1

British Steel Corp v Cleveland Bridge and Engineering Co

Ltd (1984) 1 All ER 504
This case involved a pure letter of intent. Cleveland issued a letter of intent to
British Steel which stated: "We are pleased to advise you that it is the intention
of Cleveland Bridge and Engineering Co Ltd to enter into a subcontract with
your company for the supply and delivery of the steel cage castings which form
the roof nodes on this project. The form of subcontract to be entered into will be
our standard form of subcontract used in conjunction with the IC General
Conditions of Contract and we request you proceed immediately with the works
pending the preparation and issue of the official form of subcontract".
British Steel proceeded with the works as instructed in the letter of intent and
manufactured then delivered the castings.
The parties were then unable to agree on the essential terms of the contract,and
resultantly British Steel issued a claim against Cleveland Bridge.
Cleveland responded with a claim for set-off and a counterclaim on the basis of
damages for breach of contract. In this case, the question as to whether a
contract came to existence was crucial as Cleveland's set-off and counterclaim
was formulated as a claim for breach of contract.
The Judge said that it was clear that the parties never agreed the precise and
necessary terms of the contract. The Court therefore concluded that there was no
binding contract between the parties( either an "if" contract as the work was
being done pending a contract being concluded or, an"executory" contract as
material terms remained to be concluded). The result was that there was simply
a legal obligation upon Cleveland to pay to British Steel a reasonable sum (i.e.
quantum meruit)for the work they had carried out. Therefore, Cleveland's set-off
and counterclaim failed because there was no contract between the parties and
consequently, there could be no damages resulting from breach of contract.
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Let's Be Reasonable: Quantum Meruit and Asian Equivalents

This was a talk given to the Lighthouse Club International Construction
Conference on 5 May 2006.

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?

In this paper, I will consider:

1. the usual battlegrounds where quantum meruit arguments are raised; and

2. the appropriate assessment for quantum meruit.

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.
 3

When does the Right to Quantum Meruit Arise?

The concept of restitution and the broad nature of the remedy of quantum
meruit can arise in many and varied situations. In the House of Lords
decision of Banque Financière de la Cité v Parc,2 Lord Steyn identified
four questions arising in relation to any claim in restitution, which were:

(a) had the defendant benefited or been enriched?

(b) was the enrichment at the expense of the claimant?

(c) was the enrichment unjust?

(d) were there any defences?

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:

1. the parties forgot to write the contract; and

2. the parties forgot to read the contract.

1. Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669

(See also Pavey v Matthews (1987) 162) CLR 221
2. Banque Financière de la Cité v. Parc (Battersea) Ltd and Others [1999] 1
AC 221
 4

Quantum Meruit: Forgetting to Write the Contract

1.1 Go Ahead! – Letters of Intent
It is very common in Hong Kong, particularly at subcontractor level, for a
contractor to be given the order to start work before the contract has been
finalised. No doubt, everyone in this room has experienced this situation and
probably the vast majority have also experienced a situation where the
relationship has subsequently gone wrong.

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:

Both parties confidently expected a contract to eventuate. In the circumstances,

to expedite performance under that anticipated contract, one requested the other
to commence the contract work and the other complied with that request. If,
contrary to their expectation, no contract was entered into, then the performance
of the work is not referable to any contract of which the terms can be
ascertained, and the law simply imposes an obligation on the party who made
the request to pay a reasonable sum for such work as has been done pursuant to
that request, such an obligation sounding in quasi-contract or, as we now say, in
restitution.

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.

In these situations, it is likely that a contractor's right to payment will be

determined on the basis of the price stated in the letter of intent or by reference
to the schedule of rates or bill of quantities submitted with its tender rather than
on a quantum meruit basis.

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
 5

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

(b) whether a term is so necessary as to be essential, whereby a failure to

agree on it precludes an agreement from being binding in law or makes a
contract unworkable, is a question for the parties to decide.

1.2 Better Luck Next Time – Tendering or More?

In ordinary circumstances, the cost to the contractor of preparing his tender,
including any amended tender is not recoverable. The tender process is by its
nature a speculative exercise.

However, where the work done greatly exceeds the work undertaken in a normal
tendering process, the costs could be recoverable.

In William Lacey (Hounslow) v. Davis,6 the contractor submitted a tender for

the re-building of war-damaged premises. The tender was not accepted but, in
the belief that the contract would be placed with him, the contractor
subsequently prepared various further estimates and schedules which the
 6

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
 7

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.
?
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