Construction and engineering contracts usually contemplate interim payments being made “on account”, meaning that any overpayments or underpayments can be redressed in later payment claims, or in the final account. However, as the English courts recently demonstrated, claiming back an overpayment is not always possible, especially if the overpayment was made knowingly or with indifference after the project has been completed.

Background

In Leslie v Farrar Construction Ltd [2016] EWCA Civ 1041, the English Court of Appeal had to consider an action by a property developer against a contractor, who had been a personal friend, claiming substantial overpayment on five already completed projects.

  • The relationship between the parties lasted over five years and a number of successful developments. They had an understanding that a budget would be agreed before each job began.
  • Payment applications were made by the contractor in round sums without details to support them, and were paid by the developer on the basis that they were within the agreed budget.
  • The developer and the contractor shared the profits which they made equally. The mutual regard they enjoyed is shown by the fact that the developer waived his entitlement to profit on one development as a ‘wedding gift’ to the contractor.
  • The goodwill between the parties eventually drained away as business conditions became more difficult, and was replaced by a fiercely-contested dispute, in which the developer claimed substantial sums of money from the contractor for overpayments made during the course of their business ventures.

The litigation

The court found that there had in fact been an overpayment to the contractor of some £300,000 for build costs. However, the critical question was whether that sum was recoverable. In answering this question, the English Court of Appeal set out the position of the law:

  • The starting point is that if A pays money which is not due to B, the overpayment can generally be recovered by A. This is the result if A made the overpayment whilst labouring under a demonstrable mistake as to how much B was due.
  • However, if money is deliberately paid, with no intention or interest in inquiring into whether it is done so correctly, that money is not recoverable

The Court of Appeal regarded as crucial the distinction between uncompleted and the completed transactions. In the case of uncompleted transactions (such as partially performed construction projects), only interim payments have been made, and these are routinely adjusted in the course of the project as the position is revised.

By contrast, in each of the five completed transactions here, the developer had agreed a final payment expressly to close the transactions. In the circumstances, it was held that by paying the contractor without bothering to check how much was really due, the developer had run the risk of making an overpayment. Accordingly, the overpaid £300,000 was not recoverable from the contractor.

Commercial implications

The salutary lesson that this case provides is for payers to check how much is actually due before making payment for work performed. Naturally, there will be cases where overpayments are inadvertently made, in which cases the amount of any overpayment may be recoverable. But if it cannot be demonstrated that any check was made as to what was really due, and that the payer was largely indifferent as to whether the sum paid represented the true amount due, problems of irrecoverability may arise, certainly where a project has been completed.

The issue is not only one for payers but also certifiers under construction and engineering contracts. If an architect or engineer certifies an interim payment claim for more than is actually due to the contractor, and the employer makes payment to the contractor, should the contractor then become insolvent and stop work the amount of any overpayment may be irrecoverable (assuming the contractor, being insolvent, has no available funds). This may then expose the certifier itself to a claim predicated on it not having checked properly how much the contractor was due.