A recent case demonstrates the importance of having a written agreement in place, no matter how tempting it may be to solely rely on oral terms.
Graham Leslie v Farrar Construction Ltd is a Court of Appeal decision regarding the recovery of overpayments made to a contractor.
Mr Leslie and the contractor, Farrar Construction, entered into an oral agreement for the construction of housing on suitable sites, with the build costs paid to the contractor and profit on the agreed open market value of the developments divided equally between the parties.
The parties never subsequently put this agreement into writing.
Five developments were completed by the parties. While the contractor’s interim applications were unsupported by evidence of the true costs incurred, they were paid by Mr Leslie as they appeared reasonable and were within the budget of each development.
When determining the profit share at the end of each development, the parties calculated the build costs to be the same as the budget costs and the contractor did not provide a breakdown of the actual build costs for the projects.
In time the relationship between the parties broke down and Mr Leslie commenced proceedings against the contractor for repayment of the amounts overpaid.
Mr Leslie argued that:
- there had been a mutual mistake as ‘both parties wrongly believed that the monies were claimed, and paid for work and materials that were covered by the arrangement between the parties when they were not’; or
- he had paid in the mistaken belief that the sums were properly payable and the contractor accepted payment that should not have been made amounting to unjust enrichment of the contractor.
The contractor denied the claims and counterclaimed for damages and additional amounts due.
At first instance, with an overpayment amount calculated to be £812,554, the court determined that recovery of overpayments would have been permitted if the oral agreement had been operated as originally intended, but it had not been: the parties agreed to equate the budget and build costs with no requirement for proof of build costs.
Mr Leslie had “assumed the risk of error and entered into a settlement to close off the transaction”.
Mr Leslie brought an appeal over the overpaid sums (amounting to £297,550) but the appeal was dismissed.
The Court of Appeal found that:
- as Mr Leslie was pleased with the profit he was making from the arrangement, the risk of overpayment was his;
- Mr Leslie had made a voluntary payment, in full awareness that it might be greater than the amount actually owed, and had not looked for the correct value to be calculated. No recovery of the overpayment was therefore due to him; and
- this was not a case of fraud or misrepresentation, which may have resulted in a different finding.
Lessons from the case
The first lesson is the importance of having a written agreement detailing the terms between the parties.
The argument over overpayments and the difference between the budget costs and build costs might have been avoided if Mr Leslie and Farrar Construction had recorded their agreement in writing.
The court said 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”.
The case of Harlequin Property v Wilkins Kennedy also revolved around the lack of a written contract and both cases emphasise how important entering into a written agreement is, no matter how tempting it might seem at the time to rely on an oral arrangement.
The second lesson is that Mr Leslie had lost the right to recover the overpayments by agreeing to settle the account on a different basis from the one originally intended.
If you intend to commercially negotiate a rough settlement amount for a project, rather than spend the time and effort to calculate the precise details and figures, then this can set aside the contractually agreed position and the right to recover any overpayment may be lost.
A proper assessment of what is due to the contractor at each stage would be the less risky approach.
Ian Smith is an associate at Fladgate