This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its October 2019 decision in Electrix Ltd. v. The Fletcher Construction Company Limited, the High Court of New Zealand awarded a subcontractor nearly $7.5 million for work performed for a prime contractor after finding that the parties never formalized a contract. The case illustrates the uncertainty created when parties fail to come to terms during their negotiations but insist on proceeding with performing work in the absence of a formalized contract. As the Court summarized, the dispute dealt with a large government construction project in the Christchurch Justice and Emergency Services Precinct, where the subcontractor, referred to as Electrix, performed electrical work for the prime contractor, Fletcher Construction. As the Court noted, Electrix was paid $21.6 million for the work “on the basis of successive letters of intent”, but “the parties never managed to agree formally on a contract and never completed the detailed design of the electrical works.” A dispute arose between the parties after the work was performed regarding outstanding payments.
As the Court concluded, while the parties never formalized a contract, the subcontractor was entitled to payment under quasi-contractual equitable principles:
I find there was no contract between Electrix and Fletcher Construction. The parties did not intend to be immediately bound by essential terms at any point. They expected they would be able to reach agreement on a contract, but they never did. Yet Electrix provided the electrical works services requested by Fletcher Construction. Fletcher Construction must pay the reasonable cost of the services, the “amount deserved” or “quantum meruit”. The New Zealand law of non-contractual quantum meruit is not exclusively tethered to the doctrine of unjust enrichment. Its objectives are not confined only to dispossessing those unjustly enriched but can extend to providing redress for those who have been unjustly impoverished.
Further, due to this lack of certainty in the terms, the parties ultimately had to hand the matter over to their respective lawyers to resolve the outstanding payments:
In December 2017, the legal aspect of the relationship was handed over to lawyers. A letter of 7 December 2017 by Lane Neave, for Fletcher Construction, to Bankside Chambers, for Electrix, sought to conduct a costs review/substantiation of the sums claimed to that point by Electrix.
Understandably, tensions on site appear to have worsened as well. In October 2017 the project was handed over to the Ministry, which occupied parts of the site along with other tenants. But work on the Precinct project, including the electrical works, continued throughout 2018. Electrix made its last payment claim in May 2018. Practical completion of the Precinct project overall was not achieved by Fletcher Construction until 22 February 2019.
Electrix’s board decided not to walk away from the project, despite the lack of a contract. Mr Werrett’s evidence is that he wanted to stop involvement with the project but the Electrix board decided to continue. He said that Electrix stayed “[o]ut of loyalty and goodwill” and in the “hope that contract negotiations would come to a mutually acceptable conclusion”.
In reviewing the evidence, the Court concluded that even if the parties had intended to conclude a contract, they failed to come to terms, either through a formal legal agreement or through their discussions and related contemporaneous records produced during the ongoing negotiations:
The evidence of Fletcher Construction’s witnesses does not suggest they considered or intended that meeting to have resulted in the parties being bound, conditionally or unconditionally. There is no contemporaneous documentary evidence suggesting either party considered the meeting had that effect. The evidence of Mr Harris, the key Electrix witness, that he did not have authority to commit Electrix to a subcontract, indicates that Electrix did not regard it as having that effect. I come to that conclusion even putting aside the evidence of Mr Kenna about Mr Harris’s explicit adoption of such a position.
Even if the parties had intended to be bound by the 13 April 2015 meeting, it is not clear to what they would have been bound. The meeting did not agree on a price, an adequate specification of the services to be delivered or the terms and conditions of the subcontract. The essential terms remained inchoate:
(a) There was no agreed contract value, nor a subsequent letter of acceptance of an agreed contract value, as envisaged in the template.
(b) The specification of the scope of works at the meeting was cursory at best. The detailed design had been rejected by the Ministry.
(c) It is not clear what the “ticks” against the boxes for subcontract agreement or standard conditions of subcontract meant. Mr Wilson’s evidence, that they meant the terms were accepted, is not credible given that the documents appear not to have even been available at the meeting.
