Overpayments to a contractor spells hard luck for employer

A recent Court of Appeal decision illustrates the dangers of failing to properly assess the amount due to a contractor, resulting in an overpayment that cannot then be recovered.

The case was Graham Leslie v Farrar Construction Ltd [2016] EWCA Civ 1041 and concerned the construction of housing developments for Mr Leslie (the Employer) by Farrar Construction Ltd (the Contractor).

The Facts

• The parties entered into a verbal contract, whereby a costs budget was agreed for the design and construction of the developments; Mr Leslie would pay Farrar Construction the 'build costs' and once the houses were sold the parties would divide the profit equally. The build costs were never defined.
• Farrar Construction submitted several interim payments seeking payment of the 'build costs'. The applications sought a rounded figure with little breakdown. Mr Leslie made payment without question.
• The relationship between Mr Leslie and Farrar Construction deteriorated as the profits on the houses dropped. Mr Leslie sought recovery of overpayments for seven of the developments, five of which were complete and two incomplete.
• Mr Leslie argued that the overpayments were made in the mistaken belief that the sums were properly payable.

Technology and Construction Court

• The judge at first instance found that an overpayment had been made in the sum of £297,550 across the seven developments. However, the court refused to order a repayment of sums in respect of the five completed developments.
• The court found that Mr Leslie was content to make the payments without any investigation at the time. The payments were made on the basis that the developments completed within budget and made a healthy profit.
• The judge treated the incomplete developments differently, considering repayment was due as the parties had not yet reached Final Account stage.

The Court of Appeal

• Mr Leslie appealed the decision as he considered that the judge should have also ordered repayment on the completed developments.
• The Court of Appeal considered it to be established law that where parties with opposing interests negotiate a financial settlement, the fact that one party has made a bad bargain does not affect the agreement.
• The completed developments represented a closed transaction and only if there was evidence of fraud or misrepresentation could payments be reclaimed. Mr Leslie's appeal was refused.

This case serves as a helpful reminder to employers/contractors to ensure that sums applied for are properly assessed, especially at Final Account stage where the scope for recovery of overpayment is limited.

Parties should ensure clauses allowing recovery of overpaid sums are contained within their contracts. This is the case even for interim applications, as recovery in the next application cannot always be guaranteed, particularly where the overpayment is significant, or parties are in the later stages of a contract.