If friends fall out

Words:
Alistair McGrigor

Relying on a gentlemen’s agreement is no way to do business

Perhaps it’s just me being a lawyer, but I am often amazed at the commercial agreements reached between businessmen which are not set out in writing. The upside, as a lawyer, is that inevitably there are disputes as to what exactly was agreed, when matters go wrong.

Exactly this situation has recently been decided upon by the Court of Appeal. A property developer and a builder made an oral agreement that the developer would buy sites, the builder would design and construct housing on them to an agreed scheme design and budget, the developer would then pay the builder its ‘build costs’, and on completion the open market value of the development would be agreed, purchase and build costs be deducted and the resulting profit divided equally.

This so-called framework agreement worked well at first but the relationship broke down later, partly over exactly what build costs the builder was entitled to be paid.

When the relationship had been good, payment of the build costs had been made by way of interim payments. The sums requested were round sums not supported by any details or evidence of costs incurred, but the developer paid them because the payments were within budget and appeared reasonable.

As each project completed, the parties agreed what was due to the builder in respect of build costs and profit share. The developer did not require any form of cost schedule but simply proceeded on the basis that the build costs were the same as the budget costs.

However, it transpired that the builder had interpreted the build costs to include sums other than the direct cost of labour and materials and site specific preliminaries. Other costs of his business had been included in his claims, such that the build costs were too high by 22%, which amounted to nearly £300,000 across the completed projects.

It was beneficial for both parties to avoid the expense and effort that would be involved in auditing and negotiating the actual amount of the build costs

In the dispute the developer argued that the overpayments were made by mistake, and therefore should be recoverable from the builder. However, the court upheld a principle of law that where party A voluntarily makes a payment to party B knowing that it may be more than he owes, but choosing not to ascertain the correct amount due, he cannot ordinarily recover that payment, unless there has been fraud or misrepresentation (neither of which were alleged here).

The court went on to clarify that the developer’s main concern was for the final costs not to exceed the budget costs (and thus ensure a handsome profit). Since the final payments were all in line with the budget, the developer was unconcerned about whether or not the sums paid accurately represented the build costs. Indeed it was beneficial for both parties to avoid the expense and effort that would be involved in auditing and negotiating the actual amount of the build costs.

The court made clear that just because the parties decided to rely on round figures in line with the budget figures, that did not mean that the figures were wrong – it was just a feature of the bargain reached. The court also made the point that anyone with experience of property developments (as these parties had) would know that the actual build costs would not be the same as the budget costs, but by equating the build costs with the budget costs, the developer was self evidently running the risk of paying more than was strictly due. The developer risked overpaying because it was satisfied with its overall profit.

Much of this dispute could have been avoided had the parties committed to writing down the terms of their agreement. As a result of not clearly setting out what the build costs were to comprise, the parties have ended up having to take their dispute to the courts and incur even more expense as a result.

Alistair McGrigor is partner at Nabarro LLP

 

IN PLAIN ENGLISH

Restitution

Lawyers usually talk about the two chief ways to bring a claim being ‘contract’ or ‘tort’, both of which deal with the situations either with a contract in place or without, where a claimant seeks damages to compensate it for the damages suffered at the hands of the defendant. More recently, the law of restitution has arisen, dealing with the unjust enrichment of the defendant at the expense of the claimant.

The remedy for restitution seeks to reverse the unjust enrichment, by restoring the relevant benefits or enrichment to the claimant.

Broadly, a claimant asserting a claim in restitution must establish, first, that the defendant has been enriched or has received a benefit; secondly, that the enrichment of the defendant is unjust; and finally that the enrichment of the defendant was at the expense of the claimant. If any of those three aspects cannot be met, a claim for restitution will fail.

This is an expanding area of the law, and it is likely to see increasing use, especially in circumstances when no contract exists between the two parties.

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