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Let's take this COMMON scenario. A subcontractor has submitted a bid to a main contractor that is tendering for certain work. In the course of the negotiations over the main contract, the main contractor requests that the subcontractor provide drawings detailing certain design solutions. The subcontractor is assured that it is the preferred subcontractor and will get the job if the main contractor is successful. The subcontractor incurs substantial costs in supplying the drawings.

It is then informed that the main contractor has won its bid but has decided to go to another subcontractor. The aggrieved subcontractor demands recompense, but is told to take a run and jump. Is the subcontractor entitled to compensation? The straightforward answer is no, because the costs associated with bidding for a contract are not recoverable – the exercise is speculative. But the law is never straightforward.

In the case of William Lacy (Hounslow) Ltd vs Davis (1957), Davis purchased a war-damaged building in Fulham and wished to refurbish it with compensation from the War Damage Commission. Lacy, a builder, was told that it would get the job but was asked to do some preliminary work. First, it prepared further estimates and calculations following the refusal of a licence for the proposed scheme of reconstruction. Second, it prepared estimates for a reconstruction of the premises to its original state and a schedule of prices to enable Davis to obtain more compensation from the commission. In the event it was disclosed to Lacy that Davis would be getting another builder but, ultimately, the building was sold. Lacy sued to recover a reasonable sum for the work carried out.

The court held that Lacy was entitled to recover for this extra work because "it fell right outside the normal work which a builder, by custom and usage, normally performs gratuitously".

This matter was recently given a substantial airing in the High Court in Countrywide Communications Ltd vs ICL Pathway Ltd. In August 1994 the Benefits Agency and Post Office Counters Ltd placed an advertisement in the European Union's Official Journal inviting bids for the provision of a system for the computerised payment of social security benefits. One of the bidders was a consortium consisting of ICL, Hambros, Giro Bank and others. Over time members of the consortium dropped out and ICL Pathway was formed to embrace the remainder. In April 1995 Pathway submitted a proposal that got it on to the short list. Subsequently it submitted its tender – by which time only ICL remained in the consortium and thus Pathway became a wholly owned subsidiary of ICL. The contract was awarded to Pathway on 15 May 1996.

Countrywide – public relation consultants – argued that it had entered into an agreement in November 1994 with the consortium to provide services in relation to the bid. Under that agreement, Countrywide claimed that it was to be paid in accordance with its usual rates. But this was not the whole agreement; if the bid was successful, Countrywide was to be appointed as public relations and communications advisers to the entity established to implement the bid.

A subcontractor can obtain payment for ‘speculative’ work under certain circumstances

A recent High Court case has set out the tests that the subcontractor has to pass

Pathway contested Countrywide's claims on the basis that any work done by the latter was speculative. It was the policy of the consortium – Pathway argued – to encourage prospective subcontractors to provide assistance in connection with the bid free of charge on the basis that they would be rewarded by a full appointment if the bid succeeded.

In May 1996, after the Pathway bid had been accepted, Countrywide continued to provide advice to Pathway. Subsequently, Countrywide was informed that Pathway had found another subcontractor.

The judge rejected Countrywide's contractual claim for payment. He held that, since detailed negotiations between Countrywide and the (then) members of the consortium were still to take place, there was no binding agreement.

The judge then considered Countrywide's fallback position, which was that it was entitled to a quantum meruit payment. Countrywide relied heavily on the Lacy case. Although reiterating the law that a person that carries out work in the expectation of obtaining a contract cannot claim payment for doing the work, the judge held that there were exceptional cases in which the court imposed an obligation to pay "if justice requires it or, which comes to much the same thing, if it would be unconscionable for the plaintiff not to be recompensed".

The following questions need to be addressed: Q Were the services of a kind usually given free? Q What were the terms upon which the request to perform the service was made? Q Was the benefit real? Q Did the circumstances in which the contract failed to materialise involve "fault" or (better still) unconscionable conduct? (This question is likely to be decisive.) Applying the above questions to this case, it would be unjust if Countrywide were not recompensed for its work before and after the submission of the bid in March 1996 as Countrywide was induced to provide its services free of charge by assurances that Pathway was prepared to negotiate a subcontract. Additionally Pathway had gained a real benefit from the services supplied by Countrywide.