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Settlement sorted? Five key points to consider when settling construction and engineering disputes

  • United Kingdom
  • Construction and engineering
  • Litigation and dispute management

05-02-2018

Introduction

Parties in dispute often engage in negotiations from an early stage. 

Indeed the Pre-action protocol for Construction and Engineering Disputes prescribes a meeting of the parties in order to encourage the parties to reach a settlement without the need to resort to court proceedings. In addition, the English courts have not hidden their disdain for parties who unreasonably refuse to consider alternative dispute resolution and have imposed sanctions which  have included the payment of costs on an indemnity basis.

Reaching an early settlement of disputes on ongoing construction and engineering projects can be crucial to ensuring that progress remains on track and/or any delay is minimised. An early settlement may also help:

  • preserve the parties’ commercial relationship;
  • avoid the cost and time required to pursue a dispute via a formal dispute resolution process; and/or
  • limit the negative publicity connected with a prolonged dispute and/or delays to the project.

It is easy to think that once the heads of terms of an settlement are agreed, the hard work is over. However, ensuring that the settlement is correctly recorded and documented is essential to ensure that any settlement is fully effective. This article sets out 5 questions that all settling parties should consider when drafting and negotiating a settlement agreement.

1. What is being settled and on what basis?

Parties must be clear on the effect that any settlement has on the existing dispute and/or any other disputes (current or future).  If the settled dispute is not clearly or accurately documented, parties run the risk of committing to more (or less) than they bargained for, and severely prejudicing their future position.

In Kazeminy v Siddiqi[1], Mr Kazeminy (along with a third party, Mr Grano) helped finance technologies developed by Mr Siddiqi, and brought proceedings for the recovery of loans made.  The parties entered into a settlement agreement on the first day of trial.  The settlement agreement was entered into:

“in full and final settlement of all and any claims… whether past, present or future and whether or not known or contemplated at the date of this Settlement Agreement arising under or in any way connected.”

Mr Grano subsequently assigned his right to pursue Mr Siddiqui to Mr Kazeminy, and Mr Kazeminy started fresh proceedings on the basis of those rights.  Mr Siddiqui sought to rely upon the settlement terms and applied to strike out the claim. The Court of Appeal refused his application and allowed the proceedings, stating that Mr Siddiqui was well aware that Mr Grano could make similar claims, but had not sought to join him as a party to the proceedings or the settlement. Mr Grano’s rights could therefore be asserted by Mr Kazeminy on assignment.

The Court looked at authorities including BCCI v Ali[2], Investors Compensation Scheme v West Bromwich Building Society[3] and Arbuthnott v Fagan[4], which all confirm that settlement agreements are to be construed like any other contract: their true scope can only be determined by reference to the context in which it was made. As this involves the courts looking behind the terms of the settlement agreement to determine the parties’ intentions and the reasons for the settlement, parties should carefully consider both of these factors and ensure that they are reflected within the terms of the agreement.

It is important to understand the breadth of issues that may arise, and consider how any court/tribunal may approach such issues in light of the settlement agreement that is being concluded.  

To illustrate this point, in Point West London Ltd v Mivan Ltd[5] Point West thought it had entered into settlement only in relation to certain issues.  However, the settlement agreement recorded a settlement in relation to “all works carried out and any corresponding outstanding matter”.  The settlement agreement also stated that there was a “full and final settlement in respect of the above works, together with any and all outstanding matters” and that it concluded Mivan’s “responsibilities and obligations in respect of their works”.  As a result, Mivan successfully argued that the terms of the settlement were much wider. Mivan was therefore released from a number of issues that Point West did not consider to be settled, including persistent and unresolved defects.

Although the Court’s decision turned upon the specific circumstances, Point West London Ltd v Mivan Ltd clearly demonstrates that very careful consideration must be given to drafting settlement clauses – so as to ensure that every eventuality has been considered and accurately addressed.

2. Are all requirements for a valid settlement satisfied?

The creation of a valid settlement requires:

  • an actual or potential dispute which is capable of settlement;
  • consideration, which can include the exchange of mutual promises (i.e. A promises to do (or not do) ‘X’ against B, and B promises not to issue a claim against A on that basis;
  • an identifiable agreement which is complete and certain; and
  • an intention to create legal relations.

The “complete and certain” requirement is the one that attracts the most controversy.  In determining if a settlement is “complete and certain”, the English courts look at the whole course of negotiations.  For the settlement agreement to be “complete and certain”, all of the material terms must have been agreed and expressed with sufficient clarity.

