Value Judgment

The Problem

In the construction industry, work is commonly carried without formality. Tendered prices are sometimes submitted on the basis of detailed standard forms of contract, but for good commercial reasons the contract is not concluded. If work is carried out without a concluded contract, there may be a valid claim for quantum meruit in restitution. The valuation of such work was examined in the decision by HH Judge Lloyd QC in ERDC Group Limited v Brunel University [2006] (TCC).

The facts

ERDC tendered a price for the University Sports Facility on the basis of a JCT Standard Form of Contract With Contractor’s Design, 1998 Edition with valuation of variations based on JCT Valuation Rules. A contract was not concluded on that basis because certain planning conditions were to be discharged. Instead work proceeded on the basis of successive limited contracts based on letters of intent. The parties were pragmatic and and valuation followed the terms of the unconcluded contract. The authority of the last letter of intent expired on 1 September 2002, after which work continued for a considerable time as if the previous arrangements were still in existence.

Valuation of benefit

There was no contract after 1 September 2002 and the university accepted that work carried out after then was to be valued on a quantum meruit basis. ERDC argued for a valuation on a cost plus approach, whereas the university contended that there should be a continuation of the pre-existing contractual approach.

Judge Humphrey Lloyd QC decided largely in the university’s favour. Central to the reasoning of Lloyd J was that the university should not pay more than the true value of the benefit realised or realisable. There was a move from contractual to non-contractual basis and this was not marked at the time; ERDC only made its position clear much later, by which time all the main elements of work were either substantially complete. Lloyd J held that it was wrong to switch from an assessment based on ERDC’s rates to one based entirely on ERDC’s costs. He considered that a price or rate that was reasonable before 1 September did not become unreasonable after 1 September simply because the authority in the letter of appointment expired.

Lloyd J held that, for variations, the use of the rates in ERDC’s Tender breakdown was sensible. He considered that such a contractual basis was in principle fair for the purposes of a quantum meruit, especially where ERDC’s tender was not abnormally low but was close to others and the rates and prices were objectively reasonable.

In that respect the decision is consistent with, although less severe than, the decision in Lachhani v Destination Canada (UK) Ltd. [1997] 9 CL 144, 13 Const LJ 279, in which Mr Recorder Colin Reese QC considered that the contractor's offer in the unconcluded contract should act as an upper limit to the measure of the quantum meruit, even though that might lead the contractor to sustain a loss.

The emphasis in both cases is the value of the benefit to the party requesting and receiving the benefit, based on a tendered price. It is understandable to base the value on an unconcluded contract where there is no “fault” of the requesting party. However, it cannot be fair in all cases, particularly where circumstances may render the tendered price an inaccurate measure of the true value of the benefit. In cases involving speculative work such as Countrywide Communications Ltd v ICL Pathway Ltd [1999] All ER (D) 1192, where the requesting party was at “fault”, the appropriate measures have been time and cost.

That may be the case where the reasons for the unconcluded contract lie unnecessarily with the requesting party. This is particularly so where the absence of a contract may provide a significant restraint on the contractor’s ability to obtain competitive prices and to manage the project efficiently faced with continuing uncertainty about the requesting party’s commitment; then the the price in the unconcluded contract may not properly reflect the true value of the benefit. It does not make sense to base a valuation on a whole works procurement method, if the works are in fact procured piecemeal. The circumstances in which the benefit is realised need to be considered in the true valuation of the benefit.

Effect of defective benefit on valuation

Lloyd J made a distinction between work which was defective when the contractor left the site incomplete work. He considered that ERDC had no obligation to complete in the absence of any contract. If the university had not paid for work not done, it had not received a benefit which needed to be adjusted. There will be situations where the distinction made by Lloyd J between incomplete and defective work may be difficult to make.

Lloyd J observed that rectifying defects was necessary to confer full value or benefit. The risk of correcting defects are usually included in a contractor’s rates and prices, so that some adjustment to a valuation based on those rates and prices needed to be made for defective work.

Lloyd J recognised that there were some defects that did not reduce the full benefit. For several items claimed before him for instance, he considered that if the problem was really as material as the university suggested, the remedial work would have been done. He inferred that the defect had no real effect on the benefit. However, there may be situations where a party is reluctant to commit to the expenditure of large sums for remedial works until it has clearly established its entitlement from the contractor. Drawing parallels from breach of contract, there should not be a requirement to correct the defects before claiming the reduction in value.

