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The puzzling case of when a contract is not a contract

LAW - If work is carried out without a written contract, valuation can become difficult. A recent case has brought some clarification to how value should be decided, writes Daniel Atkinson

WHEN a contractor carries out work for an employer, the price is usually specified in a contract, be it a formal document or an exchange of let ters.

But occasionally the work is carried out in such a rush that neither a contract price nor a mechanism for valuing the price is agreed.

This does not necessarily prevent the creation of a contract (which can arise from a simple request to carry out work), but without an agreed price or method of valuation, the contractor's payment will be whatever is deemed 'a reasonable sum' for the work.

This is usually measured as cost plus an uplift for off-site overheads and profit, provided the cost is reasonable and not unnecessarily incurred.

Sometimes the work carried out is not covered by a contract at all. It is not unknown for the contractor and the employer to carry on working in the mistaken belief that they have a contract when, in fact, there is none. Alternatively, there may be a contract, but the work done is outside the contract.

In order for the contractor to be entitled to payment for noncontractual work, it is necessary that the employer should have benefited, or have been enriched, from the work at the expense of the contractor.

It must be unjust for the employer to be so enriched, and this will depend on the circumstances, which are many and varied.

Judge Humphrey Lloyd's decision in the recent case of ERDC Group v Brunel University is the latest in a line of cases on this issue.

The case not only provides another example of a situation where the contractor was entitled to payment, but it also provides useful guidance on how the payment should be measured.

ERDC had submitted a tender for work based on a JCT form. The client, Brunel University, instead of proceeding with the contract for the whole of the work, issued five successive letters of intent.

Each letter offered a contract limited in value and covering a particular period, based on the proposed contract. The authority under the last letter expired on September 1, 2002. By that date, 40 per cent by value of the work remained to be done.

At the request of its client, ERDC continued to complete the work, which was outside any contract, until, by the end of November 2002, the majority of the work was finished.

During the whole period of the works, ERDC had submitted eight applications for payment. These were based on the contract sum analysis of the proposed conditions of contract and followed the JCT valuation rules which applied in the proposed contract.

On being sent contract documents for signature, ERDC refused to sign and, for the first time, claimed payment for the work carried out after September 1, 2002, based on cost rather than in accordance with the valuation rules under the JCT Standard Form.

The circumstances were unusual in that there was a move from a contractual to a noncontractual basis, and Judge Lloyd was not prepared to ignore the pricing mechanism in the proposed contract.

It was not right, he said, to switch from an assessment based on ERDC's rates to one based entirely on ERDC's costs. A price or rate that was reasonable before September 1 did not become unreasonable after September 1 simply because the authority in the letter of appointment expired.

Judge Lloyd held that, for variations, it was sensible to use the rates in ERDC's tender estimate breakdown. Such a contractual basis was in principle fair because ERDC's tender was not abnormally low, but was close to others.

The rates and prices shown in the tender breakdown compared well with the 2002 Spons Price Books and were objectively reasonable.

The judge held that the overhead percentage to be used was not the actual figure from audited accounts, but the figure that would have been adopted if a contract for the whole work had been executed.

As to profit, he held that the client should not pay more than the amount which ERDC contemplated that it would receive in its tender, even though the figure appeared low.

Judge Lloyd considered that whatever measure of payment was adopted, whether it be cost or rates and prices, the party paying for the benefit should not be required to pay for delay or inefficiency.

In arriving at the total payable by reference to rates and prices, it was necessary to look at what the contractor should have recovered by the use of those rates and prices.

Judge Lloyd then considered defects. He held that some adjustment in the measure of payment was to be made for the reduced value of the work at completion due to defects.

But there could be no counterclaim, since there was no contract. He dismissed a downward adjustment based on cost of rectification.

The value could never be negative, but it could be nil if, due to the defect, the work was of no value to the employer.

In this case, the standard was the contractual standard that had applied prior to September 1, 2002, and which continued to be applied thereafter.

Nonetheless, if the valuation of work outside a contract is to be valued on the basis of the value to the employer, then it must be right to use rates and prices in the proposed contract, if they are relevant. They would usually be the best indicator of market value.

Key points If work is carried out without a contractual agreement on payment, the contractor will be ent itled to payment of 'a reasonable sum' The measu re of what is 'a reasonable sum' will be influenced by any prior valuation agreed between the client and the contractor Where no contract exists, the required standard of work is defined by the client's request. In carrying out the work requested, the contractor accedes to that standard.