High price of oral agreements

Words:
Alistair McGrigor

Oral agreements and overpayments left a lot open to different interpretations

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 though for lawyers is the inevitable disputes as to what exactly was agreed between the two businessmen, when matters start to go wrong.

Such a situation was recently 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, the purchase and build costs deducted and the resultant profit divided equally.

This so called framework agreement worked well for the first few projects but the relationship broke down on later developments, partly over what exactly the build costs were that the builder was 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 those round sums because the payments were within budget and appeared reasonable.  

As each project completed, the parties agreed what sum was due to the builder in respect of the build costs and profit share.  The developer did not require any form of ­schedule setting out the build costs; they 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 the costs claimed, such that the build costs were too high by 22%, amounting to nearly £300,000 across the completed projects. 

In the dispute the developer argued that the overpayments were payments 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 builder had interpreted the build costs to include sums other than the direct cost of labour and materials and site specific preliminaries

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 costs, 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 costs and effort which 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, but that was just a feature of the bargain reached.  The court also made the point that anyone with experience of property developments (as these parties did have) 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 was taking the risk of overpaying because he was satisfied with the overall profit he was making.

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


Alistair McGrigor is a partner at Nabarro LLP


IN PLAIN ENGLISH: Restitution  

Lawyers usually talk about the two chief ways to bring a claim as being ‘contract’ or ‘tort’. Both deal with situations with or without a contract in place, where a claimant seeks damages to compensate it for 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.

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 three things: that the defendant has been enriched or has received a benefit; that the enrichment of the defendant is unjust; and the enrichment of the defendant was at the expense of the claimant.  If any of these cannot be met, a claim for restitution will fail.

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

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