Two unhappy customers

The subcontractor's tale

We are a mechanical subcontractor. We started work on design-and-build doctor's surgery with a main contractor and an electrical contractor. The value of the works was more that £100,000. Over the design period of about two years, the design changed and so had to be repriced on several occasions. No fee was ever agreed because the work was to lead on to the construction of the project; therefore the cost would be included in the overheads. We have been told verbally on several occasions that we will get this project. The main contractor has now sent the M&E out to competitive tender and not included us on the list. This is because on the last project our "as built" drawings were submitted late. Do we have a claim for the design/pricing work that we have carried out? And do we have a claim for lost profit because we will not be working on this project?

Claim for loss of profit

Julian Holloway, Berwin Leighton Paisner

The claim for the design work depends on whether you have a design contract with the main contractor as this may set out how abortive design and pricing work is to be dealt with. Assuming, however, either there is no contract, or if there is, it does not set a fixed price for work, you may still be able to make a claim. If there is a contract that does not specify the amount to be paid for the work, then the main contractor is obliged to pay you a reasonable amount for what you've done. If there is no contract at all, you may be entitled to be paid for the work you've carried out based on the value of the benefit received by the main contractor for the work. This basis will not always be the same as a "reasonable" amount.

The ability to claim for loss of profit depends again on whether the design contract included the promise that you would obtain the main works. For example, if you entered into the design contract based on such a promise, it's likely that this contract would include such a term. However, if the promises came after you entered into the design contract, they're unlikely to form part of your contract.

Alternatively, if the promise was merely to include you on the tender list, and it formed part of your design contract, you may still be able to claim. However, in this case there is, of course, no guarantee that you'd have been awarded the subcontract, as the employer would have made the final decision. But you lost the chance to be included; accordingly, the court would assess the likelihood of your being awarded the subcontract and would award damages based on the percentage chance you had of obtaining it.

Collect as much evidence as you can

Rudi Klein, chief executive of the Specialist Engineering Contractors Group

A judge in a recent case made the following "helpful" statement: "The identification of a unifying principle laying down when the court will impose an obligation to pay for work done in anticipation of a contract which does not materialise is not straightforward."

From the information provided the expectation was that the mechanical works were to be let to the subcontractor. This is crucial. The subcontractor will not have a claim if the main contractor is able to demonstrate that the design and pricing work was carried out speculatively (that is, in the hope that he would be in "pole" position to get the contract). It will be important for the subcontractor to collect the evidence:

• When were the available assurances given?
• Who was present?
• What was actually said?

The upshot is that the main contractor has obtained a considerable amount of work without paying for it. In these circumstances, a court is likely to admit a claim from the subcontractor on the basis that the main contractor has been unjustly enriched.

A similar problem arose in the case of Marston Construction vs Kigass. The contractor had carried out some preparatory work in the expectation that it would receive a contract for rebuilding a factory that had been destroyed by fire. The court held that Marston were entitled to be paid for the preparatory works.

Under these circumstances, according to Keating on Building Contracts, the "contractor should be paid at a fair commercial rate for the work done".

However, a loss of profit claim is unlikely to succeed since the contract for carrying out the mechanical works was not, in fact, concluded.

An alternative, and simpler, approach is to argue that there was a contract for the design and pricing work, and there was a clear understanding that such work was ultimately to be paid for. Since a fee was not agreed, it would be possible to call in the aid of the Supply of Goods and Services Act 1982. This implies a term into the contract that the subcontractor should be paid a reasonable sum for the work.

The client's tale

We are the client for a £150,000 project. The contract administrator, which is a QS and chartered surveyor, issued certificates for work that complied with neither the Building Regulations nor the contract specification. Despite this, practical completion was certified in December 2003. Almost all of the defects are still visible, but the contract administrator is claiming that it was not its responsibility to check the work and it is not liable for loss.

Appeal to your builder's better nature

Ann Minogue, partner in Linklaters

Somehow, whenever things go wrong on a construction project, nobody is responsible. Plainly, if the defects are visible to you, they should also have been visible to the contract administrator and it should not have issued a practical completion certificate. It cannot accept a fee for carrying out a service that includes administering the contract without taking some responsibility for what it does.

But unless your builder has gone bust, your efforts would be best directed towards asking it to come back and put right the defects, rather than engaging in endless correspondence with the contract administrator and its insurers. If the builder is a good, conscientious local firm, it may well be prepared to do so, even though you are presumably no longer holding any retention or other money that is due to it. Perhaps you can offer some further work as an added inducement?

You should ask your contract administrator to add its encouragement to get the defects remedied since presumably it recommended the builder in the first place.

Unless the defects render the works unusable - and by the sound of things they do not - do not even think about legal proceedings for a job of this size.

What counts as reasonable care?

Rachel Barnes, partner in Beale & Co

The contract administrator's duty is governed by its contract of engagement, the terms of which are not stated. However, having regard to its functions under the building contract, it seems unlikely that the contract administrator could realistically claim that it had no duty to check the work.

One of the contract administrator's functions is to certify progress payments as amounts due to the contractor in respect of the value of the works properly executed. Plainly the contract administrator has to form a view on whether work that it is certifying for payment has been properly executed, and the employer is likely to rely on the contract administrator to do this.

This does not mean that the contract administrator will be automatically liable to the employer for any loss that the employer incurs as a result of the certification of defective work. The contract administrator's duty would normally be to exercise reasonable skill and care. The nature of the defects, the extent to which they were visible and the contract administrator's professed expertise (in this case, that of a chartered surveyor) would be taken into account in determining whether it had performed to that standard.

In this particular case, it sounds as though the contract administrator should at least have queried whether work had been properly executed and if necessary advised the employer to obtain further advice.

Apply a bit of pressure

Andrew Hemsley, partner in Cyril Sweett

On the face of it, the contract administrator probably has a responsibility to check the works and could well be liable for the losses.

Having said this, presumably what you really want is to have the works done properly. It sounds as if the contract administrator has not yet certified that the defects have been completed, so your best chance of getting this achieved is to pressure it into making the contractor do the work.

You should fire off a letter to the contract administrator spelling out that you consider that it may have been negligent and that you hold it responsible for losses. The letter will need to refer to the appointment terms and the scope of the contract administrator's role under the contract, and say that you want the work completed and the defects corrected. You should ask the contract administrator to provide a timetable of what it is going to do to ensure that the contractor sorts out the defective work. You should also ask for confirmation that the contract administrator has put its professional indemnity insurers on notice.

That should stir things up and get some action …