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Erith v Murphy – oral contracts & knowing who you are contracting with

19 October 2017. Published by Sarah Shaul, Associate and Simon Hart, Partner

The High Court found that a waste removal company (Erith) which had provided its services to a company which had gone into liquidation (MWL) was unable to recover outstanding sums payable to it from MWL's owner. The judge found against Erith and concluded that the contract for services was between the two companies, Erith and MWL, and that the owner of MWL had not given an indemnity or an enforceable guarantee in his personal capacity. This case is a cautionary tale about the need to evidence contractual terms in writing and ensuring that parties are clear with whom it is they are contracting.

Background

The claimant (Erith) is a group of companies which provide enabling services to the construction industry which includes waste removal and haulage services. Erith is owned by Mr. Darsey. The defendant, Mr. Murphy, was the owner of a site located on the east side of Horn Link Way, Greenwich, operated by his company, Murphy's Waste Limited (MWL) (now in liquidation) which operated as a waste collection and transfer station.

Erith contended that in August/September 2014 Mr. Murphy entered into an oral agreement with Erith that Erith would supply waste clearance services for which Mr. Murphy would pay or indemnify the Erith group (referred to in the proceedings as the Works Agreement). This was in conjunction with the parties entering into negotiations for Erith to purchase the site and MWL. No specific price was agreed for Erith's services but Erith estimated that the costs would amount to approximately £500,000 based on Mr. Darsey's visual assessment of the quantity of waste. In October 2014 MWL paid £109,507.17 in respect of the services provided by Erith (using funds provided by Mr. Murphy) following invoices received by MWL from Erith. Erith did not issue any further invoices on the understanding that further waste removal costs incurred by Erith would be reflected in the price for the site and MWL.  

Erith asserted that between November 2014 and January 2015 the parties entered into a revised agreement (referred to in the proceedings as the Revised Works Agreement) under which Erith agreed to provide further waste clearance services (up to a value of £1 million) for which Mr. Murphy would pay. Erith contended that the agreement had been that payment for these services would be deferred and treated as part of the purchase price and that in event that the sale did not proceed, Mr. Murphy would be personally liable.

Ultimately, the sale of the site and MWL to Erith did not proceed as the parties were unable to agree terms. Shortly thereafter MWL went into liquidation. The sum outstanding for the services provided by Erith was £630,053.82. Erith stated that additionally, Erith had made a loan of £85,000 to Mr. Murphy for staff costs for which it was entitled to be repaid.

Mr. Murphy disputed Erith's claim on the basis that the Works Agreement was made between Erith and MWL (not Mr. Murphy in his personal capacity). He stated that there was no Revised Works Agreement, no indemnity/enforceable guarantee and that the loan of £85,000 was made to MWL and not to Mr. Murphy in his personal capacity.

Issues to be decided by the Court

The agreed list of issues between the parties was as follows:

  1. Was the Works Agreement made by Erith with MWL or with Mr Murphy (in a personal capacity)?
  2. Did the parties enter into a Revised Works Agreement?
  3. Did Mr Murphy agree to be personally liable to pay for the services, and if so was such agreement enforceable?
  4. Was the loan of £85,000 made by Erith to MWL or to Mr Murphy and did it fall within the scope of any indemnity / guarantee by Mr Murphy?
  5. Did Mr Murphy's solicitors, on behalf of Mr Murphy, acknowledge and admit in correspondence with Erith's solicitors that he personally owed any, and if so what, sums to Erith?
  6. Was Erith entitled to recover the sums claimed from Mr. Murphy: (a) under, or for breach of, any of the agreements; (b) pursuant to the alleged indemnity/guarantee; (c) by way of a claim for unjust enrichment?

 

The Works Agreement

The judge found that the Works Agreement was entered into by Mr. Darsey on behalf of Erith and by Mr. Murphy on behalf of MWL. The judge concluded that the fact that the invoices submitted in October 2014 by Erith in respect of the services provided were made out to MWL was "strong evidence" that both parties considered the agreement to be with MWL (not Mr. Murphy). This is despite the fact that the funds paid out to Erith from MWL were funds provided by Mr. Murphy which had been deposited into MWL's account. Furthermore, Mr. Darsey had accepted in cross-examination that the initial agreement for waste removal services was with MWL.

Erith had relied on the terms of the sale and purchase proposal sent by Mr Darsey to Mr Murphy on 27 October 2014 as evidence that Mr Murphy accepted personal responsibility for payment. Erith stated that as owner of the site and the business, Mr. Murphy would have all purchase monies paid to him. There was a provision in this proposal for £600,000 to be deferred for twelve months as a contingency against sums owed to Erith in respect of the waste removal services. Erith argued that the inclusion of such contingency in respect of sums otherwise payable to Mr Murphy indicated that Mr Murphy would be liable for such sums. If, as anticipated by the parties at that time, the sale and purchase agreement were concluded, the costs of the waste removal would be deducted from the contingency. If the transaction did not proceed, Mr Murphy would pay the sums due in respect of those services.

