The court has provided employers with a reminder of the importance of carrying out a proper assessment of sums due and owing to a contractor as part of the final account process before making payment. The court will not protect an employer by ordering that sums paid at final account stage be repaid notwithstanding the fact that they were made by mistake without proper scrutiny of the sum due under the contract.

The facts

The case in question is Leslie v Farrar Construction Ltd (2017), which was recently heard in the Court of Appeal. It concerned seven projects which Farrar Construction agreed to build on the instruction of Leslie. There was no formal contract as such and the projects were managed via "an oral framework agreement". Pursuant to this framework Leslie would pay Farrar Construction its "build costs". In the interim, Farrar submitted cost budgets in advance of each project, which Leslie paid against in stages as the works progressed. At the conclusion of each project there was a determination of the market value of the building against which the acquisition and "build costs" were to be deducted and the consequent profit divided between the parties.

There was no scrutiny on the first five projects of whether the budgeted cost matched the build cost. Leslie simply paid them the budgeted costs in full and the profits were divided between the two parties upon completion. After completion of the fifth project the relationship soured, leaving 2 projects incomplete. Leslie then proceeded to audit the costs of all 7 projects, i.e. both complete and incomplete, and discovered that overpayments had been made on every project. The budgeted costs did not correspond with the actual build costs. The overpayments were patent; funds earmarked for particular projects had been spent on general overheads and on projects outside the relationship between the two parties (i.e. works for other employers).

The decision

At first instance the judge held that Leslie was entitled to repayment of overpayments on the two incomplete projects as they had been made by mistake. However, the judge also held that no repayment was due in respect of the five competed projects as the period for scrutinising those costs had passed and Leslie was now fixed with the consequences of a bad deal.

Leslie appealed on a number of bases. In particular, he advanced a claim in restitution for repayment of mistakenly paid amounts on the 5 complete projects. The Court of Appeal analysed this basis of claim in simple terms as:

"If C, because of a mistake [law or fact, see Kleinwort Benson v Lincoln City Council [1999] 2 AC 349], pays money which is not due to D, he can recover that money unless one of the recognised defences applies. The courts have formulated, refined and applied that principle through a series of decisions over the last two centuries."

In considering the various available defences the Court of Appeal highlighted the defence originating from the House of Lords decision in Deutsche Morgan Grenfell v IRC [2006] 2 WLR 103. Namely, that in circumstances where the paying party has "taken the risk" of monies being paid by mistake, no remedy shall be available to them. Put another way, if the paying party knows they may (i.e. there is a prospect of) be overpaying, but does so anyway, their claim shall fail.

The analysis then becomes one of inference. The question of what inference should be made on the question of what Leslie was aware of when he made the final payments in respect of the 5 completed projects? As someone who was familiar with the construction industry, the Court could not avoid the conclusion that he must have been aware of the prospect (many would say certainty) that the budgeted costs would not meet actual spend. It went on to conclude that Leslie was aware of this risk, but was content to pay on the basis that he was making a good profit on each project even on the basis of budgeted costs. He was content to close the book on the project. Accordingly, the defence set out above applied and the claim failed. It could also be validly asked whether there was any mistake at all.

Conclusion

Whilst not pursued in the course of the appeal, one issue to consider is whether the submission of an incorrect costs budget at the conclusion of a project can be characterised as a fraud or misrepresentation (i.e. were they being held out as final accounts of costs). If this can be established, the defence to a mistake claim would fall away. Presumably sufficient evidence was not available to advance such a case, but faced with a similar claim it is an issue worthy of detailed consideration.

As a concluding note the Court of Appeal also affirmed the positon of the High Court that there is a clear difference between interim payments and final payments in a construction context. Interim payments are made on the basis that there shall be a final reckoning at the end of the project. Final payments are that reckoning. Once agreed, there should be no facility to reopen that agreement.