Leslie v Farrar Construction Limited

In an oral framework agreement for property development, “build costs” ordinarily comprise direct labour and materials and site-specific preliminaries. They do not include non-site-specific overheads or capital acquisition costs for plant and machinery, although depreciation or notional hire costs may be recoverable if properly proved.

Whether a framework agreement applies to a particular development depends on what the parties said and did concerning that development. Express agreement is unnecessary, but the circumstances must show that the parties proceeded on the basis that the framework applied. An owner may replace a contractor, but remains liable for the agreed profit share unless the agreement was ended by consent or the contractor’s repudiatory breach justified termination.

Mr Graham Leslie and Farrar Construction Limited operated an oral framework for acquiring and developing residential property. Leslie funded land acquisition and build costs, while Farrar Construction designed and constructed the developments. Net profit was to be shared equally.

After disputes arose over delay, cost overruns, payment allocation and the scope of recoverable build costs, Leslie removed Farrar Construction from two unfinished developments and commenced proceedings. Farrar Construction counterclaimed for unpaid build costs, profit shares and loss of opportunity on further sites. Leslie also claimed repayment of alleged overpayments in unjust enrichment.

The court had to determine the framework’s terms, the developments to which it applied, the legal effect of the July 2013 meeting, profit and loss allocation, and the recoverability of alleged overpayments.

1. Construction of build costs. The oral agreement was to be construed by the same principles as a written contract: Khan v Khan [2007] EWCA Civ 399 and Rainy Sky v Koomin [2011] 1 WLR 2900. Build costs comprised direct labour and materials and site-specific preliminaries. They excluded head office overheads, other non-site-specific business costs and the purchase cost of plant and machinery. Depreciation or notional hire charges could in principle be claimed if properly established.
2. Application to developments. The framework applied to a particular development where that conclusion followed from what was said and done concerning it. An express agreement was unnecessary. The framework did not automatically bind the parties to every future site, but it applied where the parties had proceeded on the basis of development under its terms, subject to anything making that conclusion clear. All five disputed sites fell within the framework.
3. Termination and profit share. Leslie was entitled to replace Farrar Construction on unfinished sites because specific performance would not ordinarily compel an employer to allow a contractor onto its land. That did not itself end Farrar Construction’s entitlement to the agreed profit share. The July 2013 conduct was repudiatory in relation to the remaining developments, and Farrar Construction accepted the repudiation. Completion costs were assessed by reference to reasonable third-party completion costs, net of profit.
4. Loss sharing. The parties’ agreement to share profits equally carried a co-extensive obligation to share losses equally. Farrar Construction’s share of the loss on Minsthorpe could therefore be set off against profits on Methley and the other framework developments.
5. Unjust enrichment. Leslie had settled the accounts for completed developments on the basis of agreed budgets and had assumed the risk of error. He could not reopen those settlements in unjust enrichment, alternatively because the payment was not causally induced by the mistake and because estoppel applied. The position differed for Methley and Minsthorpe, where no final reconciliation had occurred and Leslie retained the right to require substantiation. He recovered £62,752.34 net.
6. Disposition. Farrar Construction recovered profit-share damages for Newmillerdam, Talbot Road, Aketon Road and Holywell Lane, but not Cornlands, Moverley Way or Lindley. The net balance due to Farrar Construction was £139,428.16, together with any entitlement to interest.