In Willis Management (Isle of Mann) Ltd v Cable & Wireless Plc[6] the Court of Appeal considered whether, read together, certain documents (a letter and email) constituted an enforceable agreement of sufficient certainty.  The court said that, taken together, the letter and email contained an agreement to agree an essential term and was not sufficiently certain so as to be enforceable. In overturning the High Court’s decision (which found that the terms of the letter and email amounted to an agreement), Lord Justice Tuckey found that:

“[whilst the court] must strive to give legal effect to what the parties have agreed … the court cannot make for the parties the agreement which they have not made for themselves.”  

In practice, parties must make sure that all agreed terms and requirements are documented within the settlement agreement to ensure its enforceability. If a settlement agreement is not sufficiently certain so to be enforceable, the English courts are reluctant to fill in the gaps.  In Shirley Jackson and others v Subhash Kanji Thakrar and others[7] the then Judge Coulson QC highlighted that although settlement should be promoted wherever possible, there were limits to the programmatic approach to be adopted by the courts.  He said:

“Where, for whatever reason, a binding compromise has not been reached, it is wholly illegitimate for the court to try and fill in the gaps, in order to achieve a result that the parties themselves cannot be taken to have intended.”

In practical terms it is therefore important to ensure that, when preparing a settlement agreement, the contents of the agreement flow directly from the terms agreed between the parties and that the agreement accurately records those terms.

Parties should also be wary of the risk of concluding a binding agreement earlier than intended like, for example, where a settlement sum has been agreed in principle but the terms of agreement have still to be negotiated.

In Newbury v Sun Microsystems[8] the parties were engaged in litigation relating to alleged unpaid contractual commission. Shortly before trial, Sun Microsystems offered to settle by paying Mr Newbury, within 14 days of acceptance, a sum of money in full and final settlement. Although Mr Newbury accepted, the parties were subsequently unable to agree the wording of the Order which ended the proceedings. Mr Newbury applied to court for a declaration that a binding agreement had been reached upon his acceptance of Sun Microsystems’ offer to settle.  The English court found that the correspondence did give rise to a binding legal contract between the parties, and that the execution of that agreement was not a condition of the creation of a binding contract.

The Newbury case illustrates the risk of parties inadvertently concluding binding settlement agreements, in circumstances where they did not intend to do so.  In order to avoid this eventuality,  parties should ensure that all settlement correspondence and/or drafts of the settlement agreement are marked “Without Prejudice”  and/or “Subject to Contract”. This makes it expressly clear that the parties have not reached a final and binding settlement.

3. Is the settlement “reasonable”?

In the settlement of construction and engineering projects Employers and Contractors commonly settle disputes which, as a matter of fact, arise in respect of sub-contracted element(s) of the project.  In such instances, the Contractor will wish to protect its right to seek a recovery for the settlement from the relevant subcontractor(s).  Primarily, the Contractor will be concerned that it has fully reserved its rights as against the relevant subcontractor(s).  However, the general principle is that, in order to sustain a claim for recovery against a third party following settlement, a Claimant must be able to demonstrate that the relevant settlement (and crucially the settlement sum) are reasonable.

There is substantial case law and guidance on what will be construed as a “reasonable settlement”.  In the recent case of 125 OBS (Nominees1) v Lend Lease Construction (Europe) Ltd[9] the contractor (Lend Lease) was found liable to pay £14.7 million in damages, £6 million of which was to cover losses for sums paid to third parties in settlement of proposed claims for loss.

The Court encouraged reasonable settlements, and commented that the settled claims would have to have been “obviously hopeless” before the settlement could be regarded as unreasonable.  In this instance, the Court held that the Claimant had not settled the third party claims at knowingly inflated sums and such settlements were reasonable in the circumstances. Mr Justice Stuart Smith held that each of the steps leading to the losses claimed “were foreseeable” and could “fairly and reasonably be considered to have arisen naturally… from the Defendant’s breaches of contract”. On that basis, the Defendants should not “be immune from responsibility for the predictable losses of this type.” 

This case confirms existing principles set out in Biggin v Permanite[10] and Siemens Building Technologies FE Ltd v Supershield Ltd[11]. Settlement with one or more parties is viewed positively and will not be of detriment to continued proceedings providing that the claimant acted reasonably in settling the claim and the amount of settlement was reasonable in the circumstances.

4. Should third party rights be preserved or excluded?

Parties should carefully consider any third party rights in relation to the settlement, and whether the settlement should:

  • confer a benefit upon a third party; or
  • enable recovery from a third party.

In the UK, the Contracts (Rights of Third Parties) Act 1999 (the “Third Party Rights Act”) means that a settlement may affect a third party. The Third Party Rights Act entitles a non-contracting party to enforce a contract’s terms if:

  • the contract expressly provides that it may; or
  • the contract purports to confer a benefit on the party and the contracting parties cannot show that they did not intend the contract to be enforceable by him.

