The Consequences of Mistaken Payments: Leslie v Farrar Construction Ltd

The Court of Appeal has recently looked at the consequences of mistaken payments. The judgment in the case of Leslie v Farrar Construction Ltd [2016] EWCA Civ 1041, handed down on 1st November 2016, provides a useful summary of the position facing parties who wish to reclaim overpayments made in the course of a contract.  It is also a salient reminder of the importance of getting a business agreement reduced into writing.

The case arose from a joint venture between Mr Leslie and Farrar Construction Ltd for the development of building sites. The arrangement was that Mr Leslie would fund the building costs, Mr Farrar’s company would undertake the design and building work and the profits from selling the developments would be split equally between them.  Despite the agreement involving many millions of pounds there was no written agreement about what exactly Mr Leslie would pay for and what would count as “building costs”.

5 developments were undertaken over the course of 5 years, each one resulting in profits for both parties. During each development Mr Farrar sent Mr Leslie requests for interim payments.  Mr Leslie made no enquiry into the accuracy of the sums requested but at the end of each development simply totted the interim payments up and deducted them from the profit share due to Mr Farrar.

In time the relationship between the parties soured and various claims were made by each party against the other. Mr Leslie’s claim included an assertion that Mr Farrar had claimed more than he had actually spent for the building costs and so had been overpaid.  Essentially it was a claim for restitution of money which Mr Leslie alleged had been mistakenly paid.

The case commenced in the Technology & Construction Court. The judge at first instance found that whilst Mr Leslie had misunderstood what the interim payments were to be used for and so had overpaid Mr Farrar, he had not made any attempt to check what the actual building costs had been before he had made the interim payments.  Therefore, the judge found, he was not entitled to the return of any money overpaid as he had voluntarily accepted the amounts claimed.

On appeal by Mr Leslie the Court of Appeal affirmed the first instance finding: that it had suited Mr Leslie at the time to make the interim payments without checking the figures or what the payments were for.  This meant that he had voluntarily accepted the risk of overpayment and so could not now claim repayment.

The Court’s decision is a useful restatement of the law in this area. The judgment confirmed that payment made under a mistake may well be recoverable.  However, there are exceptions to this general rule, including the situation faced by Mr Leslie.  Other exceptions were covered in the judgment, including for example where a party chooses to settle a potential claim rather than issue proceedings.  In essence, said the Court, parties must accept the consequences of their actions even if with hindsight they would have fared better had they taken a different course.

Jackson LJ stated in his judgment that “one important principle emerges: where C voluntarily makes a payment to D knowing that it may be more than he owed, but choosing not to ascertain the correct amount due, he cannot ordinarily recover that overpayment.”

In essence, finding out that you made a bad bargain does not necessarily sound in law.

A copy of the judgment can be found at  http://www.bailii.org/ew/cases/EWCA/Civ/2016/1041.html