By late 2014 into early 2015, just before the parties' negotiations broke down and the sale fell through, the proposed agreement had been that Erith would purchase the site only as Mr. Darsey had concerns about the financial condition of the business. In an e-mail from Mr Pini of HSBC dated 5 December 2014 (which was not contradicted by Erith when received) it was stated that the contingency of £600,000 would be held against the purchase price for the business only and would not affect the purchase price of the land, which was £3 million. This was also reflected in the terms of a revised proposal for the sale of the land without the business in January 2015, which remained at £3 million i.e. it was not affected by any of the site clearance costs. The judge therefore disregarded this aspect of Erith's claim.

The Revised Works Agreement

The judge concluded that it was not credible that there had been an agreed increase in the waste removal costs of up to £1 million in November 2014 (to be dealt with by way of deferred consideration or direct payment by Mr. Murphy) when there was no evidence that this revision had been communicated to the funders or the solicitors conducting the negotiations. The judge came to this conclusion despite the fact that he accepted that it was clear from the evidence that Mr. Darsey and Mr. Murphy conducted most of their dealings in meetings or by telephone (rather than by e-mail or other documented means). 

Indemnity/guarantee

While the judge noted that Erith sought assurance from Mr. Murphy that he would be paid for the site clearance services if the sale did not go ahead, he concluded that such assurance was given to Erith from MWL and not from Mr. Murphy in his personal capacity. All the invoices which Erith submitted were only ever addressed to MWL and not to Mr. Murphy. Mr. Murphy may have provided the requisite funds by depositing money into MWL's account but it was always paid out from MWL's account.

On this basis the judge stated that the arrangement amounted to a guarantee rather than an indemnity as Mr. Murphy's liability only arose to the extent that MWL failed to pay. Guarantees must be made in writing or evidenced in writing and signed. If therefore there was a guarantee, it was only ever made orally and in such circumstances the judge concluded that it was unenforceable.

Loan

Erith argued that Mr. Murphy had assured him that in the event that MWL was unable to pay back the £85,000 loan that he provided to alleviate MWL's cash flow issues, Mr. Murphy would reimburse Erith personally. Mr. Murphy stated that this was not the case. Once again there was no documentary evidence of a personal assurance from Mr. Murphy. As with the above analysis, based on the evidence before the judge, he concluded that the arrangement would have amounted to a guarantee in any case and without such guarantee being in writing or evidenced in writing and signed, it was not enforceable.

Admissions

Erith asserted that the wording in the e-mail exchanges between the parties' solicitors admitted that Mr. Murphy was personally responsible for payment of the outstanding removal costs. Erith pointed to the fact that the solicitors for Mr. Murphy had referred to the fact that their client was in the process of "raising funds to settle the costs due to your client " and "arrangements will be put in place to settle costs due to your client". However, the judge noted that in the context of Mr. Murphy's financial support of MWL in 2014-2015 the arrangements could be a reference to an injection of funds into the MWL account to enable it to discharge its debts. He stated that an admission must be "clear and unambiguous" in order to bind a party. The words exchanged between the parties' solicitors did not therefore amount to an admission of personal responsibility on Mr. Murphy's behalf.

Unjust enrichment

In the alternative, Erith had argued that they had a claim for the costs of the waste removal service in unjust enrichment. In order to establish such a claim Erith had to establish that:

  1. Mr. Murphy had been enriched;
  2. The enrichment was at the expense of Erith;
  3. The enrichment was unjust; and
  4. There were no available defences to Mr. Murphy.

 

The judge agreed that Mr. Murphy was enriched at Erith's expense. The waste removal had enabled Mr.  Murphy to benefit from the maintenance of MWL's licence (which otherwise would have been withdrawn/suspended) and the increased value of the site. However, he stated that it was common ground that a claim for unjust enrichment will not succeed where there is a subsisting, enforceable contract. In this case there was a Works Agreement made between Erith and MWL in respect of the waste removal services. As such, the claim in unjust enrichment failed.

Conclusion & Comment

In conclusion, the judge found that there was a valid contract for the waste removal services between Erith and MWL. However, Mr. Murphy was never a party to this contract in his personal capacity. He did not therefore undertake any personal responsibility for the costs. The judge therefore dismissed Erith's claims.

This case demonstrates the importance of ensuring that parties agree contractual terms in writing and document their negotiations with sufficient detail. It might also indicate the importance of informing all parties involved in the negotiation of a transaction of the details of discussions or amendments to the arrangement and/or terms. In this case much of the crucial detail of the evolving deal was discussed only between Mr. Darsey and Mr. Murphy either on the telephone or in person and there were therefore no third parties with whom to verify or corroborate the content of their negotiations at trial. It further highlights how important it is that parties ensure they understand who the parties are with whom they are contracting; as this case demonstrates any misunderstanding in that regard can have great adverse consequences.