England’s Court of Appeal holds that employer could not recover interim payment overpayments

The English Court of Appeal decision in Graham Leslie v Farrar Construction Ltd [2016] EWCA Civ 1041, is a recent illustration of the application of the law of mistake and unjust enrichment to a construction dispute. The main issue on appeal was whether the Plaintiff was entitled to recover overpayments of building costs made on five completed projects, as monies paid by mistake. The Court of Appeal held that he could not.  

The Facts

The Plaintiff entered into an oral agreement with the Defendant on the following terms:

(1)   suitable sites would be identified and agreed as suitable for development;

(2)   the Plaintiff would acquire those sites;

(3)   the Defendant would design and construct housing on the sites to an agreed scheme design and budget;

(4)   the Plaintiff would pay the Defendant its “build costs” expended on the development; and

(5)   on completion the open market value of the development would be agreed, the acquisition and build costs would be deducted and the resultant profit divided equally.

The parties did not record the agreement in writing and did not identify what was meant by “build costs”, in particular, which items of expenditure were included and which were excluded.

In each of the five developments that the parties undertook, the Defendant would request the Plaintiff to provide interim payments, which were round sums not supported by any details or evidence of costs incurred. The Plaintiff made the interim payments as they were within budget and seemed reasonable. At the end of each project, the parties would agree the sum due to the Defendant on the basis that the build costs were identical to budget costs.

Relations between the Plaintiff and Defendant soured and the collaboration between them ended, with each of them believing that money was due to themselves. The Plaintiff commenced proceedings claiming repayment of all sums he had overpaid to the Defendant on the grounds of mistake and/ or unjust enrichment. The Plaintiff’s case was that he was under the mistaken belief that the interim payments were all related to “build costs” for the developments and had he known that the assumption was incorrect, he would have either paid only the proper build costs or paid all of the sums requested but made it clear that he would not pay more in total than the budget figures. The Defendant denied liability and counterclaimed for additional sums due in respect of individual sites and damages for repudiation

Court of Appel a Ruling

The Court of Appeal held that where a person voluntarily makes a payment to another person knowing that it may be more than he owes, but choosing not to ascertain the correct amount due, he cannot ordinarily recover the overpayment, except when certain considerations such as fraud or misrepresentation arise. It found that:-

• The Plaintiff’s main concern on all the developments was not to exceed the budget costs.
• Since the final payments were in line with the budget costs, the Plaintiff was unconcerned about whether or not the sums which he paid accurately represented the build costs.
• It was beneficial for both parties to avoid the costs and effort which would be involved in auditing and negotiating the actual amount of build costs.

The Court of Appeal therefore held that when the Plaintiff made the final payments on each of the five projects, he was not acting on the basis of a mistake or under the influence of an erroneous assumption. He had taken the conscious decision to pay the sums requested without investigation because it suited his purposes. The Court of Appeal held that this was a classic case of the Plaintiff voluntarily making a payment to the Defendant, knowing that it might be more than he owed, but choosing not to ascertain the true sums due. The Plaintiff had intended the Defendant to have the money in any event and in each of the five completed projects, had agreed a final payment in order to “close the transaction”. The Plaintiff was not, therefore, entitled to recover the overpayment.

Comments

When making interim payments, the employer will usually pay the contractor for the estimated value of work done. Any under or over payment will be adjusted in the next interim payment and ultimately when the final account is prepared. Any over payment can therefore easily be rectified.

In the Graham Leslie case, the Court of Appeal held that the Plaintiff knowingly ran the risk of overpayment and refused to overturn the findings of fact in the Court below. The lesson to be learnt from this case is that when signing final accounts or settlement agreements where a lump sum figure is agreed, the parties should make it clear whether the figure is subject to any subsequent verification. It also emphasizes the importance of having written agreements and defining important terms, such as “build costs” in the present case.

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Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

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