Occasionally in business, parties get caught in contractual no-man’s-land. They make an arrangement. One party carries out the work, expecting to be paid. The other party is late in paying, or neglects to pay at all, and then there’s no formal contract to point to as evidence of what was agreed. This tends to arise in one of three situations.
The first scenario is when you’re fully expecting the contract to materialise, but there’s an element of time pressure so you begin work before it’s finalised. Then it never gets finalised for one reason or another.
Or perhaps you have a signed engagement letter in place. But as the project evolves, the scope of your role develops and expands. If you don’t get around to updating the original engagement letter, then you’ve got no formal way of recording this new scope creep.
Another common scenario is agreeing a more casual working arrangement with a friend-of-a-friend or a business acquaintance. You might agree verbally to carry out some work, or confirm some of the details through an email exchange. But there’s never a formal contract signed between the parties.
These scenarios crop up fairly frequently in business.
What’s wrong with a non-contractual arrangement?
The problems arise when one party doesn’t stick to the arrangement. What happens if the other party doesn’t pay? Or they only pay a proportion of what you think you’re owed? It’s not technically a breach of contract if no formal contract exists. But if you’re the party that performed the service, you’ll rightly feel aggrieved if you’re not paid for it.
The fallback position – payment of a “reasonable” sum
Well, there is a legal doctrine that helps you out here. It’s called “quantum meruit”, which translates to mean “how much you deserve”. In other words, you should get paid an amount that the parties agree is reasonable for the work you carried out.
Sounds simple enough doesn’t it? But in reality, trying to agree what’s “reasonable” causes all sorts of knotty complications.
Problems with relying on quantum meruit
Without a formal contract in place, you can run into these issues:
You’re likely to end up under-paid
The amount you “deserve” is likely to be different in the eyes of the service provider and the person who received the service.
You’ll probably have to compromise to reach an agreement, which means taking a hit on what you think you’re owed. The law simply imposes an obligation on the party who made the request for goods or services to pay a reasonable sum for the work as has been done. That might be significantly different to the true value of your services or what you’d write into a contract as the price.
If you’ve got a really tricky opponent on the other side, they could even argue that they were under the impression that these services would be carried out free of charge. Or maybe they thought additional services were delivered as a goodwill gesture. In commercial dealings you’re likely to be able to rebut that position, but you can see how it can be difficult to achieve the full price for your services if the other side begins their negotiations at zero.
Uncertainty causes confusion
The terms of oral agreements or agreements made by email are often incomplete. This can make the relationship between the parties a little murky. Without a clear contract with defined terms, the details of the transaction remain uncertain.
Are you still entitled to interest on late payment? What happens in circumstances of late delivery or late performance? How long will this arrangement continue?
A formal contract gives you clarity on the key aspects of the commercial relationship between the parties.
Potential legal costs will be higher
The general rule with legal costs is that the more complicated the matter, the higher the costs. A debt claim for an unpaid invoice is relatively straightforward. A breach of contract claim requires a little more analysis and there’s greater scope to argue points of contention with the other side.
But a quantum meruit claim contains a much broader scope of uncertainty. If you want to bring a claim, you’ll have to establish how the alleged contract was formed and how it was allegedly breached. And that’s before you make submissions about how much is owed in terms of a “reasonable sum.” It’s a much more complicated and involved claim, with higher legal costs to reflect that.
Tips to avoid the quantum meruit quagmire
It’s always best practice to have a written contract in place. A professionally drafted contract is your best chance of covering all bases.
In circumstances where you’re operating under engagement letters, make sure you issue new letters with updated terms if your role expands or changes. This keeps everything up-to-date and avoids any confusion about what you’re owed if you carry out work that’s additional to what was originally envisaged.
If you don’t want to look overly formal, you could simply send an order confirmation with the key terms you’ve agreed (payment, date of performance / delivery) and your standard terms and conditions on the back.
If you’d like any help with drafting contracts or standard terms & conditions, please do get in touch. We’d be delighted to help!