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The importance of having a written agreement in place

June 2017 - Issue 94

In the recent case of Leslie v Farrar Construction Ltd, the Court found that a property developer who had paid his contractor undefined “build costs” was unable to recover sums he later alleged had been overpaid by him. This case serves as a reminder of the importance of having a written agreement in place.

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. Whilst 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 each project’s actual build costs.

The Court of Appeal concluded that Mr Leslie had overpaid the developer by almost £140,000. However, the Court also held that because the payments were made without investigation of the sums claimed, the Claimant was not acting on the basis of mistake. The Court found that Mr Leslie’s key concern was to ensure that build costs stayed within budget in order to protect the large profit anticipated (and achieved) on each site. Mr Leslie did not audit the build costs claimed as they fell in line with the projected budget costs and it was more time and cost effective to accept the sums without further analysis. Therefore, as there was no allegation of fraud or misrepresentation, the Court found that Mr Leslie made the final payments as a conscious decision to “close the transaction” and allow him to realise each profit. As such he was not entitled to claim an overpayment.

This case shows the importance of having a written agreement detailing the terms between the parties. The court said that “misunderstandings of this nature are hardly surprising if a builder and property developer choose to embark on a series of multimillion pound projects on the basis of a brief oral agreement, which no one troubles to reduce to writing”.

This should serve as a warning to employers looking to deal with final accounts quickly. Where a commercial decision is made to accept a sum applied for without further line of enquiry, the Employer will lose its right to challenge the sum at a later date. Therefore, it is worth taking the time to consider sums applied for in order to protect against unrecoverable overpayments

Michael Booth

Solicitor

e mbooth@prettys.co.uk

t 01473 298214

 

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