Party could not enforce contractual right to recover overpayments where established convention to charge on non-contractual basis

The High Court held that a social landlord was estopped from deducting overpayments it had made to a contractor, according to the contractual pricing and payment mechanism, from later payments to the contractor. The decision illustrates some of the problems that can arise where parties act in a manner that is not consistent with the strict terms of their agreement: Mears Limited v Shoreline Housing Partnership Limited [2015] EWHC 1396 (TCC).

While the original tender documents and the contract between the parties allowed for one pricing and payment mechanism, the parties operated a different pricing and payment mechanism from when work began (six months before the contract was executed) for a period of about seven months. The employer claimed that this resulted in overpayments being made to the contractor and sought to recover these overpayments.

The court held that the employer was prevented from recovering the overpayments by the doctrines of estoppel by convention and estoppel by representation. It did not matter that the contract had retrospective effect from when the work began, or that the contract contained an entire agreement clause. Daniel Woods, an associate in our disputes team, considers the case further below.

Background

Factual background

The claimant contractor was granted a tender to provide maintenance service to the defendant social landlord's portfolio of approximately 8,000 properties under management. The contract was to be on an industry standard form . The contract would allow for interim payments to be made to the contractor based on the costs it had incurred plus a fee. There would then be an adjustment every six months so that the amounts would be varied (in effect, reduced) to reflect the contract price list.

Work began in July 2009 but the parties did not sign the contract until December 2009. In the months leading up to work starting there was much discussion between the parties as to what in practice was going to happen. There were concerns on both sides that the list of tasks for which prices were requested in the original tender document was incomplete, and that the defendant's call centre staff would not be able to translate issues reported by tenants into tasks from the task list.

It was in this context that, in May 2009, the parties began to discuss the use of a set of "composite codes" that would allow a job to be entered into the system, its completion tracked and payment arranged. The composite codes were eventually loaded on to the defendant's computer system and were used when work began in July 2009.

By the autumn of 2009, it had become clear to the defendant that it was not achieving the anticipated costs savings, but its concerns were not expressed to the claimant at that time. In the meantime, the contract between the parties was still being worked on by their lawyers and was eventually agreed in December 2009 and signed in January 2010. The contract had retrospective effect from July 2009 and included an entire agreement clause which stated "This contract is the entire agreement between the Parties".

Around that time the defendant had come to the conclusion that the reason it was not saving costs was due to the use of the composite codes rather than the pricing and payment mechanism included in the tender documents and the contract. When this issue was raised with the claimant, it said it was acting on the basis agreed between the parties.

The parties stopped using the composite codes from the end of January 2010 and the defendant deducted from later payments to the claimant approximately £300,000 the defendant said had been overpaid by reference to the composite codes. The claimant brought proceedings to recover the sums deducted, arguing that there was an estoppel by convention or representation that would prevent the defendant from enforcing its strict contractual right to deduct the overpayments.

Legal background: estoppel

Estoppel is a legal doctrine whereby a party is prevented from going on back on something that it has previously asserted where it would be unjust for it to do so. There are several types of estoppel including:

• Estoppel by convention: where two or more parties act on an assumed state of facts or law, where the assumption is shared by both of them or made by one and accepted by the other.
• Estoppel by representation: where one party makes a false representation to another party, intending or knowing that it is likely to be relied upon, and the second party does rely on the representation, to its detriment.

In either case, the relevant party will be prevented from denying the assumed or represented state of affairs where it would be unjust to allow it to do so.

Decision

The court (Akenhead J) found that there was an effective estoppel, so that it would be unjust to allow the defendant to make and retain the deduction of £300,000.

The judge's key finding of fact was that there was a clear agreement and convention between the parties from May 2009 until January 2010 that work was to be logged, tracked and invoiced using the composite codes. Both parties must have known that this did not reflect the draft contract terms, but it represented a simple solution to the problem of having a system ready to go in July 2009.

Because of this finding, the judge was satisfied that there was a convention between the parties that the claimant would be paid on the basis of the composite codes. He held that it would be unjust and unconscionable for the defendant to deny this common assumption for the period until January 2010.  The unconscionability arose from the costs that would be incurred: (i) by the claimant having to re-analyse each piece of work in the relevant period by reference to the contractual price list and; (ii) the likelihood that appropriate records may not have been taken at the time (or may have been subsequently destroyed) on the basis that such information would not be needed.

As a doctrine of equity, the use of estoppel is subject to the various equitable maxims including that it must be used as a shield, not a sword. Akenhead J said this argument did not assist the defendant. Although the estoppel argument was put forward by the claimant, it was being relied upon to show that the defendant's deduction of some £300,000 was not conscionable due to the convention between the parties. If that was right, the defendant was estopped from asserting that it was entitled to make the deduction; that meant the amount deducted should be repaid because there was no remaining good ground to justify its retention.

The judge also held that, though the doctrines of estoppel by convention and estoppel by representation are legally distinct, on the facts of this case they were almost interchangeable.

The judge dealt with the contractual "entire agreement" clause only briefly, simply stating that the clause "does not exclude or limit reliance on any established and effective estoppel, either on its express wording or by way of interpretation".

Comment

This case is noteworthy as one commercial party was able to use the doctrine of estoppel to prevent the other party enforcing the contractual rights that it otherwise would have had. If the parties had negotiated and agreed the contract prior to beginning work, and had operated the contract in accordance with its terms, these difficulties could have been avoided.

It is disappointing that Akenhead J included no further discussion of the entire agreement clause in his judgement. In this case, the entire agreement clause was very simple, just stating "This contract is the entire agreement between the Parties". It is not clear whether the outcome would have been different if the entire agreement clause had also included some form of non-reliance statement (which many boiler plate entire agreement clauses do). In any event, parties would be well-advised to pay close attention to their entire agreement clauses and consider including broad non-reliance wording.