June 2013... Managing costs is a key element in the success of any project and often quotes are used to manage expectations and risk. Where the scope of work may not be entirely clear at the outset of a project, an estimate and an undertaking to keep a client updated as to progress and costs may be the next best alternative. However what is the position if a supplier fails to honour that promise to provide regular updates? A recent High Court case considered that question.
Mr McFarlane had engaged a Nelson company to undertake extensive repair and maintenance work on his 20 metre launch, the Akarua. Before delivering the launch to the company’s yard for the repair Mr McFarlane corresponded with one of the company’s operations managers who provided estimates for the various items of work, which totalled $12,537.36. Mr McFarlane indicated at that point that the estimates were more than he had expected and the operations manager responded that “… I will closely monitor the work and all materials used and keep you informed weekly of labour hours spent as the job progresses.” The company had therefore promised to provide Mr McFarlane with weekly updates on the project.
For the first three months of the project Mr McFarlane was provided with regular progress and cost updates. At the end of April the company issued invoices totalling $29,105.05. In June, Mr McFarlane paid $28,309.67 which he considered covered all the work that he had authorised including work done after 30 April. By that point the company had ceased providing Mr McFarlane with updates and when Mr McFarlane went to collect the launch about one month later he found invoices for a further $25,751.07 left on a coffee table in the launch.
Justice Miller decided that the promise to keep Mr McFarlane informed as to weekly labour hours and costs was a term of the contract. It was an express promise, made as part of the negotiations over price, and Mr McFarlane had been induced into entering the contract in reliance on that promise. The company’s failure to keep Mr McFarlane informed of the work denied him the right to put a stop to the work or to change the methodology or the scope of the work or to instead negotiate a fixed price.
In calculating the loss suffered by Mr McFarlane, Justice Miller determined that the loss was the difference between the value of time and materials actually expended by the repair company and the reasonable price for the work commissioned by Mr McFarlane. By the time the case reached the High Court the materials cost was not in dispute. Justice Miller reviewed expert evidence in respect of what was a reasonable price for each of the jobs on the Akarua and held that, in respect of the unpaid invoices (totalling approximately $26,000.00), the company was entitled to $9,093.52 for that work. The repair company’s failure to keep Mr McFarlane informed of the work was therefore a costly mistake.
While a cost estimate on its own may not be legally binding, a promise to keep a client informed as to the escalation of costs can be considered a term of the contract. Suppliers therefore need to honour such promises to make sure that they are able to recover all of the costs incurred.
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