King [2003] EWHC 1867