It is often assumed that overpayments to a contractor or subcontractor can be recovered, but the recent case of Furmans v shows that this is not always so.
The relevant facts were:
- A agreed to perform work for B for a daily rate. The agreement was relatively informal, and did not use any standard form of contract
- Despite the daily rate being agreed, there was no agreement on the number of hours that A would work each day. B alleged that there was an agreement that A's personnel would work an 11 or 12 hour day, which A denied. A's personnel were only working a 9 hour day, which B said was inadequate
- Despite its complaints that A wasn't working the required hours, B's site supervisor signed-off A's invoices, which were calculated using the daily rate. B paid these invoices. B also paid amounts claimed by A for worker accommodation, which A said weren't included in the daily rate - although B disagreed
- B believed it had overpaid A for the work performed, and sought to reclaim the overpayment
Could B recover the alleged overpayment? The Court of Appeal said "no". The fact that B had doubts about the hours worked and had raised the issue of overpayment, yet went ahead and paid the invoiced amounts, meant that it had waived its right to object to the invoices.
Standard Forms
Furmans v Elecref involved a fairly simple contract. Would the result be different if a standard form had been used?
In standard forms of contract there is not always the ability to issue a negative interim certificate, to claw back the overpayment, although some contracts like the NEC3 form and the JCT Major Project Construction Contract permit negative interim certificates.
Most standard forms allow overpayments to be recovered through the interim payment process only when the value of work done catches up with the payment value. For example, if a contractor is overpaid £10,000 in one month, the payment certificate for the next month (or a later month) may be reduced to reflect this.
The intention with many JCT and ICE contracts is that any remaining overpayments can be recovered in the final accounting process. So when a final certificate is issued, a credit will be given by the contractor to the employer, or an amount may actually be payable to the employer.
If a standard form of contract is not used, the recovery of any overpayment can be problematic (as it was in Furmans v Elecref). It may be that money is only recoverable if the employer mistakenly made the overpayment, or if it was induced by a misrepresentation made by the contractor as to its entitlement (neither of which were alleged in Furmans). If there is no contract at all then restitution might be available.
Practical Points
- Furmans v Elecref provides a sharp reminder that overpayments cannot always be recovered. If you knowingly make an overpayment, or seemingly if you doubt whether the payee is entitled to payment, you cannot recover the excess unless you have an express contractual right to do so
- A thorough and disciplined approach should be taken to interim payments to ensure that overpayments are not made - even though interim payments are usually "on account". But even if such an approach is taken, there may often be the potential for argument about whether a valuation is too much, the right amount, or too little. In the Wembley litigation, the main contractor certified its subcontractor's work at the lowest sums it believed it could properly defend in adjudication. The judge in the case said that the main contractor's approach was "ruthless but lawful"
- If an overpayment is made, it may not be legally recoverable, or in practice it may not be recoverable, e.g. if the overpaid contractor becomes insolvent before the overpayment can be recouped. There may, however, be some scope for claiming the overpayment as damages payable by the contract administrator, but this would involve showing that the contract administrator was negligent - which isn't usually easy
- A payer can protect itself by using a contract that expressly entitles it to recover overpayments, regardless of the reasons for overpayment
Reference: Furmans Electrical Contractors v Elecref Ltd [2009] EWCA Civ 170
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 22/04/2009.