If, as he now says, Mr Wilson believed at the time “that the key terms and parameters of the contract had been agreed by the end” of the meeting, I do not consider that belief was well-founded. And neither party subsequently acted as if they had concluded a contract at that meeting, as I outline below. I do not accept the parties intended to be bound at the meeting of 13 April 2015.
After concluding that the letters of intent exchanged between the parties never established contractual terms, the Court was required to assess the amount that remained outstanding between the parties. This gave rise to complex evidentiary considerations, and to the application of the equitable principles that informed the amount that the subcontractor deserved for the work performed:
The law of quantum meruit liability for “the amount deserved”
The High Court of Australia recently explained the evolution of what is still known as a claim for quantum meruit: a claim to pay reasonable remuneration for services. From the late sixteenth century in England, a claim of quantum meruit was enforceable under the general form of action for breach of contract (assumpsit). It then came to be enforced by the more convenient form of action for recovery of debt (indebitatus assumpsit). The terminology of quantum meruit endured in relation to services.
As the Court summarized in its explanation of the quasi-contractual equitable principles that underlie the payment for work rendered outside of a formal contractual relationship, those principles are intended to address situations of unjust enrichment by one party at the expense of the other and to compensate the prejudiced party for unpaid work:
Initially, a defendant’s promise to repay the plaintiff had to be proved expressly. But, over time, courts increasingly implied a promise, regardless of the intentions of the parties. Quantum meruit sat alongside other forms of action to recover money (“money had and received” or “money paid”), and goods (“quantum valebat”). Collectively, they came to be known as the law of “quasi-contract”. Quasi-contract played a key part in, and was swept into, the American creation of the field of restitution law from the early 1890s.
Ironically, the dynamism of restitution law as a unified field of law died away in the United States in the 1960s or 1970s but was reborn in England and the Commonwealth. The seminal English text, Lord Goff and Professor Jones’ Law of Restitution [Goff & Jones], was first published in 1966. Professor Peter Birks offered a comprehensive view of restitution law, including quantum meruit and other aspects of quasi-contract, unified around the civil law notion of unjust enrichment. The law of restitution, and quantum meruit in particular, in England and Wales now seems firmly tethered to the conceptual foundation of unjust enrichment, though there are periodic academic attempts to cast loose again.
In England and Wales, unjust enrichment obliges a defendant with no defence to disgorge a benefit unjustly derived at the expense of a plaintiff. Quantum meruit in this wider sense is available when there is no contract. A defendant is said to be unjustly enriched by a plaintiff’s services if the defendant requested them or freely accepted them, knowing the plaintiff expected to be paid. The unjustness of an enrichment could be found in factors such as the “failure of basis”, where a benefit is conferred on the basis of a condition which is not fulfilled, or “free acceptance”, where a defendant is aware of the benefit, chooses not to expressly refuse it and appreciates the benefit is not conferred gratuitously. Goff & Jones states that where benefits are transferred in anticipation of a contractual agreement which is intended to provide for payment for those benefits, and the contractual agreement does not materialise, the general principles of failure of basis apply. Alternatively, the free acceptance of the services might be a source of enrichment and/or injustice.
Courts in most common law jurisdictions have espoused, with varying levels of enthusiasm, the notion that quantum meruit and other aspects of restitution law are founded on the concept of unjust enrichment. But Professor Birks himself was aware that a remedy of restitution is triggered by events other than unjust enrichment. There has been a resurgence of academic commentary criticising the equation of restitution law and unjust enrichment. And New Zealand courts have not joined so enthusiastically with other jurisdictions’ embrace of unjust enrichment as a unifying doctrinal foundation. We have risen to the challenge recently posed by Gagelaar J in the Australian High Court, of resisting “the temptation to intellectual gratification that accompanies any quest to portray cases in which the common law recognises an obligation of restitution as the conscious or unconscious application of one Very Big Idea”. In characteristically pragmatic New Zealand fashion, we have generally resisted the embrace of unjust enrichment as a unifying doctrinal foundation for quantum meruit, in favour of identifying its more precise elements.
