Valuing variations where the contract does not provide a procedure

In some cases the contract does not provide a mechanism for valuing variations. This can occur where non-standard forms are used or where those forms have been heavily amended and in cases there may be no written contract at all. Small construction projects, such as house extensions and other minor value works, may be carried out under a contract that does not set out rules for valuing variations or without a written contract. Occasionally major projects are commenced without a formal contract being in place.

In these cases the courts have generally decided that the value of variations should be based on a 'quantum meruit' assessment. Quantum meruit means ‘the amount he or she deserves’ or ‘what the job is worth’ and reflects the right to be paid reasonable remuneration for work done. A quantum meruit claim may be based in contract or restitution. Restitution is a legal term based on the principle of unjust enrichment. In order for such a claim to succeed the defendant must have been unjustly enriched at the expense of the claimant.

In cases involving quantum meruit claims the courts have consciously avoided stating any rules limiting the way in which a reasonable sum should be assessed. In the Sarokinas [1986] 2 Lloyd's Rep 277 case, the judge said that the approach would be to determine a fair commercial rate. In ERDC Group Ltd v Brunel University [2006] EWHC 687 (TCC), HH Humphrey Lloyd QC said (at paragraph 42) that:

‘it has rightly been said that there are no hard and fast rules for the assessment of a quantum meruit. All the factors have to be considered ... the assessment of a quantum meruit is usually based on actual cost (which will include on and off site overheads, with in the latter case some estimates or extrapolations being required), provided that it was reasonable (which can frequently be checked by the use of standard rates and prices such as Spon [sic]) and was reasonably and not unnecessarily incurred, plus an appropriate allowance for profit.’

It is apparent that the approach to assessment depends on the facts of each case. This is illustrated by the cases of ERDC Group Ltd v Brunel University, referred to above, and Serck Controls Limited v Drake & Scull Engineering (2000) 73 ConLR 100.

In the ERDC case, ERDC was appointed to build new sports facilities for Brunel University. ERDC proceeded to carry out the works pursuant to a series of 5 letters of intent. The last of these letters of intent expired on 1 September 2002. ERDC continued with the works and refused to sign a contract in December 2002 and claimed that it would only continue work on the basis that all work carried out would be assessed on a quantum meruit basis.

Prior to that point ERDC had made payment applications based on the rates and prices in the letters of intent. HH Humphrey Lloyd QC held that work done pursuant to the letters of intent prior to 1 September 2002 should be valued on the basis of the rates and prices in those letters and that work done after that date should also be assessed by reference to those rates and prices. He said that the conditions in which the remaining work was carried out did not differ materially from the work originally contemplated and so the rates were to be regarded as fair for the purposes of a quantum meruit assessment.

In the Serck case, Serck carried out design and installation works on a control system for a research centre for British Nuclear Fuels Ltd (BNFL), which benefitted Drake, a potential subcontractor to BNFL. In a previous judgment, the court held that no contract existed between Serck and Drake and the value of the work came to be assessed on the basis of quantum meruit. Serck had proceeded under a letter of intent which promised to ‘reimburse you with all reasonable costs incurred.’ HHJ John Hicks QC concluded that the sum due to Serck should be assessed by ‘reference to what would be reasonable remuneration for executing the work.’ The judge went on to identify a number of factors that were relevant or irrelevant to this calculation.

The factors identified by the courts include:

a) Price negotiations

Some negotiations will have taken place over the price paid for any anticipated works. There is House of Lords authority that states that evidence of previous price negotiations is admissible to show what remuneration the parties had in mind (Way v Latilla [1937] 3 All ER 759).

In Rover International v Cannon Film Sales Ltd [1989] WLR 912 (Court of Appeal), the sum payable by one party to another pursuant to a contract, which was found to be void, was used as evidence of how the services were initially valued. However, these negotiations are not determinative of value nor did it provide a limit or cap on such recovery.

In Sanjay Lakhani and Anr v Destination Canada (UK) Limited [1997] 13 Const.L.J 279, the judge said that, as a general rule, a fair value of work ought to recognise an entitlement to a reasonable or normal profit margin over and above the costs actually and properly incurred in carrying out the work in question. However, he said that the general rule does not apply in all circumstances and that the court should take into account any pricing level at which the building contractor had indicated it was prepared to undertake the works in question. The rationale behind this was that a building contractor should not be better off as a result of failing to conclude a contract than if his offer had been accepted.

More recently, in Serck Controls, the judge said the following in reference to the original value of the anticipated works (as stated in a letter of intent):

‘cannot be the starting point, subject to adjustment up or down for 'variations'; first because that would be to treat it as contractual, which it is not, and second, because there is no accessible specification, programme, terms and conditions to which it applied and from which departures can be priced. Its most likely value, I think, may be as part of a check whether the total arrived at by other means is so surprising, in all the circumstances, as to cast doubt on the route by which it was reached.’

b) Prices in a related contract

The rates and prices in a separate building contract between the contractor and the developer were held to be a relevant consideration for a quantity surveyor in assessing a quantum meruit for the value of the work between the developer and a freeholder in Banque Paribas v Venaglass Ltd [1994] C.I.L.L. 918 (CA).

c) Expert opinion

There are several first instance decisions where decisions have been reached upon the basis of expert evidence of quantity surveyors and contractors. In Lusty v Finsbury Securities Ltd [1991] 58 BLR 66, an architect gave expert evidence as to the value of the work and the Court of Appeal held that this was admissible.

d) Site conditions and other circumstances (including defendant's conduct)

In Serck, there were allegations that Serck suffered delay, disruption and difficulty in carrying out the work and specific reference was made to Drake's conduct. The judge confirmed that the site conditions and other circumstances in which the work was carried out (including the defendant's conduct) are relevant to the assessment of a reasonable sum.

e) Claimant's conduct - prolongation, defective work, inefficient working

In Serck, there were allegations relating to the conduct of Serck's management, staff and subcontractors and particularly allegations of inefficient working and the absence of effective supervision. The judge recognised that the law is uncertain in respect of whether or not the defendant is entitled to argue that the value of the claimant's services falls to be reduced because of the claimant's tardy or unsatisfactory performance.

According to the judge in Serck:

'Distinctions need to be drawn. If the value is being assessed on a 'costs plus' basis, for example from time sheets and hourly rates for labour, then deductions should be made for time spent in repairing or repeating defective work, and for inefficient working or (as is one of the allegations here) excessive tea-breaks and the like.

'If the value is being assessed by reference to quantities the claimant stands to gain nothing from such activities or inactivities and, if attributable to the claimant or his subcontractors, they are irrelevant to the basic valuation; extra time and expense enter into the picture at this stage only if relied upon by the claimant as arising without fault on his part ... A second distinction is that between defects made good during the course of the work ... and those remaining at completion. There should clearly be a deduction for the latter, if pleaded and proved, whatever the mode of valuation, simply because the work as handed over is thereby worth less, but no such plea is advanced here.

'The third distinction is between what I have called the 'basic valuation' ... and matters which, even if expressed in terms of a 'reduction' or 'diminution' of the valuation, are in essence 'cross-claims' ... because what the defendant seeks is in truth compensation for loss or expense suffered or liabilities incurred by reason of the claimant's conduct.’