Settling construction disputes - some points to consider

There are many factors to address when settling any dispute, including the parties to be bound, dealing with any formal proceedings, payment provisions, the scope of the settlement, costs and interest. In this note we highlight some particular points to consider when settling construction disputes.

 1.  Ensure that the settlement negotiations are conducted on a “Without prejudice and subject to contract” basis

This is to ensure, so far as possible, that:

• negotiations can take place freely without admissions or concessions being used in any proceedings; and

• that terms agreed only become binding when incorporated into a signed document

See: Oceanbulk Shipping & Trading SA v TMT Asia Limited [2010] EWCA Civ 79 and Ofulue v Bossert [2009] UKHL 16 

2.  The scope of the settlement

Is the settlement intended to cover all known claims, and all unknown and future claims, for example in respect of latent defects?

A settlement agreement expressed to be in “full and final settlement of all claims”, or “in full and final settlement in respect of obligations for work executed under the contract”, particularly if linked to a non-exhaustive list of claims, is likely to be construed as an agreement that incomplete or defective items of works are covered however and whenever they arose.  This would mean that all claims in respect of patent defects, either those which were known about, or defects which could reasonably have been discovered, at the time of the agreement would be settled.  Clear wording should be used to retain or deny rights to pursue claims arising from latent defects.  See: YJL London Ltd v Roswin Estates LLP [2009] EWHC 3174 (TCC).

3.  Multi-party disputes – reasonable settlements

3.1 Background

A party in a construction project may want to settle a claim against it, and seek to recover the settlement sum from another party in the contractual matrix.  For example, an employer may claim against a contractor who settles the claim. The contractor may later, in separate proceedings, seek to recover the amount of the settlement from its sub-contractor (or other parties responsible for the loss).  The sub-contractor may claim that it should not be responsible on grounds that the contractor’s settlement with the employer was not reasonable.

In Siemens Building Technologies FE Limited v Supershield Limited [2009] EWHC 927 (TCC), the judge summarised the legal principles which apply, with particular reference to Biggin v. Permanite [1951] 2 KB 314, when considering whether a settlement was reasonable.  These principles provide useful guidance on steps (which we set out below) a defendant should take to maximise its chances of making the best recovery from another party.

3.2 The legal principles

Once the court is satisfied, on the usual principles, that C is liable to A,  that raises the question of the extent to which the settlement between A and B can be used to establish that C is liable to A at the second and third stages. The following principles are to be applied to such settlements:

(1) For C to be liable to A in respect of A's liability to B which was the subject of a settlement it is not necessary for A to prove on the balance of probabilities that A was in fact or would have been liable to B or that A was in fact or would have been liable for the amount of the settlement.

 (2) For C to be liable to A in respect of the settlement, A must show that the specified eventuality (in the case of an indemnity given by C to A) or the breach of contract (in the case of a breach of contract between C and A) has caused the loss incurred in satisfying the settlement in the manner set out in the indemnity or as required for causation of damages.  A must also show that the loss was within the loss covered by the indemnity or the damages were not too remote.

 (3) A must demonstrate that the claim is of sufficient strength reasonably to justify a settlement and the amount paid in settlement is reasonable having regard to the strength of the claim. In assessing the strength of the claim, unless the claim is so weak that no reasonable party would take it sufficiently seriously to negotiate any settlement involving payment, it cannot be said that the loss attributable to a reasonable settlement was not caused by the eventuality or the breach.

 (4) In general if, when a party is in breach of contract, a claim by a third party is in the reasonable contemplation of the parties as a probable result of the breach, then it will generally also be in the reasonable contemplation of the parties that there might be a reasonable settlement of any such claim by the other party.

 (5) The test of whether the amount paid in settlement was reasonable is whether the settlement was, in all the circumstances, within the range of settlements which reasonable people in the position of the settling party might have made. Such circumstances will generally include:

• The strength of the claim;
• Whether the settlement was the result of legal advice;
• The uncertainties and expenses of litigation;
• The benefits of settling the case rather than disputing it;
• The question of whether a settlement was reasonable is to be assessed at the date of the settlement when necessarily the issues between A and B remained unresolved.