After providing the background regarding the evolution of these equitable principles, the Court then offered the following summary of the elements required to establish an equitable claim under the principle of quantum meruit:
-
In Dickson Elliott Lonergan Limited v Plumbing World Limited, Eichelbaum J observed that the cases are fact dependent but identified the following elements as relevant:
-
(a) The defendant represented that it would proceed with the proposal.
-
(b) The defendant requested the plaintiff should commence work immediately.
-
(c) The work would have been of benefit to the defendant had the contract proceeded.
-
(d) If it had, the plaintiff would have been indirectly compensated for the costs of such work.
-
(e) The defendant made a unilateral decision not to proceed.
The Court also noted that an entitlement to payment is not conditional on whether the party receiving work was unjustly enriched, but, more simply, it is based on whether the party who received the work had intended to pay for it, and on whether the party who performed the work had intended to be paid:
In 2005, in Villages of New Zealand (Pakuranga) Ltd v Ministry of Health, Winkelmann J in the High Court observed “the quantum meruit cause of action continues to evolve”. She accepted a quantum meruit claim, where services were provided in anticipation of a contract, was “solidly based on principles of unjust enrichment, rather than upon a notion of implied contract”. She held a request to provide services or free acceptance of the services provided was required, but proof of a benefit to the defendant, in the sense of economic value, was unnecessary.
The Court of Appeal’s decision in 2006, in Morning Star (St Lukes Garden Apartments) Ltd v Canam Construction Ltd, is the most authoritative recent decision on quantum meruit. The Court noted quantum meruit is “generally seen” as being a restitutionary claim and “is said to be based upon unjust enrichment principles”. But the Court acknowledged the critique by Professors Grantham and Rickett that the purpose of quantum meruit is not to force the defendant to disgorge some wrongfully obtained benefit, on the basis of unjust enrichment, but to fairly compensate the plaintiff for services provided, based on the law of promissory obligations. The Court noted that if quantum meruit was based on unjust enrichment, the requirement of a benefit to the defendant was logical. But if its true purpose was to compensate the plaintiff, the nature and extent of the benefit may have little or no relevance. The Court cited Dickson Elliot Lonergan Limited and Villages of New Zealand (Pakuranga) Ltd as claims that were upheld even though there was no benefit to the defendant. The Court declined to resolve the doctrinal dispute, saying:
We will not attempt to resolve the doctrinal dispute here. It is sufficient to say that there is general agreement that a plaintiff will be able to establish a quantum meruit claim where the defendant asks the plaintiff to provide certain services, or freely accepts services provided by the plaintiff, in circumstances where the defendant knows (or ought to know) that the plaintiff expects to be reimbursed for those services, irrespective of whether there is an actual benefit to the defendant.
In 2007, In Cassels v Body Corporate 86975, Miller J noted a further possible basis for a quantum meruit claim, advanced by Professor Watts. Watts suggested the conceptual difficulties disappeared if restitution’s concern to restore a plaintiff’s position, rather than enrichment’s concern to strip undeserved gains, was seen as the basis of the action. As the Court quoted, Watts noted that a lack of enrichment has not prevented the courts from awarding quantum meruit and suggested:
A person is entitled to reasonable reward for time and effort expended on another’s behalf, at the behest or with the acquiescence of that other, the time and effort not being intended nor appearing to be gratuitous.
Miller J thought Grantham and Rickett’s writings were of similar effect and characterised Morning Star as having “skirted the doctrinal quagmire”. He considered the better view was that unjust enrichment cannot fully account for quantum meruit and that a defendant who accepts services knowing the plaintiff wants payment is liable to pay a reasonable price for them, whether or not the defendant was enriched. Miller J held:
The elements of a quantum meruit claim are threefold: the plaintiff provided services for the defendant; the plaintiff wanted payment and made that reasonably apparent to the defendant; and the defendant freely accepted the services or at least acquiesced in their provision.
