Computer Law & Security Report (2005) 21, 46e50

TECHNOLOGY PROCUREMENT AND PRE-CONTRACT WORKING

Liability for pre-contract working e Balancingthe risks in technology procurements

Justin Harrington

Technology Law Group, Field Fisher Waterhouse, UK

Abstract Pre-contract working is commonplace in large scale technologyprocurements since the parties assume that potentially it may benefit (or certainlyis unlikely to harm) either side. On the one hand, the customer perceives a benefitbecause pre-contract working is likely to ensure that milestones are met once thecontract is signed and customers assume that a supplier who has been activelyinvolved in its business before contract signature is likely to have a betterunderstanding of its business. For a supplier too there are benefits; it obtainsgreater familiarity with the customer and the key personnel involved. It also meansthat the supplier may have the ‘‘inside track’’ in respect of any competitiveprocurement exercise that the customer may wish to hold. However, there are alsopotential risks to this approach for both parties. While pre-contract working mayalso give rise to risks for a public authority under applicable procurementlegislation, the focus of this article is the risk of uncertainty facing both partiesarising from the ability of the supplier to claim a quantum meruit for workcompleted.ª 2005 Field Fisher Waterhouse. Published by Elsevier Ltd. All rights reserved.

Problems typically arise where the customerhas carried out a procurement exercise, made itsrequirements clear and lined up a preferred bid-der.1 The parties are certain that they are close toresolving those open issues that remain and thata contract will be signed shortly. In anticipation of

1 Of course, this is also an issue for a supplier who is tenderingfor a contract and who has lined up a subcontractor. See forexample the Countrywide case referred to below.

0267-3649/$ - see front matter ª 2005 Field Fisher Waterhouse. Pudoi:10.1016/j.clsr.2004.11.012

signing a contract, the supplier (possibly encour-aged by the customer) starts work. In some casesthe work carried out prior to and in anticipation ofcontract signature may be substantial in value; byway of example, in Regalian Properties v. LondonDocklands Development,2 the fees incurred by theclaimant were in excess of £2.5 million. If a finalcontract is signed, the work will be subsumed into

2 [1995] 1 WLR 212.

blished by Elsevier Ltd. All rights reserved.

Technology procurement and pre-contract working 47

the fees payable under that contract. But whathappens should a contract not be concluded?

As noted already, this is an issue of concern forboth customer and supplier. In the event a finalcontract is not awarded, will the customer beliable to the supplier for the work that has alreadybeen commenced by the supplier? In what circum-stances will the supplier be able to successfullymake such a claim?

A. Is there a contract in place?

An obvious starting point is to consider whetherthere is a contract in place for the provision of therelevant hardware or services. Typically, this maybe recorded in a letter of intent or memorandumof understanding or alternatively there could be anoral agreement.3 It may be arguable on the factsthat there is offer and acceptance, considerationand an intention to create legal relations. How-ever, an essential requirement for a binding con-tract may be missing. Negotiations or any recordedletter of intent may be ‘‘subject to contract’’ orelse there may be substantial uncertainty as to theessential terms that apply, such that it is notpossible to identify the existence of a contract.

This was the case in British Steel Corporation v.Cleveland Bridge and Engineering Co.4 While thatcase was concerned with the heavy engineeringsector, the factual matrix echoes circumstancesfrequently encountered in the context of negotia-tions for the supply of information technologyservices or hardware. Each party tried to obtainthe other’s agreement to its standard conditions ofcontract, but each party objected strongly withthe result that it could not be said that the partiesreached agreement. Nonetheless, work proceededon the basis that a contract would soon be agreedand, perhaps unsurprisingly, the issue of paymentfor that work subsequently became the subject ofa claim for a quantum meruit.

