Restrictions on recovering overpayments can make it difficult to claw-back excessive sums paid. A recent Court of Appeal case examines the parameters.
In Graham Leslie v Farrar Construction Ltd the parties entered into a verbal agreement to design and build a series of housing developments.
The employer and the contractor agreed a costs budget. On completion of each development, the acquisition and the build costs would be deducted from the open market value, with the resulting profit shared equally between them.
The contractor’s interim payment applications did not contain a breakdown of the sums claimed. As they were within budget, the employer did not request any substantiation.
Initially the employer paid the applications without question, but when the profits decreased and the relationship deteriorated, a dispute arose as to the correct calculation of the profits.
The dispute was based on the parties’ interpretation of the build costs. As the contract was not in writing, the build costs were not defined and so it was not clear which items of expenditure were included or excluded. The employer had proceeded on the basis of equating build costs with budget costs and so neglected to ascertain if the build costs were correct.
The parties had undertaken twelve separate developments and the employer claimed that he had mistakenly overpaid the contractor on seven of them.
At first instance, the judge ruled that the employer was only entitled to recover overpayments to the value of £297,550 for the two incomplete developments because the parties had not yet agreed the final account. The decision was appealed in an attempt to recover the overpayments for the completed developments.
The Court of Appeal held that in relation to the completed developments, it was established law that an agreement cannot be altered simply because one party fails to make a good bargain. The completed developments were viewed as closed transactions and the employer would only be able to successfully reclaim payments made if he could establish evidence of fraud or misrepresentation, which was not the case here.
The employer had effectively agreed to the cost of the completed developments by his acceptance of the build costs, and subsequent lack of investigation into the sums paid before completion. He had not mistakenly viewed the payments as properly due, but had not even assessed whether they were due, and had agreed them on a development by development basis.
Employers and developers should be aware of this case, as the scope for retrieving overpayments is limited after the conclusion of an agreement regarding the final account.
A clause permitting an accounting process and the recovery of overpaid sums for both interim and final payments should be incorporated into building contracts to protect an employer. Employers should also take care in assessing the sums applied for, including requesting a breakdown if one is not provided.
For further information please contact:
Gemma Wilson, associate, Construction
T: 0161 836 7884