No Contract? Payment for Extra Work.

Most arrangements for the purchase and supply of services, materials and plant will be governed by a contract. Provided there is a request for identifiable supply and there is agreement to pay, then there is likely to be a contract.

Situations do arise when there is no contract. The formalities required by the parties may not be concluded. Even if there is a contract, work may be carried out which is outside the contract, either because of excess of authority or lack of required formality.

Where there is no contract, but a purchaser has obtained a benefit at the expense of the supplier, then the law may impose an obligation to pay if it is just to do so. This is usually referred to as restitution.

The circumstances are many and varied, but the measure of the amount to be paid is less than clear.

One particular example of the law of restitution is in speculative arrangements, where the parties cooperate to tender for work. The purchaser in this case will invite the supplier to assist in the preparation of the bid with the prospect if successful that the supplier will be awarded work. This may involve considerable effort on the part of the supplier. Usually there is no prospect of payment. The problem will arise if the bid is successful but the supplier is excluded from the work.

In Easat Antennas Ltd v Racal Defence Electronics Ltd [2000] (ChD) Racal succeeded in a bid in which Easat carried out considerable work, but did not award Easat the subcontract.

There was no dispute that Racal had received a benefit as a result of the services. Easat only had an expectation of being rewarded for its work in the event of the bid succeeding and the conditions for placing the subcontract then being satisfied.

However while Easat was prepared to take the risk that Racal’s bid would fail, it was not prepared to run the risk that, if Racal’s bid succeeded, as it did, that it would not be rewarded. It was held that that was the whole purpose and underlying assumption of the agreement. On that basis the claim by Easat was held to be a good one.

In Countrywide Communications Ltd v ICL Pathway Ltd [2000] CLC 324 a consortium assembled to make a bid involved the members in considerable work. When the bid was successful the consortium excluded one of the members countrywide.

Countrywide had accepted the risk that its services might not be accepted for submission with the bid or that the bid might fail or that negotiations might fail. It had not accepted the risk that it would be dismissed after the final bid had been submitted because Pathway changed personnel.

In Stephen Donald Architects Limited v Christopher King [2003] EWHC 1867 (TCC) the parties were friends and King did not have the means to pay fees for redevelopment of the property until completion of the project.

There was probably a benefit to King from the activities of the Architects even though the redevelopment in accordance with the designs did not proceed. The benefit was obtained at the expense of the Architects. The profit was expected to be payment upon successful completion of the project in cash or in kind as compensation for the architectural work. The venture failed for want of finance for the design prepared. The Architects took on the risk that King might decide not to proceed, either for insufficient funds or on terms perceived by King to be unsatisfactory. That was the risk that eventuated and no payment was due.

Generally the measure of payment in restitution the benefit to the Purchaser. In the case of speculative arrangement, if the supplier is entitled to payment at all, then the measure will be cost plus an uplift for profit and overheads.

The measure of payment becomes more difficult if the circumstances include the agreed terms to a contract which does not apply to the work. In that situation, the payment terms of the unconcluded or inapplicable contract will have a bearing on the measure.

The measure will be the market price for the work and the price in the unconcluded contract will act as the upper limit of the amount to be paid Sanjay Lachhani v Destination Canada (UK) Ltd. (1997).

If the contract is inapplicable to the extra work then the rates could still be applied to the extra work carried out simply as a continuation of the contract work. That occurred in ERDC Group Limited v Brunel University [2006] (TCC) where the extra work was carried out after the expiry of the authority of the letter of intent. The letter of intent had created a contract and identified rates for the work. It was held that there was no hard and fast rules for assessment. It was held that it was not right to switch from an assessment based on ERDC’s rates to one based entirely on ERDC’s costs. The move was not marked at the time and ERDC only made its position clear at a much later stage by which time all the main elements of work were either substantially complete or heading for completion. A price or rate that was reasonable before expiry of authority did not become unreasonable after simply because the authority in the letter of appointment expired.

The law of restitution is a difficult but developing area of law, but creates justice in situations where the Purchaser has obtained a benefit at the expense of the supplier. Whether or not the law will imply an obligation to pay in any particular circumstances can be uncertain and the conduct of the parties is highly relevant. The more certain approach is to regulate any arrangement by contract which will exclude the operation of restitution.