Construction of contract – estimate not treated as creating fixed price

Kyren v Built Projects

Disputes often arise as to what sort of construction contract the parties have entered into. Normally, the analysis will lead to one of the following conclusions:

  • The parties have entered into a lump sum, or fixed price, contract for $x. Here the contractor is entitled to be paid $x for the contracted work, regardless of how much work he has to do to achieve that contracted result or what it costs the contractor. Or
  • The parties have entered into a rates contract, whereby the contractor is entitled to be paid at a preagreed rate of, say $y per metre for fencing between point A and point B. If it turns out that the contractor needs to erect 100 metres of fencing, he gets paid $100x, regardless of whether distance had been estimated pre-contract at 90 metres, and regardless of what it actually costs the contractor. These contracts are sometimes called measure and value contracts, or remeasurement contracts, or contracts with approximate quantities. Or
  • The parties enter into a cost contract, whereby the contract is entitled to be paid whatever it costs him to do the agreed work, usually plus an agreed fixed or percentage fee, regardless of what cost he (or the employer) might have estimated beforehand. They are sometimes called cost plus contracts, cost reimbursement contracts, prime cost contracts, or fee contracts.  Management contracts are often of this type. Or
  • The parties have not entered into a binding contract at all, or a contract with no agreement as to what is to be paid for the work.  In this case, the contractor is entitled to a quantum meruit, or reasonable sum, which, depending on the circumstances, might be assessed on the basis of cost, or on the basis of  the going rate for such work, or on the value of the work to the employer.  Or
  • The parties have not in truth agreed that the contractor should do the work at all, but rather that he will act as the employer’s agent in circumstance where it is the employer and not the contractor who has a direct contractual nexus with the trade contractors.Construction management agreements are such arrangements. Sometimes, arrangements will be made whereby the contractor will pay the trade contractors either before or after reimbursement by the employer; in such case he will be acting as an agent for payment [3].

In the first case, the lump sum is usually derived from the contractor’s estimate; the contractor estimates how much it is going to cost him to do the work, and from there the parties agree the lump sum. Croshaw v Pritchard [1] is the leading authority for the unremarkable proposition that the use of the word “estimate” does not preclude the conclusion that that estimate became a binding lump sum price; it has been conventionally cited in Australia [2] as well as elsewhere [4].

Against this background, Kyren Pty v Built Projects Ltd is a curious case. The work was done pursuant to an offer from the contractor sumarised by the Judge as follows:

  6    The facsimile from Mr Henderson to Mr Samaras dated 7 September 2005, read:

Dear Sir,

Further to our meeting yesterday I have listed below cost for your approval our estimate of material and labour to carry out the said works.

The document then set out the details of materials to be used, including the quantities, price per unit, and delivery costs; and gave a total cost for materials and delivery. It then set out the itemised and total labour that would be involved in the work, including the price per metre square. A summary of the amounts and total costs for balcony ceilings was given as “$76615-00”, including a reference to the agreed fee of 20 per cent. The facsimile continued

As agreed we can either purchase the materials on your behalf or Ceilings 2000 can supply but our fee percentage will apply to which way your [sic] go.

To confirm our agreement can you please Sign [sic] below and fax back ASAP…

Given the option presented here, one would expect that the analysis would start by asking if this was a construction contract at all, or merely an agency arrangement, as inCorradini. But the court appears not to have addressed that issue at all. Instead, it appears to have proceeded on the unspoken assumption that the contract was a construction contract (in the sense that the contractor was in the contractual chain) and concluded that the magistrate had been right to find for a cost plus arrangement, on the basis that

“this was a written contract and the word ‘estimate’ was used in its ordinary meaning and there is no reason to go behind that.”

This is a surprising conclusion for at least two reasons:

  • It  begs the question of whether, in this case as in the leading case of Croshaw, the estimate was by agreement then imported into the contract as fixed price. Indeed, it appears that Croshaw was not referred to the court.
  • Cost contracts require an express agreement for cost reimbursement, and there appears to have been none in this case.  This is in contrast to the position in agency arrangements, where the law will imply an agreement for reimbursement of sums paid by the agent on behalf of his principal in the execution of his authority [5].  Having found that there was no agreed lump sum, and in the absence of any other express arrangement, settled principle would lead to a quantum meruit, and the court gave no explanation as to why it found for a cost reimbursement arrangement.

It will be hard for parties in the future, if faced with this case, to avoid the suggestion that it was decided per incuriam, and is thus not to be followed in the future.

See also Newsletter and Full text of the case

[1]    (1899) 16 TLR 45

[2]    See eg, Building and Construction Contracts in Australia, Dorter & Sharkey at para 1.44, Halsbury’s Laws of Australia, para 65-455, Tapper v Buccaneer Pools & Spas Pty Ltd (1998) 19 SR (WA) 128

[3]    See Corradini v O’Brien Lovrinov Crafter [2000] SASC 224 at paragraph 91

[4]    See eg Building Contract Disputes: Practice and Precedents, Fenwick Elliott at para 1-30,  Hudson’s Building and Engineering Contracts at paragraph 1-022

[5]     See for example Chitty on Contracts para 32-156.

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