Under the usual principles of causation, in order to be successful in its claim before a court or tribunal, the claimant has to demonstrate that there has been a breach of contract and that that breach caused the claimant loss and/or damage, and has to prove the quantification of that loss. However, where parties are reaching a negotiated settlement, they will often bypass these rules and simply do a deal whereby they agree to drop their respective claims in exchange for the payment of a single lump sum that covers all claims and counterclaims.

Contractors, who often sit in the middle of a contractual chain, are commonly faced with a situation whereby they are required to reach such a negotiated settlement with, for example, the employer, arising as a result of a breach of contract by a subcontractor. The contractor will then look to recover the settlement amount from the subcontractor. But, in doing this, the contractor will be attempting to recover a loss that has not been established under the usual principles of causation. How can a contractor in this situation be sure to recover the settlement paid to the employer?

The Biggin Principles

The starting point for any analysis of these issues is to consider the well-known legal principles formulated in the case of Biggin v Permanite1 ("Biggin Principles") as applied in a number of subsequent cases concerning claims for the recovery of settlements with third parties. In essence, the Biggin Principles provide that, in order for the contractor to successfully recover sums reached in settlement with a third party, the claimant must show contemporaneous evidence to establish that both: (i) the defendant's breach caused the claimant's liability to the third party ("Causation"); and (ii) that the settlement and the settlement amount were reasonable in the circumstances ("Reasonableness"). The Biggin Principles can be broken downs as follows:

  • Causation: There has to be an effective causal link between the defendant's breach and the need for the claimant to pay a settlement sum to a third party. If there is no such link, there will be no liability on the defendant to pay the settlement sum to the claimant, irrespective of whether or not the settlement was reasonable.2
  • Reasonableness: The burden of proof in establishing the reasonableness of the settlement is on the claimant. The claimant has to put forward reliable evidence in order for the Court to conclude that the settlement was reasonable.

The law encourages reasonable settlements particularly where strict proof would be a very expensive exercise.3 When determining "reasonableness", the court will consider the public policy interest of encouraging mediation and the settlement of disputes. The court appreciates that claims may arise that appear intrinsically weak, but which common prudence suggests should be settled in order to avoid the uncertainties and expenses of litigation.

Therefore, it is not essential to prove that the third party claim was likely to succeed for the settlement to be "reasonable". However, the claimant will need to provide evidence to allow the court to conclude that, on the information available at the time, the third party claim was of sufficient strength to justify the settlement and that the settlement amount was within the range of what would be considered reasonable.4  

If, on the facts known to the claimant at the time, the third party claim had a reasonable prospect of success then, even if the claimant is found on later analysis not to be liable to the third party, the settlement sum could still be recoverable against the defendant whose breach caused the loss.5 Of course, the fact that the claimant was not liable to the third party either at all or for anything approaching the sums payable may be a factor in determining that the settlement was not reasonable. Nevertheless, it is generally understood that a claim will usually have to be so weak as to be obviously hopeless before the settlement would be deemed to be unreasonable.6  

Where a settlement is not established as reasonable, the settlement will be irrelevant to the calculation of the true measure of the claimant's loss, and the amounts paid in settlement will be irrecoverable as against the defendant.7 Nonetheless, it will still be open to the claimant to recover discrete elements of the settlement sum to the extent that it can be proved that there is an effective causal link between the payment of those sums and established breaches of duty. In those circumstances, it is legitimate for the court to consider what was likely to have been payable to the third party as a matter of fact and of law as the foreseeable result of the defendant's breaches.  

The High Court's decision in Costain v Haswell

In the case of Costain v Haswell8, Costain was the construction and civil engineering contractor on a water treatment works project in the UK. Costain engaged Haswell as consulting engineers to design suitable foundations for the works. Haswell advised certain ground treatment works to the existing foundations, but these failed, leaving Costain having to substitute the pile foundations which resulted in delay and extra cost. The Court found that Haswell's design was defective, and therefore that Haswell was in breach of contract.

As part of Costain's damages claim, it sought to recover part of the sums that it paid in settlement to one of its contractors, "OD", for delay, disruption and prolongation costs arising as a result of a number of delays caused by Costain. Costain contended that some of these delays, including to the start of two elements of OD's works, occurred as a direct result of delays caused by Haswell's breach of contract.  

