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Employer couldn’t recover overpayments made to contractor

The Court of Appeal’s decision in Graham Leslie v Farrar Construction Ltd concerned whether an employer could recover a £300,000 overpayment for build costs made to a contractor. While the principles the court applied are well-established and generally uncontroversial, the outcome – that the employer could not recover the overpayment – may be surprising to many operating in the construction industry.

Graham Leslie v Farrar Construction Ltd

Mr Leslie, a businessman, and Farrar, a building contractor, entered into an oral agreement by which it was decided that:

  • Farrar would design and build housing on sites acquired by Mr Leslie and identified by the parties as being suitable for development.
  • Mr Leslie would pay Farrar its “build costs” expended on each development.
  • On completion, the open market value of each development would be agreed and, after deducting the acquisition and build costs from that value, the resulting profit would be divided equally between them.

The parties’ agreement was never reduced to writing, and the phrase “build costs” was left undefined.

For five years matters proceeded smoothly and five developments were completed pursuant to the agreement. The parties agreed a costs budget in each case before work began. As work proceeded, Farrar made requests for interim payments. These were for round figures and were unsupported by evidence of the actual costs incurred. Mr Leslie paid them on the basis that the sums were within budget and appeared reasonable.

On completion of each project, the parties agreed what sum was due to Farrar in respect of the build costs and profit share, proceeding on the basis that the build costs were the same as the budget costs. No breakdown of actual build costs was ever requested or provided.

In 2013, during the course of further developments, the parties’ relationship deteriorated and Mr Leslie commenced proceedings seeking repayment of all the sums he had overpaid Farrar. He advanced his claim on the basis of unjust enrichment, pleaded in the following terms:

“In the premises [the sums overpaid] fall to be repaid as being monies paid by mutual mistake i.e. on the basis that both parties wrongly believed that the monies were claimed and paid for work and materials which were covered by the arrangement between the parties when they were not alternatively the Claimant paid in the mistaken belief that the sums were properly payable and the Defendant accepted payment which should not have been made and/or as monies paid for no consideration i.e. monies paid for work and materials from which the Claimant derived no benefit as the said work and materials were not for sites owned by him and the retention of the same would amount to unjust enrichment of the Defendant.”

Farrar denied liability. It counterclaimed for additional sums due in respect of each of the sites, plus damages for repudiation.

At first instance

In the Manchester District Registry of the TCC, HHJ Stephen Davies concluded that the total amount Mr Leslie had overpaid was £812,554, and that:

  • At the time Mr Leslie made the payments he was operating under the tacit assumption that the monies were not intended for purposes other than to fund build costs specifically in relation to the developments for which they were requested. However, that assumption was incorrect, because Farrar did not intend to use those monies only for those specific purposes (because the sums paid did not reflect Farrar’s actual build costs).
  • Had the parties’ oral agreement been operated as they had originally intended, Mr Leslie would have been entitled to recover any overpayment of build costs “as a necessary incident” of that agreement. However, the agreement had not been operated as originally intended. Instead, both parties were content to agree that the build costs equated to the budget cost, with the result that there was no need for Farrar to provide substantiation or for Mr Leslie to consider it. Mr Leslie therefore “assumed the risk of error and entered into a settlement to close off the transaction” in each case, preventing him from succeeding in his unjust enrichment claim.

There were two further possible analyses, both leading to the same result:

  • It could be said that there was no causative link between Mr Leslie’s mistake and his payment, in that Mr Leslie chose to proceed on the basis of the budget price and not to enquire into whether the actual build costs were less.
  • Alternatively, Mr Leslie had implicitly represented that he would not require Farrar to ascertain and substantiate its actual build costs, or repay any excess overpaid, and Farrar had acted to its detriment in accepting that settlement (because it might have transpired that its actual build costs were higher than the costs budget). Farrar could therefore rely on an estoppel defence.

The appeal

Mr Leslie appealed, seeking a reversal of the judge’s decision in relation to the sums overpaid for the five completed developments, totalling £297,550.

