On what basis is a contractor entitled to payment where work proceeds under a letter of intent but no formal contract is concluded?
The payment basis depends first on the letter itself and then on the objective basis on which the parties requested and performed the work.
The letter should state the payment basis expressly; if it does not, the contractor may recover reasonable remuneration assessed by reference to the parties' dealings
A letter may incorporate contractual rates for authorised work, promise direct costs and losses, or provide for reasonably ascertainable costs. Work after the letter expires may be remunerated on a quantum meruit basis. That does not automatically mean reimbursement of the contractor's recorded cost. Existing rates, workmanship, delay and the commercial structure may inform the reasonable amount.
| Issue | Position |
|---|---|
| Express payment clause | Apply the agreed wording |
| Terms incorporated by reference | Those terms may govern valuation |
| Work after expiry | Potential reasonable-remuneration claim |
| Quantum meruit | Reasonable value, not automatic cost reimbursement |
| Profit | Recoverable only where the wording or valuation basis supports it |
Start with the letter
The payment clause determines the first line of entitlement. It should identify the work authorised, valuation method, payment dates, treatment of profit and the position if the intended contract is never executed.
Robertson: wording protected profit
The letter promised reimbursement of direct costs and directly incurred losses if no formal contract was entered into. The court treated the protection against loss as extending to profit, because failure to earn profit could constitute a loss within the commercial wording used.
ERDC: reasonable remuneration did not mean recorded cost
Successive letters referred to payment under JCT terms. Work before the last letter expired was governed by the limited contract. Later work was remunerated on a quantum meruit basis, but the same contractual rates were used rather than converting the later period into a cost-reimbursable arrangement.
Skanska: incorporated terms included payment
The Court of Appeal treated the instruction to provide services under the terms of the proposed agreement as incorporating all relevant terms, including payment, during the stated interim period.
An informal contract may precede the formal document
A proposal that the agreement be recorded in a formal contract signed later did not prevent the parties from having already committed themselves informally on the same terms, so the terms identified in the letter governed the work.
What quantum meruit means
Quantum meruit is reasonable remuneration for the benefit requested and provided where no contractual payment term governs the work. The assessment is fact-sensitive. Tender rates, interim valuation practice, actual cost, market rates, defects and delay may each bear on the reasonable figure.
The court may reject a pure cost-plus calculation where the parties' earlier rates provide a sounder measure.
Drafting and administration
State the valuation basis in the letter.
Define whether profit, overhead and loss are included.
Set the authorised period and work scope.
Issue written extensions before expiry.
Continue payment records on the agreed valuation basis.
Record defects and delay that may affect reasonable value.
Authorities
| Authority | Citation | What it decides |
|---|---|---|
| Robertson Group (Construction) Ltd v Amey-Miller (Edinburgh) Joint Venture | [2005] CSIH 89 | Direct costs and directly incurred losses included profit on the wording used |
| ERDC Group Ltd v Brunel University | [2006] EWHC 687 (TCC) | Post-expiry work valued on a quantum meruit using contractual rates |
| Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd | [2006] EWCA Civ 1732 | Interim wording incorporated the proposed agreement's payment terms |
| Bryen & Langley Ltd v Boston | [2005] EWCA Civ 973 | An intention to sign a formal contract later did not prevent an earlier informal contract on the same terms |