3.3 Steps for a defendant to take to before settlement of a primary claim 

• The defendant should try and ensure that a settlement binds all claimants and potential claimants, to avoid receiving claims in future from them after the primary claim has been settled;
• Ensure that the claim is properly investigated and that legal advice is taken on both the merits of the case and the ranges of settlement value;
• Record the reasons for the settlement;
• Keep the other party (party “C” in the examples above) informed of the claim and the proposed settlement, and seek their agreement to the proposed terms of settlement;
• If the settlement is to cover various disputed items, record how much of the settlement payment is attributable to each item;
• Ensure that the settlement agreement can be referred to in later claims against others, and that it is not subject to confidentiality clauses which could prevent this;
• Try to ensure that the settlement agreement does not waive rights to seek recovery from others in respect of the subject matter of the settlement.  (Note: to avoid being brought into the claimant employer may seek; and
• Note the date of the settlement.  To avoid a claim against others liable in respect of the same damage being time barred, proceedings must be commenced against them within two years from the date of the settlement

4.  Costs

Settlement terms should expressly address liability for, and preferably the amount of, costs of the dispute or proceedings. 

In Southern Electric v Mead Realisations, a defendant offered to settle proceedings to enforce an adjudicator’s decision by paying pay the “balance” due, with no specific reference to costs.  This was held by the judge, on the facts, to include not only the balance of any sums under the adjudication decision, but also interest and any other ancillary relief that was being sought in the proceedings, including costs.

In Amber Construction Services Limited v. London Interspace HG Limited TCC, the defendant filed an admission to claim which had been brought by the claimant to enforce an adjudication decision. The issue that arose there was whether or not the claimant was only entitled to fixed costs under the Civil Procedure Rules (“CPR”), which in that case were £100, or whether the court retained a discretion to allow a different amount of costs. It was held that the court retains a discretion to allow to a party a sum different to the fixed costs regime. The court indicated that in Technology and Construction Court cases for enforcement of an adjudicator’s decision it was wholly appropriate for the court to exercise its discretion to order costs at a greater level of costs fixed by the CPR.

5.  What is to happen if one party breaches the settlement agreement?

Parties to a settlement agreement should consider whether the settlement is intended:

• to dispose of the underlying dispute unconditionally; or
• to be conditional upon the performance of terms ( such as payment by a certain date), with the right to revive the underlying dispute if the terms are breached

It is not uncommon for a claimant to accept a lesser sum in settlement on the basis that the settlement monies are received by a certain date, for example the claimant’s financial year end.  A settlement might also be conditional on certain works, or sections of works, being completed by a certain time.  If a party wants to retain the right to revive the underlying claim if a particular term of the settlement agreement is not satisfied, rather than having to enforce the settlement agreement, this should be specifically provided for in the settlement agreement.

6.  Will the settlement agreement be subject to the Housing Grants, Construction and Regeneration Act (“the Act”)?

If the settlement agreement is construed as a variation to an underlying contract for construction operations governed by the Act, statutory payment and adjudication provisions will be implied into the agreement even if such provisions are not specifically provided for in the agreement.  Whether it is a variation of the underlying contract will depend on the facts of each case and the wording of the settlement agreement.

If the agreement is in full and final settlement of all claims, but specifically reserves the right to deduct in respect of latent or other specified defects, a withholding notice must be served if the cost of rectifying those defects is quantified and to be withheld before payment of the settlement sum.  If a withholding notice is not served, the receiving party would probably be able to obtain an adjudication award for the full amount of the settlement sum, without any deduction, leaving the paying party to take separate proceedings to recover in respect of the deductions.  This will not only affect the paying party’s cash flow, but could result in no recovery in respect of deductions if the receiving party becomes insolvent before the deductions are recovered.