In his judgment, with which McCombe LJ agreed, Jackson LJ conducted a review of the authorities and stated the following principles:

  • The starting point is that if C, because of a mistake, pays money that is not due to D, he can recover that money unless one of the recognised defences applies.
  • When parties settle litigation, each party forgoes the chances of achieving a better result and avoids the risk of suffering a worse result, and must accept the consequences of what they have agreed, even if the law subsequently changes to the advantage of one side or the other. The same principle applies:

    “…in the general run of situations where parties with opposing interests negotiate a financial agreement.”

  • The question of whether a party should be treated as having taken the risk in question depends on “the objective circumstances surrounding the payment as they could reasonably have been known to both parties” (following Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioner).
  • Accordingly, “where C voluntarily makes a payment to D knowing that it may be more than he owes, but choosing not to ascertain the correct amount due, he cannot ordinarily recover that overpayment”. A different result might arise, however, in cases of fraud or misrepresentation.

Applying these principles, Jackson LJ concluded that:

  • Mr Leslie took the risk of overpaying because he was satisfied with the overall profit he was making from the agreement.
  • This was a classic case of C voluntarily making a payment to D, knowing that it might be more than he owed, but choosing not to ascertain the correct amount. In those circumstances Mr Leslie was not entitled to recover the overpayment.
  • The judge had been right to conclude that Mr Leslie had waived his right to make a detailed inquiry into the actual build up of the costs of each development.
  • Whether an estoppel defence was also open to Farrar was “more difficult” and did not need to be decided.

Therefore, Mr Leslie’s appeal was dismissed.

Practical points arising from this judgment

In addition to the Court of Appeal’s exposition and concise analysis of the relevant authorities (see paragraphs 31-40), the decision also highlights three practical points that are worth bearing in mind in cases of this sort.

First, the genesis of the parties’ dispute as to overpayments can be traced back to their failure to clarify what was meant by “build costs”. In turn, this can probably be traced back to the parties’ decision not to draw up a detailed written agreement. As Jackson LJ noted:

“…misunderstandings of this nature are hardly surprising, if a builder and a property developer choose to embark upon a series of multi-million pound projects on the basis of a brief oral agreement which no one troubles to reduce to writing.”

Second, it is important to be clear that Mr Leslie would have had a contractual right to recover the overpayments if the agreement had been operated as the parties had originally intended. This will normally be the case in disputes between employers and contractors concerning overpayments, either because the contract will contain express final account provisions or because the final payment provisions in the Scheme for Construction Contracts 1998 will apply. It is only where the parties choose to depart from the contractual final account mechanism and agree to settle the account on a different basis that Leslie v Farrar will become relevant.

However, as Jackson LJ noted, it is relatively common for parties not to bother to ascertain a precise final account and instead agree a rough settlement with which they are both content:

“…it is a feature of countless business negotiations every day of the week that people agree round figures or compromises because they really cannot be bothered to go into the details… Mr Leslie was a busy man… He did not wish to devote further resources to grinding through the figures with professional assistance. There is nothing particularly surprising in that state of affairs.”

Some in the construction industry might be surprised to learn that convenient agreements of this kind (whether at the interim payment or final account stage) may later be treated as displacing the effect of the contractual terms originally agreed. Mr Leslie’s case is therefore something of a cautionary tale to employers who are content to make payments to contractors without properly assessing the amount due under the contract at each stage on the (risky) assumption that anything overpaid will be susceptible to recovery later.

Third, cases of this kind will inevitably be highly fact-sensitive, depending as they do on “the objective circumstances surrounding the payment as they could reasonably have been known to both parties”. One feature of such cases is that they are inherently more difficult to challenge on appeal. As McCombe LJ observed:

“We are being invited to overturn a judge’s conclusion on a finding of fact, made after a complex trial. It was a finding made in a very careful and comprehensive judgment on eleven issues. In such circumstances, I would not be easily persuaded that he was not entitled to make that ultimate finding of fact on the evidence which he had heard and which we have not.”

Conclusion

For these reasons, Leslie v Farrar is a useful – and possibly surprising – illustration of:

  • The practical value of reducing an agreement to writing.
  • The importance for an employer of properly assessing what is due to the contractor under the contract at each stage.
  • More generally, of the dangers involved in coming to an approximate settlement for the time being on the assumption that any overpayment will be recoverable later on.
Keating Chambers Harry Smith

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