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The High Court[1] has ordered The Fletcher Construction Company Ltd (Fletcher) to pay one of its subcontractors Electrix Ltd (Electrix) $7.5m for electrical work carried out on the recently completed Christchurch Justice and Emergency Services Precinct (Project). In reaching this decision, Palmer J shed light on certain issues common to construction projects including letters of intent, contract formation and quantum meruit.
A troubled project
The Precinct was the first major building project completed after the 2011 Christchurch earthquakes. The Ministry of Justice, as principal, and Fletcher, as head contractor, agreed a maximum price of $240m for the entire Project, with just under $16m of that allocated for electrical work.
Fletcher selected Electrix as its electrical sub-contractor; however, the parties never finalised (much less signed) a formal contract, nor did they complete the detailed design of the electrical works, resulting in a piecemeal design process that changed the scope of the Project throughout.
The judgment confirms this was a “troubled project”, as was widely known in the industry. Practical Completion was achieved more than two years later than planned, with the Project suffering from poor management, delay events, disruption and significant time pressure driven by the deadlines to which Fletcher had agreed with the Ministry.
It is no surprise then that, from 3 February 2017 Fletcher was paying “significant” liquidated damages to the Ministry for late completion. This corresponded with a concentrated effort on Fletcher’s part to negotiate a formal contract with Electrix. Despite these efforts, negotiations unravelled and ultimately failed.
Electrix issued 42 payment claims over the life of the Project, totalling nearly $29m. Fletcher paid Electrix $21.6m on the basis of a series of letters of intent totalling just over $14 million, which had become the standard (and indeed the only) formal instrument used to regulate the relationship between the parties.
Fletcher withheld several payments, issuing payment schedules that stated payment was on account “until contract negotiations advanced to resolution of contract method and cost substantiation”. Fletcher also counterclaimed, saying it had paid Electrix $7m too much.
No contract
Palmer J determined there was no formal contract between the parties due to a lack of objective evidence that they intended to be immediately bound at any point sufficient to satisfy the prerequisites of contract formation. In fact, the evidence suggested the parties did not regard themselves as having yet agreed terms, including statements that the price and programme were “still to be agreed” and that there was “still no contract in place”.
Importantly, the letters of intent were not considered to be a base level of agreement between the parties. Although providing evidence that the parties were working with the “intent” there would be contract, they were not evidence of an intention to be immediately bound. Rather, they indicated the reverse.
Quantum meruit
Despite there being no formal contract between the parties, payment was awarded to Electrix on the basis of quantum meruit: that one should pay what a job is worth, or “the reasonable cost of services”.
This decision confirms that the New Zealand law of non-contractual quantum meruit is not exclusively tethered to the doctrine of unjust enrichment, but can extend to providing redress for those who have been justly impoverished. Electrix duly provided the electrical works requested by Fletcher and were therefore entitled to the “amount deserved” for these works.
To date, New Zealand case law has not delved too deeply into the principles governing the calculation of an “amount deserved”, with the courts generally referring to the plaintiff’s ability to recover the “reasonable cost of services”.
Palmer J considered that while information about the market value of the services is relevant in assessing the reasonable costs, just as relevant is the actual cost of providing the services in the circumstances of the work at the time.
In this case, with no contract, no agreement on the price of the services, and a significantly disrupted and poorly planned worksite, the costs of services actually provided was the best starting point. Such costs should reflect the market value of the particular inputs used in the provision of the services in the circumstances. Together with the market-related profit margin, these reflected the reasonable costs of services to Fletcher.
Had Palmer J been required to determine Fletcher’s counterclaims on the basis of the Fair Trading Act 1986 and negligent misrepresentation, these would have been rejected – with the Court finding them poorly founded and unclear.
Our comment
While it is common practice for projects to commence on the basis of letters of intent or memoranda of understanding, it is surprising that the parties continued to proceed with the Project works without formalising arrangements particularly having regard to the sums involved. As in this case, Letters of Intent generally (but not always) evidence an intention to form a contract at a later stage, and merely indicate general terms of what that contract might look like.
A party does not hold a “get out of jail free” card if it transpires there is no formal contract in place. Although the judgment ultimately determined Electrix was entitled to the reasonable costs of its works, the dispute is yet another example of the dangers of proceeding without a formalised contract. There are obvious difficulties in determining what a reasonable or deserved amount is for services provided under a construction contract, and qualified experts can reasonably disagree. Prices (or a mechanism for determining prices) ought to be clearly documented in a formal contract.
Given the commercial reality that many projects are carried out without “perfect” contracts (or formal contracts at all), and the practical reality that many projects are carried out without “perfect” planning, parties can nonetheless have some assurance that the absence of a contract will not leave them out of pocket. A path to a claim for quantum meruit based on unjust impoverishment has been lit; clarifying an avenue of recovery for contractors and subcontractors where work has been duly completed, and a benefit received, despite the lack of a formal agreement.
If you have any questions about the issues raised by this judgment or your construction contract obligations and entitlements, please get in touch with our construction team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
[1] Electrix Limited v Fletcher Construction Company Limited [2020] NZHC 918