1. Where there is no contract inplace L quantum meruit claims

Where there is no contract, another alternative isto look at what some judges have called ‘‘impliedcontract’’ or ‘‘quasi contract’’.5 In William Lacey

3 For example an oral agreement was pleaded in Yule v. LittleBird e an unreported decision of Buckley J of 5th April 2001.4 [1984] 1 All ER 504.5 For example see Goff J in British Steel above: ‘‘BSC’s

primary contention was that no binding contract was everentered into and that they were entitled to be paid a reasonablesum for the nodes on a quantum meruit, a claim sounding not incontract but in quasi contract’’.

v. Davis,6 Mr Justice Barry, discounting the argu-ment of the defendants to the effect that thereought to be a contract before there could be anyliability, commented:

‘‘.in its early history, it was no doubt a genuineaction in contract, based upon a real promise topay, although the promise had not been agreed.Subsequent developments have however consider-ably widened the scope of this form of action andin many cases the action is now founded upon whatis known as quasi-contract, similar in some ways tothe action for money had and received.’’

There is growing acceptance that this is now tobe viewed as an action in restitution for a quantummeruit.7 Customers can take comfort, but suppli-ers should note with caution, that the casesemphasise that such a claim will succeed only in‘‘exceptional circumstances’’. As Nicholas StraussQC sitting as a deputy judge stated in Countrywidev. ICL Pathway8:

‘‘There is no doubt that in most cases a person whocarries out work in the hope of obtaining a con-tract, for example a builder who prepares anestimate, cannot claim the cost of doing so. Ingeneral, parties are free to withdraw from nego-tiations at anytime before a contract is enteredinto for good or bad reasons or for none at all,without incurring liability. If it were otherwise,persons seeking quotes for work might routinelyfind themselves liable for expenses of severaldisappointed bidders.’’

The sorts of circumstances that will be excep-tional enough to justify a quantum meruit claimare briefly discussed below. But it is worth notingthat this area is made all the more difficult due toconflicting case law; it is extremely difficult todiscern any principles of general application savefor the classic restitutionary requirements ofbenefit and unconscionability. As Strauss QC wenton to state in Countrywide:

‘‘I have found it impossible to formulate a cleargeneral principle which satisfactorily governs thedifferent factual situations which have arisen, letalone those which could easily arise in othercases’’.

6 [1957] 2 All ER 712.7 Most commentators regard the quantum meruit claim to be

a species of unjust enrichment. But see the comments ofBuckley J in Yule (see footnote 3) where separate considerationwas given to quantum meruit and unjust enrichment.8 Unreported decision of 21st October 1999. See [2000] CLC

324 for a summary.

48 J. Harrington

2. Requirements for a restitutionary claim

A restitutionary claim for aquantummeruitwill seekevidence of unjust (or unconscionable) enrichment(or theunjustorunconscionable receiptofabenefit)by the defendant at the expense of the claimant.

B. Benefit

In particular, what may constitute a benefit or anenrichment has been the subject of debate. Thereis unlikely to be a difficulty in concluding thata defendant has gained a benefit if he acceptedcomputer hardware or software delivered to himat his request. Thus in British Steel Corporation9

when negotiations broke down, Goff J held thatthe claimants in that case were entitled toa quantum meruit payment for the 137 cast-steelnodes which had been delivered by them to thedefendants’ specifications. In part, this was be-cause the nodes had been completed by theclaimants at the request of the defendants.

1. Are services different?

For some time there has been additional uncertain-ty as to whether the provision of services couldamount to a benefit unless those services have beenrequested by the defendant.10 Thus in BrewerStreet Investments Limited v. Barclays Wool &Co Ltd.11 the parties were negotiating ‘‘subject tocontract’’ a lease to be granted to the defendants.The plaintiffs agreed to make alterations at thedefendants’ request but negotiations broke downand no contract was signed. In the Court of Appeal,Denning LJ (with whom one of the other judgesappeared to agree) held that the defendants hadbeen enriched by the performance of services (eventhough they never actually took possession of thepremises) by the plaintiffs at the defendants’ re-quest and should therefore pay a quantum meruit.

