Latin is a Language, Dead as Dead Can Be, It Killed the Ancient Romans, And now It's Killing Me.
Anon
Introduction
Quantum meruit appears in many construction claims, whether in arbitration or adjudication – the claimant seeks $xx amount in damages for breach of contract, or in quantum meruit. Other than a fancy Latin tag, a shadow of a time when lawyers peppered their speech with words and phrases designed to confound the common person, what does it actually mean?
Literally, quantum meruit translates to “the amount earned”. In the legal context, Black’s Online Law Dictionary gives a more detailed, but perhaps similarly jargon laden definition:
As much as he deserved. In pleading. The common count in an action of assumpsit for work and labour, founded on an implied assumpsit or promise on the part of the defendant to pay the plaintiff as much as he reasonably deserved to have for his labour.
In short, a claim in quantum meruit is one which is raised where there is no contract, or no contractual provision is available, to cover a claim for work done or services provided.
This is not an infrequent claim, where work is commenced on a loose or inadequate letter of intent, or a contract which is never signed or affirmed, or fails to meet the core requirements for a binding relationship to be formed. It also arises where there is a contract, but for some reason the contractual provisions do not apply. In those situations, the person providing the work or services is left without a common law claim for payment in contract.
Unjust enrichment
This has become an area where the restitutionary, equitable doctrine of unjust enrichment has been used to fill the gap; or to provide judges with an doctrinal explanation to right what they have seen as a wrong. In technical terms, the traditional analysis of offer-and-acceptance has failed, or the fundamental requirements of a contract (consensus ad idem, to coin another Latin tag) have not been met, either through lack of capacity, clarity of agreement and certainty of price and/or subject matter.
Simplistically, the party providing the work or service has believed there is a commitment to provide some benefit for which it will be paid, and the beneficiary of that work or service has allowed the work or service to be provided without formally accepting the basis for payment for the benefit which it is to receive. The courts have adopted the equitable concept of unjust enrichment to explain the basis for compensation under quantum meruit.
In general terms, unjust enrichment can be summarised in the following terms:
The courts have held that a claimant must demonstrate three things in order to make out a cause of action in unjust enrichment: that the defendant has been enriched, that his enrichment was gained at the claimant's expense, and that the defendant's enrichment at the claimant's expense was unjust. If these three requirements are all satisfied, then the further question arises, whether there are any defences to the claim, and if there are not, then the court must decide what remedy should be awarded. However, there is an additional consideration that the court must also bear in mind, namely that some overriding legal principles [may] justify the defendant's enrichment and thereby nullify the claimant's right to restitution.[1]
Applying that metric, an owner or head contractor has the benefit of work or services (enrichment), given at the cost of the (sub)contractor or consultant and such benefit was unjust (in most circumstances, payment declined on the technical basis of no formal contract).
In the construction industry, entitlement to quantum meruit, in lieu of a formal contract, is typically not hard to establish. There may have been a failure to conclude the formal contract (deficient in some essential term), letters of intent may have been issued, with no formal contract ever considered, work may have been undertaken outside the terms of an existing contract or, for some reason, contract terms may no longer apply.
Quantifying the claim
The real challenge is how is a claim in quantum meruit quantified, if it is based in a restitutionary claim. Is the measure to put the claimant in the position it would have been in, had it not been unjustly put to expense, should the defendant be required to share in its enrichment or benefit, or should a market value assessment be made?
Contractual approach?
If quantification is based on restoring the claimant’s position, then the normal contractual quantification of putting the innocent party into the position it would have been had the contract been complied with does not apply. In a restitutionary claim, the claimant is put back into the position it would have been had the work not been done with profit and lost opportunity ignored. In that case, the claimant is left with a sense of wasted effort to the respondent’s gain.
Unjust enrichment approach?
Conversely, using benefit under the normal principles of unjust enrichment as a measure, the respondent is penalised for acceding to the claimant providing the work or services, but the claimant is at risk on the quantification of the respondent’s benefit with little regard to the cost of that work or service.
Where this may be a suitable approach for financial transactions, or where assets are applied to a commercial venture for gain, in the construction industry, this is well outside the contractor’s risk on most projects. The increase in value of a house, after renovations, or the profit from the use of a new plant or factory may be measures, the but for most infrastructure development (for example a road or a footpath) there may be no revenue derived and operating costs may be greater than had been the case before the work was undertaken (for example, the Hobson Bay and Central Interceptor sewer mains, designed to reduce sewage outfalls into the Waitematā Harbour).
Even in the increase in partnering between owners and contractors, the commercial risk underlying the decision to proceed with a project, and any anticipated return or capital gain, rests firmly with the owner. That is an equity risk, which contractors generally do not share.
Professor Peter Watts KC considered this issue in some detail suggesting:
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.[2]
In Professor Watts’ view, any conceptual difficulties disappear if restitution’s concern was to restore a claimant’s position, rather than enrichment’s concern to strip undeserved gains. As mentioned above, the difficulty with a restitutionary approach is that no account is taken of any potential gain on the part of the respondent, but more critically the claimant is deprived of any gain in reputation, expertise, credit-worthiness, cashflow or profit from undertaking the work. In the construction industry, while these may be difficult to quantify, they can be significant considerations.
In the UK, the approach remains to have reference to the benefit unjustly gained.[3] Australia has followed that approach, with the further consideration that the case of repudiation or invalidity of a contract, while the amount recoverable under quantum meruit may be based on value, that assessment would be limited to what would otherwise have been recovered under the contract, if it applied.
Market value?