As part of its settlement with OD, Costain paid GBP 850,000 based on a total of 36 weeks' delay caused by Costain (i.e. GBP 23,611 per week). Two years later, Costain's representative at the negotiations with Haswell, drew up a file note just prior to his retirement recording the course of the negotiations with OD and that he considered that of the 36 weeks' delay, 21.6 weeks and therefore GBP 510,000 was attributable to delays caused by Haswell. Accordingly, Costain claimed GBP 23,611 for each week of delay found attributable to Haswell. Haswell maintained that Costain's claim should fail in its entirety as it had not been proved.

The Court acknowledged the need to encourage sensible settlements of commercial disputes and was prepared to take into account that where settlements are made by busy commercial people there may be less, or even no, detailed paperwork showing the precise breakdown of the settlement sum with respect to the various heads of claim.  

However, the Court considered that there was a limit to the leeway that claimants could be given. It held that Costain had failed to establish the essential causal link between Haswell's breach and Costain's payment of sums in settlement to OD due to the "virtually complete lack of contemporaneous evidence and/or delay analysis". In particular:

  1. It was striking that the contemporaneous documents showed no references whatsoever to suggest that OD's works had been delayed by matters within Haswell's responsibility. OD's claims for extensions of time and recovery of costs referred to the absence of work faces in accordance with the programme but gave no further particulars. Further, OD's own claim document suggested that it had not been delayed by the foundation delays as alleged.
  1. Costain had made no attempt to deal with what the Court considered was a major problem in presenting its claim, namely that the claim was based on the recovery of the whole of OD's site costs and a rate of ₤23,611 per week, whereas on any view there was no evidence that any part of OD's works other than those connected with the foundations, were in any way affected by delays caused by Haswell.
  1. Further, the settlement reached with OD was a global settlement with respect to delays caused by a number of different causes. Costain had not made any attempt to extract from the global sum paid that part that was attributable to the delays caused by Haswell. In addition, no attempt had been made, either contemporaneously or later, to show how the alleged delay of 21.6 weeks had been calculated.

In concluding, the Court recognised that it was highly likely that delays caused by Haswell's failures would have led to delays to OD's works, but held that the claim had to fail because there was simply no satisfactory material available from which the Court could determine what that delay was. Further, while it may well have been that OD had incurred costs as a result of such delay, there was simply no material to establish what those costs were. The contractor failed to establish the necessary causal link and therefore the claim failed in its entirety.

The Court of Appeal's decision in Supershield v Siemens

The more recent case of Supershield v Siemens9 concerned a contractor's claim against its subcontractor for the recovery of settlements reached with the owner, tenant and other parties of claims arising as a result of a flood in an office building in London. The High Court held that the subcontractor was in breach of contract as alleged and that the settlements reached by the contractor with the third parties were reasonable, applying the Biggin Principles. The subcontractor appealed on the grounds that the High Court had not properly examined the strength of the contractor's causation and remoteness defences, a proper analysis of which would have concluded that the strength of the contractor's defence was not reasonably reflected in the settlement reached.

The Court of Appeal held that, when considering the reasonableness of the settlement in accordance with the Biggin Principles above, the judge will bear in mind that he is likely to have a less complete understanding of the relevant strengths of the settling parties than they had themselves, especially in complex litigation. Accordingly, it will not embark on a disproportionately detailed investigation of the merits of the parties' claims and counterclaims or be looking to decide what assessment it would have made of the most likely outcome of the settled claim. Instead, the judge will be deciding whether the settlement was within the range of what was reasonable. The Court of Appeal reviewed the High Court decision and held that the contractor had provided sufficient evidence to show that it was reasonable to settle the claims made against it as it did.

Conclusion

The Costain case is a salutary lesson for contractors seeking to recover settlements made with third parties. Contractors cannot simply rely on establishing the defendant's breach and then put forward the third party settlement as quantification of its loss. They still have to satisfy the causation and reasonableness requirements established in the Biggin Principles. The reasonableness of the settlement will not be considered against a detailed investigation of the parties' respective claims and counterclaims, but contemporaneous records of the basis of the settlement will usually be required.