Certainly a request for services by the defendantis a common ingredient inmany of the cases relatingto the provision of services, but its necessity hasrecently been questioned by commentators.12

While it is true that historically services have beenperceived differently, the law appears to have now

9 [1984] 1 All ER 504.10 Or else been the subject of an ‘‘implied request’’ as inMarston Construction v. Kigass Limited.11 [1954] 1QB 428.12 See Paul Key ‘‘Detrimental Reliance in Anticipation ofa Contract’’ III LQR 576 who argues that it is not essential andthat this requirement should generally be viewed as part of thequestion of unconscionability.

moved on. As a result, in Marston Construction v.Kigass Limited,13 Mr Justice Bowsher was able tocomment:

‘‘When considering benefit, a distinction has to bemade between the delivery of money and goods onthe one hand and the provision of services on theother hand.. There is however some authoritythat treats a service as beneficial where it resultsin an ‘‘incontrovertible benefit’’ to the defen-dant... Goff and Jones state that an incontrovert-ible benefit is established where the defendant hasmade an ‘‘immediate and realisable financial gainor has been saved an expense which he otherwisewould have incurred.’’

In that case, the obtaining of consents for theconstruction of a factory, the production of de-signs and working drawings together with animplied licence to build the factory in accordancewith those drawings (though the licence is limitedto having the factory built by the claimants in thatcase) were held to have conferred a benefit. Whilethis was not a benefit that had been realised at thetime of the hearing, it was a benefit capable ofrealisation by the defendant.

It is worth noting that this broad view of benefitcontrasts with the approach of Mr Justice Rattee inRegalian Plc v. London Docklands DevelopmentCorporation14 where he held that payments madeby the claimants to third parties, the production ofdesigns and the obtaining of planning permissionfor a proposed property development, were madein order to obtain the contract and did not result inany direct or indirect benefit to the defendant. Inthis respect Rattee J, in contrast to most academicwriters, sought a positive accretion to the defend-ant’s wealth, even though (arguably) the defen-dant was ultimately saved the expense of payingthose third parties.

2. Is the purported benefit something thatwould normally have been paid for?

In considering whether a benefit has accrued, thecases indicate that a key issue will be to distinguishthe tendering costs of the supplier (and other coststhat the defendant would not normally expect topay for) from any other benefit afforded to thedefendant. In this respect, the supplier’s tenderingcosts are unlikely to amount to a benefit, but otherwork may constitute a benefit, particularly if it iswork that would normally be paid for. In this lastrespect, the following are worthy of note.

13 15 Con LR 116.14 [1995] 1 WLR 212.

Technology procurement and pre-contract working 49

(i) In William Lacey v. Davis the defendant hadbought a house which he planned to rebuild.Having obtained a number of quotes, theclaimants were informed by the defendant thatthey would be awarded the contract. Theysubsequently carried out work which wouldenable the defendant to reclaim costs fromthe War Damage Commission. This work wasnothing to do with their original tender. Whenthe defendants informed the claimants thatthey would use another firm, the claimantssought recovery of their costs. Barry J held thatthe claimants were entitled to recover ona quantum meruit for their advice because ‘‘itfell outside the normal work which a builder bycustom and usage normally perform gratuitous-ly when invited to tender for the construction ofa building’’ and since the defendants hadobtained a real benefit. The claimant’s workhad been instrumental in obtaining the approvalof the reconstruction plans and the grant ofa licence to build as well as a much higher‘‘permissible amount’’ for the war damageclaim. Normally the defendant would have hadto have paid for these services.

(ii) A similar analysis was carried out in Country-wide where the claimants sought payment ofa quantum meruit for their communicationsand public relations work for a consortium runby ICL in respect of an IT system for theBenefits Agency. ICL was awarded the con-tract, but Countrywide was subsequently notappointed as subcontractor for the communi-cations and public relations work. The judgefound that ICL had obtained a benefit sinceCountrywide assisted ICL to formulate thecorrect approach to communications and pub-lic relations work and to provide an estimate ofcosts for which allowance would be made inICL’s final tender. The advice was of benefit toICL because ICL would have had to have paidfor these services in the absence of theassurance they had given to Countrywide.

C. Unconscionability/unjustness.

It has been suggested that the element of uncon-scionability is likely to take one of three forms15:

(a) the contradiction of a promise or representa-tion;

15 Carter in ‘‘Essays on Restitution’’ pp. 211e12. In other cases(e.g. Yule, see footnote 3) the judge found an ‘‘impliedrequest’’.