In New Zealand, the approach has been on the more general consideration of market value of the work or services provided:
The doctrine of quantum meruit is based on the principle that a party should be entitled to restitutionary relief for the reasonable value of work or services provided to the other party which for some reason falls outside the terms of their contractual relationship. In order for a claim to succeed it must be established that services were provided by one party to another at the latter's request or instruction, and that the second party freely accepted those services and obtained a benefit from their provision. In such a situation it is equitable that the first party should receive fair and reasonable remuneration for those services.[4]
The issue of quantum in New Zealand is, therefore, largely uncoupled from issues of unjust enrichment. Quantification of market value, or “fair and reasonable remuneration” is inevitably more subjective, though not affected by the benefit received. Despite its difficulties, this approach is more relevant to the construction industry, where work is priced and valued, not on the basis of the potential benefit to the person who procures such work, but on the basis of cost, plus a reasonable return, subject to market forces through traditional tendering procedures.
Electrix v Fletcher Construction
In the recent case of Electrix Ltd v The Fletcher Construction Company Ltd,[5] Fletcher ran a request for proposals for the electrical installation at the Justice Precinct in Christchurch; a project which was already in some difficulty. No design was finalised, no price was agreed and there was a general failure to agree on any of the essential terms for the contract. Fletcher engaged Electrix to carry out the electrical installation on what appears to have been an ad hoc basis under a series of letters of intent. Much of the work was done out of sequence, and considerable elements of the installation were redone.
It is not surprising that the parties fell into disagreement over Electrix's entitlement to payment. The original budget was $14 million for the installation; Fletcher paid over $21 million; Electrix sued for a further $7 million; and Fletcher counterclaimed for the repayment of $7 million.
Justice Palmer reviewed the seminal cases of Fletcher Challenge Energy v Electricity Corporation and Transpower v Meridian Energy in relation to heads of agreement, letters of intent and the requirements for formation of contract, and held that no contract had been formed between Electrix and Fletcher. The primary ground for this finding was that too many essential terms were not agreed for a contract to be in place - there was no agreed contract value (or presumably mechanism for establishing one, eg on a cost plus basis); the specification for the work was "cursory at best"; the detailed design had been rejected by the Ministry of Justice (under the head contract); and it was unclear what the terms of the subcontract were.
The letters of intent contained a clear expression that Fletcher did not consider itself to be bound. They simply provided authority to carry out specific activities with Fletcher's approval; they did nothing more than provide comfort to Electrix that it would be paid for design work, pre-ordering and ultimately, installation, in lieu of a contract.
In relation to quantum meruit, Palmer J canvassed the doctrinal dispute over whether the claim is in unjust enrichment, accepting that the underlying justification was "evolving", or in restitution.
The difficulty, as outlined by Professor Watts KC, was whether the relevant considerations were to restore the parties to the original positions, reimburse the claimant for the enrichment enjoyed by the respondent, or payment on some value assessment. Where a contractor carries out work or provides services in the expectation of being paid for them, compensation assessed on the basis of value of enrichment to the recipient could result in some very strange results. In the technology field, it would not be at all uncommon for services and even work to be undertaken at considerable cost, but incomplete have no value at all to the defendant.
In this case, there was no contract; Fletcher knew Electrix expected to be reimbursed; and therefore it was liable to Electrix for "the amount deserved" in quantum meruit. On the question of valuing the amount deserved, His Honour had this to say:
[96] While unjust enrichment may well be a useful conceptual foundation for some aspects of the law of restitution, it has limitations that do not make it a satisfactory unifying conceptual foundation. As seen above, that is recognised by academic commentary in relation to restitution generally and in relation to quantum meruit in particular ... The normative objectives of the New Zealand law of restitution in relation to non-contractual quantum meruit are not confined only to dispossessing those unjustly enriched but can extend to providing redress for those who may have been unjustly impoverished.
[97] This has nuanced consequences for the assessment of relief. It makes sense that the English understanding that unjust enrichment underlies quantum meruit leads to a focus on the benefit to the defendant. Starting with the market value of the services and adjusting for the value of the services in the hands of the defendant is a logical corollary of that. But, in New Zealand law, benefit to the defendant is not always necessary. Information about the market value of the services is still relevant to assessing the reasonable cost of the services provided. But just as relevant is the cost to the plaintiff of providing the services in the circumstances of the work at the time. That may be different from the market value of the work done...
After assessing Electrix's work on the basis of cost plus margin and market value, the court found that Electrix was entitled to the additional $7 million claimed, and interest.
The case is interesting, not simply because it is topical, but also for the fact that the High Court took the time to clarify the basis for assessing the amount deserved under quantum meruit, and for treading a path between the doctrinal principles of unjust enrichment, with its potentially odd results, and the similarly unattractive approach of restoring the parties to their original positions. Whether or not the contractor’s costs, plus a reasonable return, or market value is a fair assessment based on quantum meruit remains to be seen.
Conclusion
While the distinctions between common law and equity, and the niceties of restitutionary remedies, unjust enrichment and quantum meruit may seem arcane and esoteric, the realities of establishing an entitlement to be compensated are very real; and the doctrinal considerations underlying the amount to be recovered have to be navigated with some care.
In the UK and Australia, the courts have accepted a market value approach, as in New Zealand, but with the overlay of the benefit to the respondent on an unjust enrichment basis. It is clear that, in New Zealand, that overlay is less likely to apply. What is not in doubt is that what is “deserved”, what is “fair recompense” or “market value” will be a subjective assessment which will be fertile ground for quantum experts in the future.
[1] Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones The Law of Unjust Enrichment (8th ed, Sweet & Maxwell, London, 2011) at [1.09].
[2] Watts,“Restitution – A Property Principle and a Services Principle” [1995] RLR 49.
[3] Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938
[4] ACM Removals Ltd v Southern Demolition and Salvage Ltd
[5] [2020] NZHC 918