The third party must be expressly identified by name, as a member of a class, or a particular description. The third party need not be in existence when the settlement is entered into.

This operation of the Third Party Rights Act inevitably provides challenges when drafting a settlement agreement.  Settling parties should therefore consider whether or not Third Party Rights Act is to apply, and expressly state if it applies in the agreement. If the parties do not want third party rights to apply then such rights should be explicitly excluded.

When settling a dispute, it is also important to consider whether the release from liability should extend to parties associated with the released party, including its related entities (parent, subsidiary and/or group companies), employees, officers, contractors and agents. This may potentially impact upon future claims against the related third parties and therefore any wording on this point should be carefully reviewed, particularly in the context of the future relationship of the parties. 

Take, for example, if Person A claims that Company B misled them as a result of misleading statements that were made by Company B’s employees. If Company B settles with Person A, it should consider a release from liability that extends to the employees made the misleading statements. Otherwise, there remains a risk that separate claims will be brought against the employees, who may then make a contribution or indemnity claim from Company B as their employer.

5. Is the settlement agreement a construction contract in its own right?

In the UK, the right to refer a dispute under a construction contract to adjudication at any time is a powerful tool.  However the courts have seen a number of attempts to resist the enforcement of adjudications on the grounds that they concerned the settlement of a construction contract dispute (rather than a construction contract).

In J Murphy & Sons Ltd v W Maher and Sons Ltd[12] Murphy engaged Maher as a sub-subcontractor. The parties disagreed over the value of Maher’s account but managed to reach a settlement following discussions.  The agreed settlement was recorded through an exchange of emails, which recorded that the parties agreed a ‘final account sum’ at £720,000.00.

A dispute was referred to adjudication when the agreed settlement sum was not paid. Maher issued a two referrals; one pursuant to the sub-subcontract and (following the first challenge by Murphy (see (a) below) one pursuant to the Scheme. Murphy responded to both referrals by challenging the adjudicator’s jurisdiction on the basis that:

  • in relation to the first referral, the sub-subcontract included the TCC as the nominating body so the adjudication provisions were deficient and the Scheme applied;
  • in relation to the second referral, on the basis that the adjudicator had no jurisdiction under the Scheme to consider a dispute arising out of the alleged final settlement.

Part 8 proceedings were issued by Murphy. Sir Robert Akenhead distinguished between:

  • a settlement agreement that varies the original contract, such variation being subject to the same adjudication provisions as the original contract; and
  • standalone settlement agreements that give rise to a new set of rules for the parties’ relationship, such agreements not being subject to the adjudication provisions of the original contract.

In reaching his decision, Sir Robert Akenhead held that the agreed settlement “was in effect a variation of the earlier agreement. It was substituting a figure as due for whatever else was due by way of resolving a claim under the sub-subcontract”. Accordingly, the matter could be referred to adjudication.[13]

In practice, there is little a party can do to prevent a counterpart from bringing an adjudication in relation to a construction contract as the right to adjudicate is a statutory one. However, express wording confirming that a settlement agreement is not considered to be a construction contract and/or the inclusion of a tailored dispute resolution procedure should encourage parties down other routes, rather than jumping straight to adjudication.

Conclusion

When entering into settlement negotiations, the primary consideration is to ensure that the agreement is clear as to what is actually being settled and ensuring that this translates into an enforceable and accurate settlement agreement.  An obvious point perhaps.  But, as the case law  above illustrates, it is important to set out exactly what falls within the scope of the settlement and parties cannot simply rely upon broad terms of settlement to catch all potential settlements reached.

The above is not an exhaustive list of questions that parties should ask when entering into a settlement agreement.  Each settlement will turn on its own facts, and wider consideration should be given to the relevant issues and wider circumstances, particularly where the settlement is in relation to complex claims and/or third party rights and claims may feature.

 


 

 

[1] [2012] EWCA Civ 416

[2] [2003] EWCA Civ 639          

[3] [1999] Lloyd’s Rep. P.N. 496               

[4] [1996] LRLR 135

[5] [2012] EWHC 1223 (TCC)

[6] [2005] EWCA Civ 806

[7] [2007] EWHC 271 (TCC)

[8] [2013] EWHC 2180 (QB)

[9] [2017] EWHC 25 (TCC)

[10] [1951] 2 KB 314 

[11] [2009] EWHC 927 (upheld in the Court of Appeal; [2010] EWCA Civ 7)              

[12] [2016] EWHC 1148 (TCC)

[13] It is important to note that, following the Murphy decision, the court indicated that it would be sympathetic to an application for permission to appeal because it would be helpful to have a Court of Appeal decision on the issues raised. However, given the facts of the Murphy case, an appeal may not occur.

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