For other material defects Lloyd J held that the university could not reduce the valuation by something like a set-off or cross-claim equal to the costs of putting the work right, except perhaps where as a result of what ERDC did or did not do, there was no benefit or value.

In carrying out the assessment of the adjustment to make for defects, Lloyd adopted the evidence of the actual cost of rectification on each item of defect. In some cases he adopted the full cost. In other cases he reduced the actual cost to take into account an unexplained method of procurement which may have increased the actual cost. In still others he reduced the actual cost to take into account an unexplained method of procurement which may have increased the actual cost. Or, he applied a broad correction factor to the actual cost when he considered that the work actually undertaken, and claimed, went beyond that required to bring the work up to standard.

It appears that the approach was taken in the absence of any evidence to support a different method of valuation, based for instance on the reduced value of the benefit and the tendered price.

Valuation of Defective Realisable Benefit

In most situations where physical construction work has been carried out according to the requesting party’s specification, there will be an incontrovertible benefit. Lloyd J appears to have adopted this approach accepting it was sufficient that the benefit was realisable. It was not necessary to show that it had been realised.

The distinction arose in one of the issues before Lloyd J - a problem of waterlogging and surface water run off onto track from an embankment. The unconcluded contract performance specification required a system of below ground drains and perforated land drains so as to prevent water spilling on to the track. The unconcluded contract employer’s requirements required a land drain and a collector drain and ERDC’s design did not do that. Based on those standards, ERDC’s design was flawed. The work carried out based on the flawed design was incomplete, since it did not include the additional drain to comply with the employer’s requirements, and was overall defective since it did not meetthe performance specification.

A land drain had to be installed to relieve the problem at a cost of approximately Ł2,000. ERDC did not carry out the additional work having left the site by then.

Lloyd J considered that the work to overcome the design flaw affected the value of the benefit and an adjustment to the valuation of the work had to be made measured as the cost of remedial works of Ł2,000. He held that the benefit may comprise a design and was not limited to the as-built work. That was one reason for emphasising that the benefit should be realisable and not realised. He held that by the time that ERDC left the site the additional drainage should have been designed and installed. The area of the embankment was therefore not what it should have been.

It is not clear from the judgment why the cost of the remedial works was adopted as the adjustment to the valuation of the works. If the design had been properly carried out, then ERDC would have constructed the additional drains. If its tender price was a lump sum for work based on its design, then the value of the work based on the unconcluded contract price would have included the additional drains. The valuation of the work carried out without the additional drains would then have been a pro rata of the price, and there would be no need to consider the cost of the remedial works. Alternatively, if instead the value of the additional drains under the unconcluded contract was to be based on a measure and rate, then there would be no need to consider the cost of remedial work, since ERDC would not have been paid for the work.

It may be that the approach taken by Lloyd J was an application of the principle stated in Lachhani v Destination Canada (UK) Ltd. that a building contractor should not be better off as a result of the failure to conclude a contract than he would have been if his offer had been accepted.

If a tendered price approach is adopted in the valuation of benefit, then there should be some recognition of the arrangements made by the contractor to carry out the work. This may be particularly relevant if a subcontractor is responsible for the defective works. In Costain Civil Engineering Ltd v Zanen Dredging & Contracting Co [1997] 85 BLR 77 it was said in different circumstances, and in relation to valuation of profit that consideration had to be given to the relationship of the parties and the competitive edge that the contractor had by the significant advantage of having already mobilised his equipment.

This approach did not appear to find favour with Lloyd J who dismissed the concept of mitigation. He held that the net benefit to the university could not be affected by whether or not ERDC was given the chance of putting the work right.

PRACTICE NOTE:

· The basic concept of valuation of quantum meruit in restitution is that the requesting party receiving the benefit pays no more than the true value of the benefit realised or realisable.

· Where there is an unconcluded contract it is likely that those rates and prices will be the basis of valuation even if the contractor makes a loss, particularly where the prices and rates are objectively reasonable.

· If completed work was left defective an adjustment to the valuation of benefit had to be made if the defects reduced the value of the benefit, but this could not be valued like a set-off or cross-claim since there was no contract.

· The benefit may comprise a design and was not limited to as-built work - one of the reasons for emphasising that the benefit should be realisable and did not have to be realised. The benefit was to be adjusted to take into account the work to overcome a design flaw.

· The absence of cogent evidence of the reduction in value of the benefit may lead to valuation of the adjustment on the basis of cost of rectification.