Working for free can be avoided…sometimes!
A combination of custom and practice and enforceable disclaimers, along with the complexities of certain prospective projects, all conspire to lead to considerable work being done without hope of recovering the man-hours expended on bids. Why is this?
Firstly, tender costs will generally not be recoverable because invitations to tenders will typically be expressed to be ‘subject to contract’. As Mr Justice Ratee observed in Regalian Properties Limited London Docklands Development Corporation [1995] 1 WLR 212, this means that both parties are deemed to understand that “…pending the conclusion of a binding contract any cost incurred by him in preparation for the intended contract will be incurred at his own risk, in the sense that he will have no recompense for those costs if no contract results. In other words …by deliberate use of the words “subject to contract” with the admitted intention that they should have their usual effect, L.D.D.C. and Regalian each accepted that in the event of no contract being entered into any resultant loss should lie where it fell.”
Secondly, there is an expectation that tender preparation costs will always be met by recovery of overheads and profit (‘OHP’) on contracts which have come to fruition, and this was recognised by Mr Justice Barry in William Lacey (Hounslow) Limited v Davis [1957] 1 WLR 932, when he said that the contractor “…undertakes this work as a gamble, and its cost…he hopes will be met out of the profits of such contracts as are made as a result of tenders which prove to be successful.”
Lastly, even if a tender has been accepted, the parties are in negotiation prior to entry into any contract; as the House of Lords said in Walford v Miles [1992] 2 A.C. 128, the law does not recognise ‘an agreement to agree’, so without some form of protection, if negotiations break down then costs incurred in this period will generally still ‘lie where they fall’. Add to this such legal niceties required to create a contract like the ‘intention to create legal relations’ and ‘certainty of terms’, and the battle for recovery of such expenditure is all ‘uphill’!
As a result many simply sigh when their bid is unsuccessful and say ‘That’s just the way it is, you’ve got to incur these costs to be seen to be a player in the market’. Alternatively, others stick firmly to what (or who) they know rather than incurring the expense of bidding for more stretching projects. However, in straightened times with narrow margins, it may be worth challenging this fatalism, and remembering that the cost of speculative work is not always irrecoverable. There are a number of routes.
The Tender Contract
In principle, an invitation to tender is a unilateral offer to the prospective bidders, involving an implied promise that the tender will be conducted fairly. A prospective bidder’s involvement in the process in submitting a bid results in acceptance of that offer, and the creation of a ‘Tender Contract’. If the principles which underpin the fairness of the process are infringed, even by a procedural error, that is an actionable breach.
The classic case does not concern construction but illustrates the principle just as well. In Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 1 W.L.R. 1195 CA, the Council had invited the Club and others to submit tenders for a pleasure flight concession from Blackpool airport. The invitation to tender stated “The Council do not bind themselves to accept all or any part of any tender. No tender which is received after the last date and time specified shall be admitted for consideration”, and the submission deadline was 12 noon on 17 March 1983. The Club posted their tender at 11am on that day in the Town Hall post box which was cleared each day at noon. However, the Council failed to do that on 17 March and it did not open the Club’s tender until 18 March, and dismissed it as late. The Club’s bid to provide the service was the most comprehensive of the three since it covered two types of aircraft (so would give greatest return for the Council), but the Council accepted Red Rose Helicopters’ bid instead. When their error was realised, the Council sought to re-run the procedure, but abandoned that when Red Rose Helicopters threatened to sue for breach of contract.
The Club sued, alleging that the Council impliedly warranted that if a tender was returned to the Town Hall before noon on 17 March 1983, it would be considered along with other tenders returned on time when the decision to grant the concession was made. The trial judge agreed, holding that an express request for a tender might in appropriate circumstances give rise to an implied obligation to perform the service of considering that tender. The Council’s appeal was also dismissed. The invitation to tender prescribed the procedure for the submission of tenders. The Club complied with those terms and they were entitled to have their tender considered. Because it was not, the Club was entitled to damages.
