Make sure you have a formal written agreement before you start on site, warns Andrew Milner
Verbal agreements, Samuel Goldwyn once said, aren’t worth the paper they’re written on. Yet informal agreements and oral bargains are common in the construction and engineering industries.
They are chosen to avoid formal and visible promises, to reach agreements quickly and quietly, and to provide flexibility for subsequent modification or even renunciation. Importantly, they differ from written agreements not because their substance is less important but because the underlying promises are less visible and are open to more than one interpretation.
The use of such informal devices is no substitute for entering into a formal written agreement, as the Court of Appeal case Furmans Electrical Contractors v Elecref (2009) demonstrates.
Furmans entered into agreement with Elecref to install electrical cabling and was originally paid on a meterage-installed basis, but later this changed to a daily rate.
Furmans charged the daily rate, basing its figure on a nine-hour day for four men, even though Elecref was working 11-hour days.
Almost all Furmans’ invoices between February and October had been checked by Elecref’s site personnel and paid without any question being raised. None of the invoices set out the actual hours worked or the hours being charged. All Elecref knew at that stage was that Furmans was on site working for a specified period of time per day and claiming the daily rate.
In September there was a disagreement about the working hours. According to Elecref there was an oral agreement that Furmans would work 11-hour days but in fact it was working nine hours. Furmans responded by referring to a fax which purported to record agreed terms and conditions that it would work nine-hour days.
Despite the parties’ disagreement, Elecref paid a further substantial sum but refused to pay invoices for August to October. In November, Furmans issued proceedings against Elecref for payment of the outstanding invoices.
Elecref claimed that Furmans was in breach of the oral agreement but Furmans disagreed, claiming that it could charge a daily rate no matter how much work was involved and how many hours it worked. But at the trial the real issue was whether the two firms had agreed that the rate per day was based on 11-hour or nine-hour days.
According to Elecref there was an oral agreement that Furmans would work 11-hour days but in fact it was only working nine hours. Furmans responded by referring to a fax which purported to record agreed terms and conditions that
it would work nine-hour days
The court at first rejected Furmans’ argument because Elecref claimed it had not received a fax. It then rejected Elecref’s argument through lack of evidence. Furmans then sought to argue that, because it worked a nine-hour day without protest from Elecref, there was an agreement that they were the hours on which the daily rate was based through a course of conduct.
The court rejected this argument. If the invoices had stipulated that the daily rate was calculated on the basis of a nine-hour day, that might have provided a basis for an agreement, by virtue of a continuous acceptance by Elecref of such invoices.
Since no agreement had been reached – or none that could be shown to exist – the court held that Furmans’ claim under all the invoices, whether they had been paid or what was being claimed, was on a quantum meruit basis (payment for partial fulfilment of a contract). This was assessed by reference to evidence (not expert) given at the trial by both parties.
The Court of Appeal held that the court at first was correct about the non-existence of any agreement but incorrect to base Furmans’ claim on a quantum meruit basis because it failed to take into account the invoices already paid. It was the outstanding invoices that should have been the subject of a reasonable sum, not those already paid.
Elecref alleged that it had overpaid Furmans’ invoices and sought to have them reopened and recalculated on a reasonable basis. The Court of Appeal rejected this because for a long period the invoices had been paid after Elecref site personnel had checked them.
That Elecref was working 11 hours whereas Furmans was working nine was a matter that Elecref could have established but didn’t. This alone created a difficulty in seeking to reopen the invoices. But still Elecref made no claim for the return of any money and indeed followed the protest with a very substantial payment.
The law states that, where the payer has doubts but pays nevertheless, it is unlikely to be able to recover the payments. Even where the payer has no doubts, it will not recover the payments where it has waived any claim to recover the money.
Having raised doubts, but not reclaimed the money, and then gone on to pay a big sum, Elecref waived any claim to recover the money.
Andrew Milner is with Integritam Construction Consultancy
Electrical and Mechanical Contractor