#ContractLaw #HighCourt Decision reaffirms importance of defining in advance who one contracts with

HIGH COURT DECISION UNDERLINES IMPORTANCE OF KNOWING WHO YOU ARE CONTRACTING WITH ~ Kerrie BarrettHerbert Smith Freehills, 23 June 2017.

The High Court has recently found that a group of waste removal companies which provided services to a company that went into liquidation shortly afterwards was not entitled to recover outstanding sums from the company’s founder. The agreement for works had been entered into with the company itself, and the founder had given no guarantee or indemnity in his personal capacity. Even if a guarantee had been given, it was merely oral and therefore unenforceable:

Erith Holdings Ltd and Others v Ronald William Murphy [2017] EWHC 1364 (TCC).

This decision serves as a cautionary tale which underlines the importance of knowing who you are contracting with and of recording the terms of your agreement formally in writing rather than relying on oral discussions. Where you have concerns regarding the financial standing of a company you are dealing with, and want to ensure that an individual who stands behind a company takes on personal liability, it will be particularly important to ensure that the individual is a party to the agreement or that any guarantee is properly documented.   

Kerrie Barrett, an associate in our disputes team, considers the decision further below.

Background

The defendant (Mr Murphy) owned a site (the “Site”) operated by his company, Murphy’s Waste Limited (“MWL”), now in liquidation, as a waste collection and transfer station. The claimants (collectively referred to as “Erith”) were companies providing waste removal and haulage services.

The parties entered into negotiations in August/September 2014 for Erith to purchase the Site and MWL. Around this time it was orally agreed that Erith would carry out waste clearance works from the Site prior to the sale (the “Works Agreement”).  No price was agreed for those works, but Erith estimated the costs would amount to approximately £500,000. In October 2014 MWL paid approximately £110,000 in respect of those works, using funds provided by Mr Murphy. Erith did not issue further invoices and instead planned to treat the waste removal costs as part of the purchase price for the Site and MWL.

Erith contended that, between November 2014 and January 2015, the parties entered into a revised agreement under which Erith agreed to provide further waste clearance services up to a value of £1 million (the “Revised Works Agreement”). Erith contended that it was agreed payment would be deferred and treated as part of the purchase price, but if the sale did not proceed Mr Murphy would be personally liable. Mr Murphy denied that there was any Revised Works Agreement.

The waste removal services continued into early 2015, and in addition Erith made three loan payments to MWL totalling £85,000.

Ultimately the sale did not take place and MWL went into liquidation. Erith brought proceedings against Mr Murphy to recover outstanding sums, asserting that the waste removal services had been carried out, and the loan paid, on the back of assurances from Mr Murphy in his personal capacity that such costs would be reimbursed. Mr Murphy denied that he was under any liability to Erith, maintaining that the legal relationship was between Erith and MWL.

Decision

The judge (Mrs Justice O’Farrell DBE) dismissed the claims, having determined various issues including the following:

  1. Whether Erith entered into the Works Agreement with MWL or with Mr Murphy;
  2. Whether the parties entered into a Revised Works Agreement;
  3. Whether Mr Murphy agreed to be personally liable to pay for the services, and if so whether that agreement was enforceable;
  4. Whether the loan of £85,000 from Erith was to MWL or Mr Murphy, and whether it fell within the scope of any indemnity/guarantee given by Mr Murphy;
  5. Whether Mr Murphy’s solicitors had admitted in correspondence that Mr Murphy owed any debt to Erith in his personal capacity; and
  6. Whether Erith was entitled to recover the sums claimed from Mr Murphy by way of a claim for unjust enrichment.

1. The Works Agreement

The judge found that the Works Agreement was entered into by Mr Darsey (chairman and director of Erith Holdings Limited) on behalf of Erith, and by Mr Murphy on behalf of MWL. The fact that the invoices were addressed to MWL, and that payments were made from MWL’s account, was “strong evidence” that both parties considered the agreement to be with MWL. This was supported by the fact that Mr Darsey accepted, in cross-examination, that the initial agreement for waste removal services was with MWL.

2. Revised Works Agreement

The judge noted that, although there was evidence of general discussions regarding the waste on site, there was no documentary evidence of a revised estimate or any further agreement during this period.  It was significant that there was no evidence that Erith had communicated any increase in the estimated waste removal costs, or Mr Murphy’s responsibility for those costs, to the funders or the solicitors conducting the negotiations.

3. Indemnity/guarantee

The judge accepted that Mr Darsey may well have requested assurance that Erith would be paid for its site clearance works in the event the sale did not proceed, and that Mr Murphy may well have given a general assurance that Erith would be paid by MWL. She did not however accept that Mr Murphy agreed to give a personal indemnity or guarantee. All invoices were addressed to MWL, and although certain funds were paid by Mr Murphy, they were deposited into MWL’s account before being paid to Erith. There was no evidence of MWL’s debts being paid directly by Mr Murphy.

In any event, the arrangement in question would have constituted a guarantee rather than an indemnity (since Mr Murphy would have secondary liability, arising only on the failure of MWL to pay), and a contract of guarantee must be in writing or evidenced in writing and signed. Any guarantee given by Mr Murphy was made orally, and so would be unenforceable.

4. Loan

Erith alleged that Mr Murphy confirmed that, in the event MWL was unable to pay back the £85,000 loan, Mr Murphy would reimburse Erith personally. Mr Murphy disputed this, and the judge found in favour of Mr Murphy: the loan was paid into MWL’s account, and there was no record of Mr Murphy undertaking to repay it (in correspondence between Erith and its funders or legal advisers, or between the solicitors drafting the transaction documents).

Further, as above, based on the evidence before the court any such promise by Mr Murphy would have amounted to a guarantee, and would be unenforceable as it was made orally.

5. Admissions

Statements by Mr Murphy’s lawyers that their client was “raising funds to settle the costs due to your client”, and that “arrangements will be put in place to settle the costs due to your client” did not amount to an admission that Mr Murphy owed those sums in his personal capacity. An admission must be in “clear and unambiguous terms” in order to bind a party. In this case, these could simply be references to Mr Murphy putting MWL in funds in order to satisfy the outstanding invoices.

6. Unjust enrichment

Mr Murphy was indeed enriched at Erith’s expense, and that enrichment was unjust in that the services were provided in anticipation of the sale which did not ultimately proceed.

However, it was common ground that a claim for unjust enrichment will not succeed where there is  a subsisting, enforceable contract (MacDonald Dickens & Macklin v Costello [2011] EWCA Civ 930). In this case, in light of the Works Agreement, the judge found that the unjust enrichment claim must fail.


 

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