The same principles were applied in J&A Developments Ltd v Edina Manufacturing Ltd [2006] NIQB 85 (QBD (Northern Ireland)). The National Joint Consultative Committee, a now defunct organisation consisting of the major professional bodies involved with construction, produced codes of procedure, including the Code of Procedure for single stage selective tendering 1996 (‘the Code’). Edina adopted the Code when inviting tenders from 6 shortlisted contractors for a workshop, offices and associated works near Lisburn. The Code included: “….good tendering procedure demands that a contractor's tender price should not be altered without justification.” and prohibited “…any practice which seeks to reduce any tender arbitrarily where the tender has been submitted in free competition and no modification to the specification, quantity or conditions under which the work is to be executed is to be made, or to reduce tenders…to a figure below the lowest tender.” J&A’s tender was the lowest. Edina’s architect separately invited each of the three lowest tenderers to reduce their tender price in a ‘Dutch Auction’. J&A offered to reduce its price on condition that the specification was reduced, but the second place bidder unconditionally agreed to reduce its price by £25,000 and was awarded the contract. J&A sought damages for breach of contract, on the basis that it had entered into an agreement, the effect of which was that the tendering procedure would conform to the principles of the Code. The NI High Court agreed; a binding undertaking or representation was given by Edina to J&A that the tendering procedure would be conducted in accordance with the principles of the Code - Edina had bound itself to accept either no tender at all or one at the price at which it was submitted, with a reduction occurring only in the circumstances contemplated by the Code. The ‘Dutch Auction’ tactics were a breach of contract, as was the award to the second lowest tenderer at his reduced price, so J&A could recover damages.
‘Going the extra mile’
There is a further category of cases where the contractor has ‘gone the extra mile’ without a contract, and a point is reached where the extent, duration and benefit of the work done result in an obligation to pay for it.
William Lacey (Hounslow) Ltd v Davis [1957] 1 W.L.R. 932 (QBD) is a classic example. In April 1951, Lacey had submitted a bid to reconstruct bomb-damaged premises, and were told that they were likely to get the contract to redevelop the premises with shop and office accommodation on the ground floor and residential flats above. However, funding was dependent on Davis’ ability to obtain extra compensation from the War Damage Commission. After tendering, Davis asked Lacey to furnish calculations for timber and steel requirements and revised estimates in respect of new specifications and plans. Lacey did this, then submitted yet further calculations to the Commission, and fielded the Commission’s queries. In June 1952, Davis’ surveyors wrote to Lacey saying they were hoping “to prepare contracts for the work really to commence,” so Lacey ordered the bricks required for the work. In July, 1952, Davis told Lacey that he proposed to employ another firm of builders; in fact, he’d sold the premises on.
Lacey sued. Mr Justice Barry held that there was an implied promise that Davis would pay a reasonable sum to Lacey for the whole of the services which were rendered. He decided Lacey’s work fell outside the type of work that any builder would be expected to do without charge when tendering: “I am, of course, fully aware that in different circumstances it might be held that work was done gratuitously merely in the hope that the building scheme would be carried out and that the person who did the work would obtain the contract. That, I am satisfied, is not the position here. In my judgment, the proper inference from the facts proved in this case is not that this work was done in the hope that this building might possibly be reconstructed and that the plaintiff company might obtain the contract, but that it was done under a mutual belief and understanding that this building was being reconstructed and that the plaintiff company was obtaining the contract.”
Similarly, in Marston Construction Co Ltd v Kigass Ltd (1990) 15 Con. L.R. 116, Kigass invited Marston to tender for the design and build contract for the construction of a new factory after the old one burned down. Kigass made clear to Marston that no contract would be awarded until Kigass had obtained insurance money to pay for the rebuilding, but that if the policy did respond, Marston would be awarded the contract and that the insurance company would pay. Marston incurred costs in respect of preparing the tender and performing additional preparatory works, including designs, working drawings and progress towards gaining consents, despite Kigass not giving any assurance that it would meet Marston’s costs before the contract was signed. The insurance money was not forthcoming and no contract was signed.
