Payment for preparatory works done before contract

It is quite common for contractors to start work even without signing a contract beforehand. Sometimes, these are actual works, but other times, they are preparatory works. For actual works, even if the contract is not signed, as long as those works are instructed by the client and/or are for the benefit of the client, the law seems clear that there can be a claim in restitution or quasi-contract.

But what about preparatory works?

In Regalian Properties plc v London Docklands Development Corporation, the contractor submitted a tender for a housing development project, and this tender was accepted “subject to contract”. However, the project was delayed and subsequently abandoned. Before the project was abandoned, there were various requests by the employer for new designs. The contractor sued for £3m paid to their professional consultants for undertaking the tender as well as the design. The claim was rejected by the court, on the basis that these are costs incurred for purposes of negotiations which cannot be recovered when no contract results. The use of the words “subject to contract” means that each party had to bear its own loss if there is no contract.

A similar situation occurred in Marston Construction Co Ltd v Kigass Ltd, but with different results. There, parties agreed that the contractor would be appointed to carry out a design and build contract to re-build a factory that was destroyed in a fire. The employer made it clear that the contract would only be awarded when insurance money is available. However, the insurance pay-out was insufficient, and as a result, the project was abandoned. The contractor sued successfully on the basis that there had been requests made for design work to be carried out, and there was an implied request to carry out preparatory work in general.

How to reconcile these two seemingly contradictory cases?

Perhaps it could be argued that the contractor in Regalian Properties plc was carrying out works with the clear understanding that a contract was not yet concluded, but the contractor in Marston Construction Co Ltd was carrying out works on the understanding that the factory will be re-built and that the contract is as good as concluded provided the insurance moneys came through.

It is a fine distinction to be made, and no doubt the factual matrix of every case will add to the complications. That is simply par for the course where construction disputes are concerned.

Kheng Hoe Advocates is a firm of lawyers based in Kuala Lumpur, and focused on construction disputes throughout Malaysia. For any queries, e-mail khenghoe@khenghoe.com.

Can you sue for losing a tender?

If a project is put out to tender, there is somewhat of an expectation that all tenderers would be afforded an equal opportunity. Unfortunately, a lot of tenders do not specify the criteria by which the tenders would be judged. On the contrary, many tenders would expressly specify that the employer is not obliged to accept the lowest priced tender, or any at all. When the employer has not even ruled out the possibility of a directly negotiated contract even whilst it puts out a tender for the job, frankly it reeks of bad faith on the part of the employer. This is different from a situation where the employer puts out a tender but all the tenderers were found to be unsuitable.

Can an unsuccessful contractor bring an action on the basis that the tender had not been fairly determined? And if one does so, what would be the likely outcome?

A lot of reported cases in this regard relates to public tenders from the UK, mainly because European laws require equal treatment of tenderers. Hence in Aquatron Marine v Strathclyde Fire Board, an unsuccessful tenderer was awarded £110,000 on the basis that the tender was decided based on criteria which were different from what was specified.

In so far as private tenders are concerned, there does not seem to be any reason why an unsuccessful contractor would not be able to maintain a similar action, provided there was some indication in the tender documents with regard to the criteria by which the tender would be determined. Alternatively, a contractor intending to bid on a tender may seek a clarification as to the criteria for award. Any such clarification afforded may give rise to a legitimate expectation on the part of the contractor, and estoppel may also arise to prevent the employer from resorting to a different criteria.

What would an unsuccessful contractor stand to gain?

If the criteria had been clear and the contractor would have been successful in the tender, then a claim for loss of profits may be sustainable. Otherwise, the contractor may claim for a loss of opportunity based on a discounted profit loss, or at the very least the costs incurred to participate in the tender. Depending on the complexity of the tender requirements, such costs may be significant.

For employers, it would be good practice once it has been determined that a tender is to be carried out to properly clarify the criteria for selection in order that the most-qualified and cost-effective tenderer gets awarded the project. The practice of calling for a tender but still retaining absolute discretion in whom to award the project may give rise to abuses and leakages which would ultimately not be to the employer’s own benefit.

Kheng Hoe Advocates is a Malaysian law firm based in Kuala Lumpur that specialises in construction disputes. We have handled cases involving projects in Kedah, Penang, Ipoh, Kuala Lumpur, Selangor, Melaka, Johor, Pahang, Terengganu and Sarawak. If you have any queries, contact us at khenghoe@khenghoe.com.