(b) the failure to disabuse the plaintiff of a mistakeor false expectation; or

(c) the attempt to retain without payment a ben-efit conferred in circumstances where thedefendant knew that there was no intentionto confer a gift.

Essentially, each of these appears to require anassumption as to payment and some unconsciona-ble denial of this assumption by the defendant. Inmany ways, unconscionability is ground covered byestoppel, an area that the Australian courts areexpanding.16 In England and Wales by contrast thishas hitherto been limited by the sword/shield ruleset out in Combe v. Combe.17 As a consequencethe normal action in the United Kingdom is fora quantum meruit.

But there is a further issue here; establishingwhether unconscionable behaviour has occurredmay be difficult in light of case law. While a numberof the cases (such as British Steel and Regalian)involve no substantive discussion of the question ofunconscionability, others analyse the issue in depth.Thus in Lacey the requirement for unjustness orunconscionability was found in the assurance that theplaintiffs would be given the contract to reconstructthe building. It was unjust or unconscionable towithhold payment once the assurance was broken.Similarly in Countrywide, the claimant incurred feeson the basis that, if ICL were successful in its tender,ICL would negotiate a contract with Countrywide. Inthis last respect, Countrywide were given repeatedverbal assurances that ‘‘Countrywide was on’’, thatis, they would be part of ICL’s consortium.

It is worth noting that a number of factorsmay becrucial for a finding of unconscionable behaviour.

(i) In Countrywide, the judge noted that hewould have held against Countrywide if therewas evidence that the reason why Countrywidedid not get the work was that its work wasdefective. In that sense, defective workman-ship would have gone to the issue of benefit,but would also affect the issue of unconscio-nability; if there was a rational reason (notaffecting the conscience of the defendant) forchoosing a third party supplier, there would beno grounds for a restitutionary claim.

(ii) Likewise, whether there can be said to be anassumption of risk outside that originallyundertaken by the claimant at the outsetmay be material. Again, in Countrywide, the

16 For example Waltons Stores (Interstate) Ltd v. Maher(1988) 164 CLR 387.17 [1951] 2KB 215.

50 J. Harrington

judge commented that, in performing theservices, Countrywide did not take the riskof a change of personnel at ICL deciding thatits reputation was not good enough for the job.The question of Countrywide’s suitability tobe involved in the ICL consortium had beenagreed at the outset; the only risk Country-wide took related to whether the ICL consor-tium was awarded the main contract. Bycontrast, in Regalian, Rattee J believed thatthe deliberate use of the words ‘‘subject tocontract’’ meant that, on the facts of thatcase, each party assumed any costs incurredwould be at its own risk; on that basis therecould not be any unconscionable behaviour.

D. Lessons learnt

In many ways, the issue of quantum meruit pay-ments for pre-contract wording could be resolvedby having a general duty of good faith negotiationsin English law. In the absence of such a duty,freedom of contract means that claims such asthese are always going to be problematic. Thissection seeks to wind-up by considering some ofthe practical lessons to be learnt from the case lawdiscussed above.

1. For suppliers

Avoid beginning work without a written agree-ment. Make sure such an agreement is not ex-pressly or impliedly ‘‘subject to contract’’, issufficiently precise and deals with payment ofyour fees with regard to work carried out beforeany anticipated contract is entered into. Keepdetailed and separate records of your tenderingcosts and any other costs involved in providinga pre-contract benefit. If you rely on a statementor assurance from the customer, keep contempo-raneous notes e you may need them in court!

2. For customers (and suppliers in respectof their subcontractors)

If you wish to ensure that you are not liable forpre-contract expenses, make sure any letter ofintent and all negotiations are expressly ‘‘subjectto contract’’ and that there is absolute clarity as towhere the risk for pre-contract liabilities rest. Donot encourage suppliers to run up costs unrelatedto their tender. Finally, if you must give assurancesto suppliers, honour those assurance and makesure you document precisely what was said.

Justin Harrington, Partner, Technology Law Group, Field FisherWaterhouse.