Marston sued. The court decided that as a result of the belief that Marston would have to commence preparatory works before the contract was signed, Kigass impliedly requested Marston to carry out the preparatory works. It was contemplated that the work would be paid for out of the contract sum. The works were a realisable benefit (if not a realised one) performed for the benefit of Kigass. In relation to both the implied request and a further express request to carry out design works, Marston could recover a reasonable sum where Kigass had obtained the benefit of the work.
Although these judgments arise from particular facts, this type of conduct on the part of employers creates obligations in what lawyers call ‘quasi-contract’, and yields an entitlement to payment on a quantum meruit (fair value) basis, because without it the employer has been ‘unjustly enriched’, so there must be ‘restitution’. This will apply even in the absence of an agreed price, a winning bid, letter of intent or Pre-Construction Services Agreement.
What’s it worth?
So what, in the context of these cases, does ‘damages’ mean? Where there has been a breach of a ‘Tender Contract’, and the contractor can satisfy the test of causation by proving that it would have been awarded the contract if the relevant procedure had been properly conducted, it can recover all its loss of profit. According to Harmon CFEM Facades (UK) Ltd v Corporate Officer of the House of Commons (1999) 67 Con. L.R. 1, recovery of profit in full can occur where the likelihood of winning the contract exceeds 90%.
This will be rare, because there is often uncertainty over which bidder would have won if the relevant procedure had been properly conducted. Here, the courts take the ‘loss of chance’ approach, so if the contractor can demonstrate that there was a ‘substantial chance’ of the contract being awarded to it, the court will award a proportion of the loss that would have been suffered to reflect that chance. For example, if the chance of being awarded the contract is assessed at 70 per cent, the contractor may recover 70 per cent of the loss of profit.
Determining profit is not a matter of simply looking at the OHP the contractor included in its tender. The aim is to award the contractor the profit (or a percentage of it) that would have resulted at the end of the job; the courts will take into account the uncertainties and risks of the construction industry. Indeed, in Harmon, by general agreement of the parties and the judge, Harmon’s projected profit figure was reduced by 50 per cent to reflect the fact that it was unlikely in practice to have realised its tender OHP in full. Any profit recovered will include the costs of preparing the tender, so those will not generally be recoverable as a separate head of loss.
Where a contractor has ‘gone the extra mile’, the quantum meruit damages will be the time spent carrying out the work, any materials expenditure, and a reasonable amount of profit. The importance of accurate records substantiating these losses cannot be underestimated if they are to be proven to the court’s satisfaction. In some cases, a different route to recovery could be to ascertain the open market cost of what the employer has gained i.e. the sum by which the employer has been unjustly enriched. Indeed, in Amey LG Limited v Cumbria County Council [2016] EWHC 2856, which concerned an allegation of ‘skimped performance’, the TCC recently adopted the restitutionary measure of loss, which supports this type of claim.
Errors in the procurement of Public projects may attract the above remedies, but there are other regulatory provisions to consider too. Most serious is Misfeasance in public office, in relation to publicly funded projects. This may apply alongside The Public Contracts Regulations 2015, but public procurement is a massive subject which will have to wait for another day.
What does this mean for you or your business?
I hope this romp through case law has given you a flavour, and while there are few hard and fast rules on this, perhaps now you’ll recognise an actionable instance of ‘taking the Michael’ when you see it. The ‘Tender contract’ cases demonstrate that contractors do have remedies where the procedure the employer says they will follow is not adhered to.
The ‘going the extra mile’ cases are potentially of comfort to anyone who undertakes speculative work in anticipation of being awarded a building contract or professional appointment, particularly where collateral objectives are at work e.g. to secure grant funding or an insurance pay out, planning consent or building control permissions.
It should be acknowledged that taking action to recover pre-contract costs could have a reputational impact – but so could taking no action despite your legitimate expectations being dashed. No-one likes being taken for a ride, and the only way to address sharp practice at the pre-contract stage is by holding others to account by bringing these types of claims.
What should you be doing now?
Recovery in cases like this will depend on accurate record keeping. As ever though, prevention is better than cure, so if work has to be done before a contract is finalised, do at least try to ensure you get a letter of intent, or better still agree a Pre-Construction Services Agreement for ‘pre-start’ work.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.