Overpayments may not be clawed back.

Facts

This case concerned an appeal by Leslie (the funder and developer of multiple projects) against a decision that he owed Farrar (the contractor) various monies.

Leslie and Farrar had entered into an oral agreement under which Farrar agreed to develop sites acquired by Leslie, who would then pay Farrar the “build costs” that it expended on the development.  On completion, the parties would agree the open market value of the development from which the acquisition and build costs would be deducted, and the resultant profit share would be divided equally between them.

All initially went well and the parties completed various developments.  In each case, before work began, the parties agreed a costs budget.  As work proceeded, Farrar submitted requests for interim payments.  These were round sums not supported by any details or evidence of costs incurred.  Leslie made these payments because they were within budget and appeared reasonable.  On completion, the parties agreed the sum due to Farrar in respect of the build costs and profit share.  Leslie did not require, and Farrar did not produce, a breakdown of the actual build costs.

Unfortunately, relations between Leslie and Farrar deteriorated and in 2013 Leslie refused to continue funding the current developments.  Each party believed that it was owed money by the other.  Leslie issued proceedings, claiming a repayment of all sums which he had overpaid in respect of both the completed and uncompleted developments.  Farrar responded by serving a defence denying liability and a counterclaim.

At first instance, the judge held that Farrar had claimed build costs that had not been properly recoverable, resulting in Leslie making overpayments.  However, the judge did not allow Leslie to recover these on the completed developments.  He held that there were a number of reasons why Leslie had agreed not to require a breakdown of the costs incurred.  Notably, costs had come in under budget and Leslie had made a significant profit.

Leslie appealed on the following two main grounds:

• the judge should have allowed recovery of overpayments made on the completed developments as monies paid under a mistake; and
• the judge should have treated the completed and uncompleted developments in the same way.

Decision

The Court of Appeal dismissed the appeal, upholding the first instance judgment that the employer could not recover overpayments it had made on the contractor’s request, without further investigation, in respect of the completed developments.

As to whether the judge should have allowed the overpayments to be recovered on the basis of mistake, the court reviewed the relevant authorities and concluded that, absent fraud or misrepresentation, there was no legal right of recovery.  Leslie had not been mistaken, but rather had made a conscious decision to make a final payment on completion.  His key concern was to make a profit on the completed developments in line with his expectations, without “grinding through the figures with professional assistance”.  He was not concerned whether the sums he paid accurately reflected the build costs.  On that basis, the court concluded that this was “a classic case of C voluntarily making a payment to D, knowing that it may be more than he owes, but choosing not to ascertain the correct amount“.

The court went on to hold that the judge had been right to treat the completed and uncompleted developments differently.  This is because the employer normally makes interim payments for building works on the basis that there will be a reckoning at the end of the project, with a final balancing payment being made one way or the other.  Having found that the interim payments on the uncompleted developments were too high, the judge inevitably ordered Farrar to repay the excess.

Key takeaways

If you make an overpayment on a construction project, don’t assume that you can simply recover it.

On incomplete developments, if your contract is silent on how overpayments should be dealt with, you may be able to claw the money back through the next interim payment, or during the final account process.  For completed developments, the position is more certain.  Absent fraud or misrepresentation, you will not be able to recover any overpayment unless your contract allows.

So what’s the solution?  It’s very simple.  Make sure that your written contract states what will happen in the event of an overpayment.

Perhaps the whole dispute would have been avoided if the parties had defined “build costs”.  The Court of Appeal commented that “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.”