In 2017, in BDM Grange Ltd v Trimex (New Zealand) Ltd, Duffy J observed that the idea unjust enrichment might provide a distinct and overarching cause of action, encapsulating all personal restitutionary causes of action, has still to gain acceptance in New Zealand.172 But, “[n]onetheless, the doctrine is seen to be a unifying legal concept which underlies and so shapes their evolving forms”. She considered there appeared to be acceptance in both England and Wales and in New Zealand that:
any personal restitutionary claim (quantum meruit included) usually entails four elements: (a) the defendant has been enriched; (b) the enrichment is at the expense of the claimant; (c) the enrichment is unjust; and (d) consideration is then given to any applicable defences.
Most recently, in 2019, was Northlake Investments Ltd v Wanaka Medical Centre Ltd. Osborne J analysed nine factors found by Professor Baker to run through relevant cases across common law jurisdictions. He observed that rendering services without a defendant obtaining a benefit does not bar a claim, on the authority of Morning Star. He had regard to factors including: the extent of risk undertaken by the plaintiff; whether the services would normally be provided free of charge; whether the plaintiff accelerated work at the request of the defendant; and why a project did not materialise. He found the circumstances pointed strongly against any expectation of reimbursement, each party accepted the risks, and he declined the claim.
So, for the past 50 years an ongoing jurisprudential debate has swirled around and within the law about the nature and scope of restitution and unjust enrichment in common law jurisdictions. The New Zealand law of non-contractual quantum meruit is not exclusively tethered to unjust enrichment, but there is reasonable coherence in what is required as a matter of practice.
From a practical perspective, the Court noted that the main issue turns on how to quantify the amount owed to a party for work performed outside of a formal contract:
In this case, uncertainty in theoretical underpinnings do not disturb the issue of liability. Mr Fulton, for Fletcher Construction, accepts that, if there was no contract, then a quantum meruit claim has to be addressed. It is clear Fletcher Construction requested Electrix to provide the services it did and freely accepted the services once provided. Fletcher Construction knew Electrix expected to be reimbursed. Fletcher Construction is liable to Electrix for the “amount deserved”, the non-contractual quantum meruit. But what is the amount deserved? Theoretical underpinnings may have practical consequences for how the law of quantum meruit is applied in marginal cases. In particular, they could affect the principles governing the amount recovered.
To determine the amount payable, the Court ultimately turned to calculating the payment based on the expert evidence submitted by the parties:
This case depends largely on my assessment of the expert evidence. My assessment, and the result, would be the same irrespective of the theoretical underpinnings of the law of quantum meruit. But it is informed and assisted by the conceptual underpinnings of non-contractual quantum meruit law in New Zealand law.
…
Overall reasonable cost. Having worked through each element of the costs, I regard the overall cost of the Precinct project assessed by Mr Hanlon and Mr Quincey to be substantially lighter than reasonable. I am not confident of all of Mr Thompson’s methodology. I accept Mrs Williams’ expert analysis of Electrix’s actual and reasonable costs in providing its electrical works services. That cost is certainly higher than what each party expected at the beginning of the Precinct project. That is largely because of the problems deriving from the lack of a detailed design for the electrical works, the associated scope creep, delays and disruption combined with the time pressure on all parties and the difficulties posed by acceleration. I also accept Electrix’s claim for interest under s 10 of the Interest in Money Claims Act 2016, from 1 June 2018, after Electrix’s last payment claim.
After considering the evidence, the Court concluded that the subcontractor was entitled to approximately $7.5 million for the unpaid electrical work. As this case illustrates, to avoid a descent into the uncertainties of complex legal doctrines, which tend to entangle parties in costly legal disputes and protracted legal proceedings, contracting parties should formalize their terms before commencing performance. Investing the time needed to establish the certainty of terms pays high dividends in containing the risks of downstream payment disputes.
