Courts Uphold Consultant’s Right to Payment where Anticipated Contract Fails to Materialise

United Kingdom

As Judge Bowsher QC noted in the case of VHE Construction plc -v- Alfred McAlpine Construction Limited (14th April 1997) it is remarkable how often uncertainty about the very existence of a contract, and its terms, is at the root of disputes in the construction industry.

Whatever the reasons for this, and the lack of adequate planning must be one, the result is that there is a considerable body of case law where the principles of contract formation are considered and the potential for payment on some form of quasi-contractual basis is assessed.

So what is the position where anticipated contracts do not materialise? It is not unusual for consultants to undertake some “preliminary” work before contract negotiations have even commenced, never mind been concluded. That work may be time consuming and of considerable value to a client. Is a consultant entitled to be paid for work executed or services provided in those circumstances?

As a starting point, there is no doubt that where a consultant carries out work in the mere hope of obtaining a contract, and the parties are free to withdraw from negotiations at any time before a contract is concluded, the costs associated with the work which has been carried out cannot generally be recovered. In those cases, it is implicit that the work is being carried out at the consultant’s own risk. Similarly, where a contractor is invited to tender for work, unless there is an express provision to the contrary, it is unlikely that it will be entitled to payment for that work if a contract subsequently fails to materialise.

One reason for these conclusions is that English law does not recognise any concept of good faith. It is also well established that an “agreement to agree” is generally unenforceable. However, there are some exceptional circumstances in which a party may be able to recover costs which it has incurred, not pursuant to an actual or implied contract, but because the Courts will impose an obligation to pay.

Most recently, this issue was considered in the case of Countrywide Communications Limited -v- ICL Pathway Limited and Another (21st October 1999). Whilst this is not a construction case, it does address some principles of general importance.

Countrywide is a public relations consultancy which carried out work for the First Defendant in relation to a project for the proposed implementation of a computer system for the payment of social security benefits. It is apparent from the judgment that the course of negotiations was relatively involved, but the precise details are of no immediate concern. In short, it transpired that Countrywide provided various services to the First Defendant with a view to being appointed on a long-term basis if the First Defendant’s own bid for work was successful. For reasons best known to the parties, Countrywide was not subsequently appointed.

The Judge held, on the facts, that there was no binding agreement to appoint Countrywide if the bid was successful. Indeed, all of the detailed terms and conditions remained to be negotiated. However, the Judge rejected the Defendant’s submission that all of the preliminary work Countryside had carried out was part of the ordinary process of bidding for work and that it was accordingly speculative and “entirely at its own risk”.

The Judge reached this conclusion by applying the principles of restitution. In summary, on the facts of this case the Court was prepared to impose an obligation to pay even if this had not the been clear intention of the parties. Whilst there is considerable academic debate, to which the Judge referred, on the circumstances in which claims of this kind can be advanced, certain principles are apparent. In particular, for a claim to succeed:

  • the Defendant must have been “enriched” by the services provided;

  • enrichment must have been at the Claimant’s expense;

  • retaining the benefit of the services provided without payment for them must be unjust; and

  • any defences would need to be taken into account.

This area of law is difficult and continuing to develop. Payment for services provided during the course of negotiations with a view to being appointed under a formal contract is by no means certain and there is no substitute for obtaining a binding contract with clearly defined rights. Nevertheless, it is quite clear that the Courts will, in some circumstances, impose an obligation to pay where a consultant would otherwise have provided a benefit for free in circumstances where refusal to pay is, quite simply, unjust.

If you have any further questions on this topic, please contact Andrew Rawstron at anr@cms-cmck.com or on +44 171 367 2519