Electrix Ltd v The Fletcher Construction Company
In this case, Fletcher’s engaged Electrix as an electrical subcontractor for works on the Christchurch Justice Precinct. The two parties never agreed to a formal contract, with Electrix proceeding with the works outlined in relevant letters of intent (LOIs). Additionally, the electrical works were impeded by poor site management and continual alterations to the scope and design of works. This required Electrix to uninstall and reinstall a significant portion of works, whilst constantly working under immense time pressure.
Intentions to later negotiate a contract were never realised, as relations between the two parties broke down and they failed to negotiate a contract price or method of valuation. At completion, Fletcher’s had issued nine LOIs, totalling approximately $14m, whilst Electrix had issued payment claims to the sum of $28m. Fletchers had paid $21.6m, leading to the proceeding.
Electrix argued that there was no contract, or agreed contract price, and brought a $7m quantum meruit claim. Fletcher’s counterclaimed under the Fair Trading Act for a refund of approximately $7m, for misrepresentation of contract price, arguing that the LOIs and associated documents constituted a contract that stated a contract price of approximately $14-16m.
The Court identified three primary issues:
- Was there a contract?
- Is there liability for the amount deserved?
- Do the counterclaims succeed?
The Court held that the LOIs, related documents and negotiations between the parties did not constitute a binding contract as it could not be inferred at any point that the parties had intended to agree to terms.
Following this, the court held that a quantum meruit claim should reflect the costs of the services provided, stating:
[That] those costs … should reflect the market value of the particular inputs used in the provision of those particular services at the relevant time and in the relevant circumstances. Together with the addition of a market-related profit margin, I consider that will reflect the reasonable costs of the services to the service supplier.
After considering expert evidence, the Court held that Fletcher’s must pay Electrix $7,473,207 (GST excl) plus 5% interest for reasonable costs incurred completing the works outlined in the LOIs.
Finally, the Court held that Fletcher’s counterclaim failed due to a lack of evidence and clarity in making out a genuine claim.
There are two key lessons from this case for contractors:
- It is essential to agree to a contract before the subcontract works begin, to ensure certainty of price and grant commercial certainty.
- Site management – particularly sequencing and spatial issues – is paramount in preventing a cost blowout as was seen in this case.