The recent TCC decision in Siemens Building Technologies FE Limited (Part 20 Claimant) v Supershield Limited (Part 20 Defendant) [2009’ EWHC 927 provides a good example of the difficulties that can arise where a claim involving numerous parties in a contractual chain is settled. Where one party settles with those further up the contractual chain and then seeks to recover the sums it has paid in settlement from its own sub-contractor, the sub-contractor may try to argue that the damage was too remote and/or the settlement was unreasonable. Here, the court concluded that questions of remoteness should not depend on whether something else, if it had functioned correctly, would have avoided or reduced the damage ultimately suffered. The court also sets out six principles governing the question of whether a concluded settlement was reasonable. To read the judgment click here.

Siemens v Supershield: In October 2001, a nut and bolt connection on a float valve in a storage tank failed and water from the tank (which supplied the sprinkler system) overflowed into the basement of Slaughter and May’s new office building. The resulting flood led to extensive damage. Slaughter & May sued the contractor, Skanska, who then joined the ME sub-contractor, Haden Young Limited, who then joined its sub-contractor, Siemens (who had been contracted to supply and install the sprinkler system) who then joined its sub-contractor, Supershield, who had installed the sprinkler system, including the ball float valve and lever arm that failed. Supershield had a contractual obligation to tighten up the nut and bolt connection that failed because it had not been sufficiently tightened when initially installed. Supershield had agreed to indemnify Siemens against any loss arising from any breach or non-performance by it under that contract.  

Siemens settled the claims with all parties up the contractual chain but maintained its Part 20 claim against Supershield. Supershield defended the claim on the basis that: (a) the damage was too remote to have been within the contemplation of the parties in that the drains, alarms and maintenance that had been installed in the building should have avoided a flood from occurring so that the failure of these devices/methods constituted intervening acts, which had broken the chain of causation; and (b) Siemens’ settlement with Haden Young had been unreasonable.  

In relation to the issue of remoteness, the court concluded that ‘questions of remoteness should not turn on issues of the likelihood of damage being reduced or limited by particular devices or methods which might not be effective.’ Drains block, drain pumps malfunction, building management systems sometimes do not operate or warnings are not acted on and maintenance is not always effective. As a result, the damage was not too remote.  

In relation to the issue of whether a party’s settlement of a claim against it was reasonable, the court set out six principles:  

  1. For C (Supershield) to be liable to A (Siemens) in relation to A’s liability to B (Hayden Young), which was the subject of a settlement, it was not necessary for A to prove on the balance of probabilities that it was or would have been liable to B or that A was or would have been liable for the amount of the settlement;  
  2. A simply needs to 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 and that the loss was within the loss covered by the indemnity, or the damages were not too remote;  
  3. Unless 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, it cannot be shown that the loss has been caused by the relevant eventuality or breach of contract. 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:
  1. The strength of the claim;
  2. Whether the settlement was the result of legal advice;
  3. The uncertainties and expenses of litigation; and
  4. The benefits of settling the case rather than disputing it.
  1. 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.