Quantum meruit and unjust enrichment in New Zealand

Andrew Skelton*

Quantum meruit means the “amount deserved” and refers to a claim for a reasonable sum for work performed. 1 A claim for a quantum meruit can arise either as a “contractual quantum meruit” or a “noncontractual quantum meruit”.

A contractual quantum meruit is where the parties have entered into an agreement to provide services but either no price is agreed for the services, or the parties agree that the service provider is to be paid a reasonable price for the services without stating what the price is. The service provider is entitled to reasonable remuneration for the work performed. This is an entitlement that arises under the contract.

A non-contractual quantum meruit arises by operation of law where work is performed for another and there is no contract or no enforceable contract. Noncontractual quantum meruit has been controversial both as to the legal basis for the remedy and valuation of the amount deserved.

In this article, I discuss one of the most common circumstances in which an entitlement to a noncontractual quantum meruit can arise. That is where work is undertaken pursuant to a request to perform work or a letter of intent in the expectation that the parties will ultimately enter into a contract, but no contract materialises (anticipated contracts which fail to materialise). 2 In particular, I focus on the recent decision of the High Court in Electrix v Fletcher Construction. 3

Unjust enrichment in New Zealand law

Many common law jurisdictions, in particular England and Australia, have recognised unjust enrichment as a unifying legal concept for a range of restitutionary remedies, including non-contractual quantum meruit. 4

In these jurisdictions, it is recognised that four questions should be considered:5

a. Has the defendant been enriched?

b. Was the enrichment gained at the expense of the claimant?

c. Was the enrichment at the expense of the claimant unjust?

d. Are there any defences available to the defendant?

These questions provide an analytical framework for application of the tests used to identify whether there has been an unjust enrichment at the expense of the claimant. One such test is “free acceptance” of work or services, for example, where a recipient of services knows that the services are not being provided gratuitously, but fails to take an opportunity to decline the services. 6

This is considered to operate as a test for “enrichment” because a reasonable recipient should have known that the person who rendered services expected to be paid for them but the recipient did not take the opportunity to reject the services. 7 It is also used as a test of “unjustness” because of the unconscionability of the recipient in not taking the opportunity to reject the services. 8

The New Zealand courts have generally refrained from recognising unjust enrichment as the unifying basis for restitutionary claims such as quantum meruit and adopting the analytical framework discussed above. 9 In many cases, the Court embarks on a survey of case law and academic commentary, attempting to distil the elements afresh. A recent example is the decision in Northlake Investments Limited v Wanaka Medical Centre Limited. 10 In that case, the Court identified nine factors which were considered to be relevant to establishing liability in “inconclusive negotiation” cases.

Several cases have acknowledged academic commentary to the effect that the purpose of the New Zealand law of restitution (and non-contractual quantum meruit) may not be to force the defendant to disgorge some underserved benefit, but to compensate the plaintiff fairly or restore the plaintiff’s position. Thus, it is suggested that establishing an enrichment or benefit to the defendant may not be necessary. 11

However, the law of unjust enrichment and the restitutionary remedies that come with it are not concerned with disgorgement of gains by defendants, nor with compensation for losses suffered by claimants. These are the functions of the law of contract and civil wrongs. Rather, the concern is with the reversal of transfers of benefits between plaintiffs and defendants. 12

The element of “benefit” can be difficult. But it is important not to focus only on residual objective benefit, in the sense of marketable residuum or end product. The recipient of pure services (such as a taxi ride) receives a benefit. And where a service produces an end product, it is the value of the work which is central to the claim for enrichment at the expense of the claimant not the realisable value of the end product. 13

As indicated by the various approaches taken in the New Zealand cases, the eschewing of the analytical framework has arguably resulted in uncertainty and a lack of coherence in New Zealand law as to the doctrinal basis for restitutionary remedies such as quantum meruit and therefore the elements that must be established by the plaintiff. The High Court of Australia in Mann recently confirmed the importance of the analytical framework to the development of the law: 14

Although, over time, novel categories of case may come to be recognised, or existing categories refined, that must occur in accordance with the common law’s ordinary process of incremental development: by analogy with decided cases, albeit that, within that process of development and refinement, the four questions [being the analytical framework] may serve to focus attention on the nature, availability and measure of restitutionary relief, and so assist in structuring understanding as to avoid the development of the law of unjust enrichment degenerating into an exercise in idiosyncratic discretion.

