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CONSTRUCTION LAW UPDATE NO. 608

Can an Estimate be Binding?

Introduction

Price estimates are a common way for a contractor to attempt to ensure that there is some flexibility in relation to the actual contract price which will be charged once a binding contract is concluded. This is not always successful; the Courts have on occasions held that an "estimate" is contractually binding where the recipient of the estimate is likely to rely on an "estimate" containing a scope of works. In other words, an estimate can be treated like a tender price – as an offer capable of being accepted to create a contract between the parties, rather than as a rough guide only.

A recent South Australian Supreme Court decision illustrates the difficulties that may face parties who rely on an estimate but fail to make sure that the estimate is incorporated into a binding contract.

On 11 July 2006 the Supreme Court handed down its decision in Kyren Pty Ltd v Built Projects Pty Ltd [2006] SASC 204. Built Projects Pty Ltd, the contractor, sued Kyren Pty Ltd for the unpaid balance of invoices in relation to the renovation of a 10-storey apartment block. Built Projects had, during negotiations for the contract, faxed to Kyren a document containing, in several place, the term "estimate". The document set out detailed pricings, including quantities of materials and labour. Built Projects was to be paid on the basis of a 20% mark up to the costs of labour and materials in completing the works.

The document concluded "As agreed we can either purchase the materials on your behalf or Ceilings 2000 can supply but our fee percentage will apply". The final figure stated on the document was a grand total for all of the estimated works. Kyren argued at the trial and on appeal that despite the fact the fax contained the term "estimate" it was in fact a fixed quote which was binding.

In consequence of Built Project's failure to finish all the works set out in the estimate, Kyren said it could set off against amounts claimed by Built Projects the cost of completing the works.

Kyren's arguments

Kyren put forward four arguments in support of its submission that the fax amounted to a fixed price, despite the use of the word "estimate":

The decision should be made on an objective assessment, that is, by deciding what a reasonable person faced with such a fax would understand it to mean;
The fax was very detailed and precise. It set out the exact nature of the materials, detailed prices per square metre and was signed by both parties;
The work required the approval of other parties and therefore it was important for the figure to be a fixed quote rather than an estimate;
The trial judge should not have made the finding that as Built Projects had experience in the building trade it was "inherently implausible" that it would permit itself to be locked into a fixed figure for the works.

The Court's decision

The Supreme Court held that the price contained in the fax was not binding. The Court said there was no reason not to give the word "estimate" contained in the fax its ordinary meaning. Also, a reasonable person in the position of Kyren would have interpreted the offer as being an estimate rather than a fixed price. The level of detail contained in the fax did not mean that it could not be an estimate. The evidence given at the trial on behalf of Built Projects was that the detail was given as a matter of good practice and to allow Kyren to know what they were "going to be up for." The Court held that this was consistent with the fax being an estimate only.

The Court also found significant the fact that Kyren had in fact paid Built Projects about 4% above the sum named in the fax, which indicated that Kyren had accepted that the fax was not a fixed price quotation.

The Court made the following general observations:

A fixed quote for certain work to be performed at a certain price is a binding contract for that amount for the completion of the entire job.
An estimate is "just that" – an estimate of the cost of a particular job to take into account the contingencies of the building trade.
An estimate allows some flexibility as to the amount which will subsequently be charged.

It is surprising that the decision contains no reference to the longstanding authority of Croshaw v Pritchard where the builder wrote: "Estimate. Our estimate to carry out the sundry alterations according to the drawings and specification, amounts to the sum of ₤1,230.0.0d." and, on acceptance of the estimate by the owner, was found to have entered into a binding contract. A detailed analysis of the Kyren decision appears on our website.

Conclusion

The language used by the parties when giving "estimates" is important, but not entirely conclusive. Use of the term "estimate" will strongly suggest that the parties in fact intended it to be a mere estimate as opposed to a fixed quotation. Even a very detailed set of prices can amount to an estimate if properly expressed to be an estimate. However, the conduct of the parties is also taken into consideration.

Labelling a document an "estimate" will be compelling (although not conclusive). If a price given by a contractor is in fact intended to be an estimate this must be made clear on the face of the document, preferably also with words to the effect: "This price is an estimate only and is subject to change". There should be no ambiguity in the document. All references to price throughout the document (and any subsequent documents) must be entirely consistent with it being an estimate. If a price is given verbally, it must be clearly stated that the price is an estimate and is subject to change. If possible, notes should be made of any such conversation shortly after it takes place, including a reference to the exact terms used by the parties.

A contractor must always bear in mind that even if a price is held to be an estimate, the contractor may in some limited circumstances still be liable if the estimate is inaccurate and the costs considerably exceed the amount estimated. A contractor may be liable in misrepresentation, if the estimate given was (deliberately or inadvertently) false or misleading, or if there was no reasonable basis upon which the estimate was based. The contractor may be liable in negligence if the estimate was negligently given.

Contributor: Kerry Colmer

Kerry is Special Counsel at Fenwick Elliott Grace. Her practice includes construction and engineering work as well as general commercial dispute resolution. She is a highly experienced practitioner who has a reputation for getting results for her clients.

Contact Details

Kerry Colmer – Special Counsel

Ph. (08) 8110 8003

kerry.colmer@feg.com.au

Tom Grace – Partner

Ph. (08) 8110 8004

tom.grace@feg.com.au

Jeanie Elliott – Partner

Ph. (08) 8110 8006

jeanie.elliott@feg.com.au

August 2006

This publication is not legal advice. It is for general interest. You should not rely on it without obtaining legal advice.