Claims Outside the Contract

In the last article I addressed the issue of global claims for loss and expense falling outside the provisions of the contract. In this same vein, this month I look at other claims outside the contract which regularly arise, namely undue or unjust enrichment and quantum meruit.

When contractors are under-recovering due to low rates or no rates for a particular item, they often seem to want to rely on the concept of unjust enrichment, the apparent principle being that if the employer were to refuse to make payment for the work, then the employer would be enriched by the actions of the contractor in constructing that work.

Enrichment

Firstly, there is nothing magical in the use of the terminology “enrichment”. Indeed, the essence of a construction contract is to enrich the contractor, hopefully by making a profit from the work performed. Neither is there any magic formula that will allow a contractor, who is under-recovering through the terms of the contract, to obtain additional compensation through the principle of enrichment. Where a valid contract is in place between the parties, it will be virtually impossible for the contractor to claim enrichment has taken place since the relationship, insofar as payment is concerned, will be regulated by the contract. In order to succeed on a claim of enrichment, the party must demonstrate that there is no contractual basis upon which compensation has agreed to be paid; that the party claiming the benefit of enrichment has performed work and the other party has obtained a benefit and, in the absence of any contractual framework, compensation can then be made under the common law provisions of unjust enrichment, an equitable remedy in which the contractual provisions are largely irrelevant. See for example Kudu Granite Operations (Pty) Ltd v Caterna Limited 2003 (5) SA 193 (Supreme Court of Appeal). Employers, therefore, faced with a claim for unjust enrichment or indeed contractors facing a claim from a sub‑contractor on this basis, where a contract exists between the parties, can almost be certain that there is no valid basis for such a claim.

Quantum meruit

A closely interrelated principle is that of quantum meruit, a fair and reasonable payment for work performed in circumstances where, for whatever reason, the contractual basis for payment has been invalidated. The starting point for these types of claims is invariably that the work that was contemplated at the time of entering into the contract was superceded by work which was so far removed from what was contemplated that in fact the work was not within the contract at all and the contractor seeks to recover compensation on the basis of a quantum meruit. Interestingly, one of the earliest considerations by a court of this proposition dates back to the judgement of Lord Cairns in 1876 in Thorn v Meyer & Commonality of London (1876) 1 App. Cas. 120 at 127-127. Lord Cairns described the principle as follows:

“… either the additional or varied work … is the kind of additional and varied work contemplated by the contract, or it is not. If it is the kind of additional or varied work contemplated by the contract, he must be paid for it, according to the prices regulated by the contract. If, on the other hand, it was additional or varied work, so peculiar, so unexpected, and so different from what any person reckoned or calculated upon, that it is not within the contract at all, then, it appears to me, one of two courses might have been open to him; he might have said: I entirely refuse to go on with the contract-Non hec in foedera veni: I never intended to construct this work upon this new and unexpected footing. Or he might have said, I will go on with this, but this is not the kind of extra work contemplated by the contract, and if I do it, I must be paid a quantum meruit for it. Or, for aught I know, for I wish to express no opinion on the subject, having gone on with it, he might now, if this is not extra work within the contract, have maintained a proceeding for remuneration for a quantum meruit for the extra work he so did …”.

Local examples

When Alfred McAlpine & Son constructed the Pretoria to Bronkhorstspruit Road back in the early 1970s, this contractor pursued its claim in the court on precisely this basis. McAlpine had undertaken to build a double freeway but, because of the many variations and alternations to the original agreement, McAlpine claimed that that agreement had fallen away and that a tacit agreement had been brought about by conduct. It claimed it was entitled to remuneration at a fair and reasonable rate for all the work done on a quantum meruit basis. McAlpine’s claims on this basis failed, in part, because throughout the operation of the contract it had abided the terms of the contract and, only when the contract was at an end, did it attempt to claim on the basis of the tacit agreement. Presumably McAlpine’s rates for this contract were uneconomic and it sought to avoid the contract and seek compensation through the common law route. As with unjust enrichment, this type of approach is unlikely to succeed where there is a contractual agreement in place between the parties; where rates or prices are agreed and where the parties by their conduct have abided the terms of the contract.

However, where incomplete performance has been rendered but the performance is such that the employer is able to make use of the incomplete performance, then it would clearly be inappropriate for the original rates or prices to be applied since such rates and prices would contemplate performance in accordance with the design and/or specification and, under these circumstances, the courts have regularly allowed compensation on a quantum meruit basis sometimes also referred to as “a reduced contract price”. See for example BK Tooling (Pty) Ltd v Scope Precision Engineering (Pty) Ltd (1979) (1) SA 391 (A), where the contractor produced some moulds for the employer which moulds were defective. Despite the defects, the employer was able and did make use of the moulds and the contractor claimed for payment. The employer resisted the claim on the basis that the work was defective but had to admit that it was making use of the work. In the circumstances the court allowed the claim on the basis of a reduced contract price and, whilst the principle applied was fair compensation for the work actually carried out, the court emphasised names such as quantum meruit and the language of enrichment liability was to be avoided.

As with all these types of cases, the facts of a particular situation will determine whether it will be possible to formulate a claim outside the contract and circumvent the typically wide wording of variation clauses in the modern standard forms of contract. As McAlpine found out it will also be necessary, in most instances, to demonstrate that the contractor raised some form of protest in this regard during the life of the contract and did not wait until the work was completed before complaining that the basis of remuneration was no longer contractually binding.

Chris Binnington is the Managing Director of Binnington Copeland & Associates (Pty) Ltd.

THE CIVIL ENGINEERING CONTRACTOR JUNE 2005