The Electrix case

The Electrix case arose out of the Christchurch Justice and Emergency Services Precinct project. Electrix was engaged by Fletcher Construction for the electrical services package and undertook the work on the basis of a series of letters of intent authorising work totalling $14,055,145 (GST excl).

Over the course of the works, Electrix issued 42 payment claims totalling approximately $28.9 million. Fletcher Construction paid Electrix $21.6 million overall, eventually stating that payments were “on account” pending cost substantiation.

Issues arose with regard to payment. Electrix claimed an additional $7 million plus interest from Fletcher Construction for the work undertaken. Fletcher Construction counterclaimed, saying it paid Electrix some $7 million too much, whether there was a contract or not.

The Court found that no contract had been formed between Electrix and Fletcher Construction. While the letters of intent provided evidence that the parties were working with the intention that there would be a contract, the parties did not intend to be immediately bound by essential terms at any point. Although they expected to reach agreement on the contract, they never did. 15

Availability of remedy

Palmer J reviewed the caselaw and academic commentary in relation to the New Zealand law of noncontractual quantum meruit. He found it unnecessary to utilise the analytical framework adopted in other common law jurisdictions, finding that: 16

The New Zealand law of non-contractual quantum meruit is not exclusively tethered to unjust enrichment, but there is reasonable coherence in what is required as a matter of practice.

The Court determined that the remedy was available because: there was no contract; and Fletcher Construction requested and freely accepted the services knowing Electrix expected to be reimbursed. 17

Doctrinal basis

The doctrinal basis for liability in Electrix is not clear. It is apparent that it is not unjust enrichment. Rather, the Court seems to accept the position of academic commentators that the New Zealand law of noncontractual quantum meruit is more concerned with compensating a plaintiff for services provided or restoring the plaintiff’s position.18

Notwithstanding this approach, the Court adopts, as elements of a non-contractual quantum meruit claim, a “request” for services and “free acceptance” of those services. As noted above, free acceptance is used as a test for “enrichment” and “unjustness”. A request for services has been adopted in some jurisdictions as a test of enrichment on the basis that, where a person requests and receives something a reasonable person would realise is not provided gratuitously, the recipient will be enriched by the receipt.19

Reliance on these tests for unjust enrichment, when the basis of the remedy is expressed to be compensation or restoration (rather than reversal of an enrichment), exposes the doctrinal quagmire that the New Zealand law of non-contractual quantum meruit finds itself in.

Quantum

Palmer J acknowledged the approach to valuation of a non-contractual quantum meruit in English law; being to identify the objective market price of the services and then allow for the defendant to prove that it did not value the benefit at all or as much (subjective devaluation).20 He then reverted to the position referred to above, that the New Zealand law of non-contractual quantum meruit does not necessarily require proof of a benefit to the defendant, and can extend to providing redress for those who have been “unjustly impoverished”.21

Ultimately, the approach taken to valuation was: 22

a Determine the cost of the services actually provided as the starting point, i.e., the actual cost to Electrix;

b Add a market-related profit margin; and

c If the defendant can show that the actual cost incurred was more than was reasonable for the work undertaken in the market conditions at the time, then the cost is reduced accordingly.

The Court stated that assessing the reasonable cost of the services to the supplier would uphold the plaintiff’s “reliance interest” in the anticipated relationship, which would provide the purchaser of the services with an incentive to conclude the contract. The Court noted that the purchaser is “able to avoid requesting, or to decline to accept the services, which is relevant to liability existing at all”. 23

The difficulty with this approach is that the “reliance interest” is typically recognised as an interest protected by damages for breach of contract rather than the law of non-contractual quantum meruit. 24

Further, there does not seem to be any reason why the provider of the services should not have as much incentive to conclude a contract as the purchaser. The provider puts itself at risk in continuing to provide the services without a contract, as it does not have the protection of the law of contract and damages. Having run that risk, it is difficult to see why the provider should recover any more than the market value of the benefit conferred on the recipient.

The Court also found that, because there was no contract and no agreement had been reached on the price of the services, it was difficult to put any weight on the evidence about budgets, expectations and negotiations between the parties. However, in Way v Latilla, 25 in the context of assessing the value of a non-contractual quantum meruit, the House of Lords held that the court may take into account negotiations between the parties and would be wrong in ignoring them altogether.

There was evidence that Electrix submitted a proposal at a price of approximately $17 million and the parties considered that a “value engineering” process could reduce that price. Subsequently, at least one of the letters of intent referred to a final forecast subcontract value of around $14 million for the electrical services, and letters of intent were issued authorising work to around that amount. There was also evidence of a concerted effort to negotiate a formal contract involving an exchange of agreements; negotiations went through stages of being about a lump sum, costs-plus and verified costs. In the circumstances, it seems that there may well have been sufficient evidence of bargaining between the parties for the Court to take into account in assessing the value of the quantum meruit.

With regard to potential deductions, the Court found that it would be surprising if some of the problems on the project were not caused by Electrix. 26 However, on the basis that there was insufficient evidence Electrix had caused “difficulties or inefficiencies greater than what would usually be expected in a large commercial project”, it was found that Electrix had not materially added to the cost of the project. 27

In the end, Electrix was awarded $7,473,207 (GST excl) which must be close to 100% of its actual costs plus profit.

Conclusion

The New Zealand courts continue to grapple with the theoretical underpinnings of non-contractual quantum meruit. The cases raise issues as to whether the remedy is about the reversal of benefits unjustly obtained or compensating the plaintiff for work done; and whether the actual cost of the services provided, rather than the market value of the services, is the starting point for valuation.

I propose that the way forward is not to cast noncontractual quantum meruit as a compensatory or restorative remedy, as if it is a remedy governed by the law of contract or promissory obligations. In my view, the New Zealand courts should acknowledge the doctrinal basis for the remedy as unjust enrichment, and utilise the analytical framework adopted by other common law jurisdictions, enabling a principled and coherent development of the New Zealand common law in this area.

* Andrew Skelton is a barrister based at Capital Chambers in Wellington. He has been a barrister since 2012 and specialises in civil litigation and arbitration.

REFERENCES

1 Mann v Paterson Constructions Pty Ltd [2019] HCA 32 (Mann) at [150]; Keating on Construction Contracts 11th Ed 2021 (Keating) at 4-031.

2 For example, Dickson Elliott Lonergan Limited v Plumbing World Limited [1988] 2 NZLR 608; Villages of New Zealand (Pakuranga) Limited v Ministry of Health (2006) 8 NZBLC 101,739 (HC) (Villages); Morning Star (St Lukes Garden Apartments) Limited v Canam Construction Limited CA90/05, 8 August 2006 (CA).

3 Electrix Limited v The Fletcher Construction Company Limited [2020] NZHC 918 (Electrix).

4 Goff & Jones, The Law of Unjust Enrichment, 9th Edition (2016) (Goff & Jones) at 1-06 -1-08; Mann at [199], [212]-[213].

5 Goff & Jones at 1-09; Keating at 4-032; Mann at [213].

6 Villages at [74]-[80].

7 Goff & Jones at 4-43 – 4-50, 17-03 – 17-18.

8 Goff & Jones at 4-43 – 4-50, 17-03 – 17-18; Edelman & Bant, Unjust Enrichment, 2nd Ed, 2016 (Edelman and Bant) at pp 74-75, 129-130, 323-328.

9 Electrix at [73]-[87]. Exceptions include Stiassny v Commissioner of Inland Revenue [2012] NZSC 106, [2013] 1 NZLR 453; Commissioner of Inland Revenue v Stiassny [2012] NZCA 93, [2013] 1 NZLR 140 at [92]-[94];

10 [2019] NZHC 3443.

11 Morning Star (St Lukes Garden Apartments) Ltd v Canam Construction Ltd CA 90/05, 8 August 2006 at [40]-[50]; Cassels v Body Corporate 86975 (2007) 8 NZCPR 740 at [41]-[43]; Electrix at [73]-[87], [96].

12 Goff & Jones at 1-17.

13 Skelton, Restitution and Contract, Mansfield Press, Oxford, 1998 at pp 8-14.

14 Mann at [213].

15 Electrix at [47]-[72].

16 Ibid at [85].

17 Ibid at [86].

18 Ibid at [85] and [96].

19 Edelman & Bant at pp 68-71.

20 Electrix at [90]; Benedetti v Sawiris [2013] UKSC 50; Mann at [208].

21 Electrix at [96].

22 Ibid at [98]-[99].

23 Ibid at [99].

24 Fuller & Perdue, “The Reliance Interest in Contract Damages” (1936-37) 46 Yale LJ 52 & 373.

25 Way v Latilla [1937] 3 All ER 759, at 764.

26 Electrix at [23]. 27Ibid at [121].

Andrew Skelton