Picture the familiar scenario: An employer claims against the D&B contractor for damages in respect of defects in its building. It is the contractor's case that the negligence of other parties, such as the sub-contractor, engineer or architect, have also caused the appearance of the defects. Cue the contractor's Part 20 proceedings against the third party for contribution to the damages payable by the contractor.
But what if the contractor settles with the employer? By virtue of section 1(4) of the Civil Liability (Contribution) Act 1978, the contractor can still seek contribution from the third party. The provision states:
(4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established
This provision is intended to prevent the need for the defendant to prove it was in fact liable to the claimant as a pre-requisite to bringing a claim for contribution against the third party.
But, where does one look to determine the "factual basis" of the claim which is assumed against the defendant? Plus, what if the defendant claims that the claimant's claim was time-barred: Can the third party rely on this to defeat the third party action?
This was considered and answered by the Court of Appeal in the case of IMI Kynoch Limited and others v. Delta Limited and others  EWCA Civ 773.
IMI and Delta had been found by the European Commission to have participated in an unlawful price-fixing cartel in the market of copper alloy fixings. Companies belonging to the Travis Perkins Group ("TP") brought claims against IMI to the tune of £390 million. IMI then commenced its own contribution proceedings against Delta.
TP and IMI eventually settled the case between themselves and IMI continued with its contribution proceedings against Delta.
The important aspects of the pleadings were:
In IMI's defence to TP's claim, IMI stated that the claim was time barred as it had been issued over six years after the claim had accrued.
In its Reply, TP denied the claim was time barred on the basis that IMI had deliberately concealed the cartel. Therefore, in accordance with s. 32 Limitation Act 1980, time would not start to run until TP had discovered the facts which were concealed, being the decision of the European Commission in 2006.
In Delta's Defence to the Part 20 contribution claim brought by IMI, Delta denied any concealment and therefore adopted IMI's case that TP's case was indeed time barred. Such a defence was termed a "collateral defence" being one which is raised by a defendant in the main proceedings but which does not involve a denial of the factual basis of the claim against it, but is in the nature of a defence of avoidance, such as limitation.
Delta's argument was that it was open to it to plead, by way of a defence to contribution proceedings that, that when IMI made an agreed payment to TP, TP's claim was barred by limitation. Delta did so by arguing that in interpreting section 1(4) of the Contribution Act, it must be read in light of section 1(2) of the Contribution Act which provides:
(2) A person shall be entitled to recover contribution…notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, provided that he was so liable immediately before he made or was ordered or agreed to make the payment in respect of which the contribution is sought.
Conversely, IMI argued that its concealment case set out in its Reply was as much part of the "factual basis" of their claim as their substantive claim in the Particulars. Once the Court assumes the facts as stated in the Particulars of Claim and the Reply to be established, all that was required was for the Court to consider was whether or not the facts disclosed a reasonable cause of action. If the Court does so consider, then that is the end of the inquiry and Delta is not entitled to raise any matters which might have defeated TP's claim against IMI.
The Court unanimously accepted IMI's approach and decided that:
"Section 1(4) must also be read as a whole and its major part (down to the proviso) makes it clear that, subject to the proviso, a contribution claim made [by a defendant against a third party] made in the wake of [the defendant's] bona fide settlement or compromise of the claimant's claim neither requires nor permits any investigation into whether or not the defendant 'is or ever was liable in respect of the damage…that is whether or not he was actually liable." Accordingly, following a settlement, the defendant was not required to prove its own liability before it could commence contribution proceedings. To require otherwise would be to turn "all the usual conventions of civil litigation upside down". Accordingly, Delta's collateral defence must fail.
In order to determine the factual basis of the claim, one "must look at the totality of the pleaded case as the pleadings stand at the date of the settlement". This included the Particulars and the Reply.
In satisfying the proviso at the end of section 1(4), all that was required of the party bringing the contribution proceedings was whether or not the facts in the pleadings against it disclosed a reasonable cause of action.
Finally, it remained open for the third party to defeat a claim for contribution by proving that the settlement was not in fact bona fide and that it was a collusive, corrupt or dishonest one.
Clearly the Court of Appeal has substantially limited the availability of collateral defences in defending contribution proceedings. This is on the basis that a party claiming contribution need only prove that the claimant had a reasonable cause of action against it.
This decision benefits those contractors which settle up the chain and which have a contribution claim down the chain. The contractor can now commence contribution proceedings safe in the knowledge that the court will not entertain an enquiry into whether or not it was in fact liable before it settled the case.
However, the judgment has a somewhat unusual outcome in that a third party may face a damages claim even if the claim by the claimant was always statute barred. Often, the receiving party of a contribution claim is a smaller sub-contractor and it may appear unfair that the defendant may have had defences which were ultimately not tested at trial (and which, if successful, would mean no claim would be brought against the sub-contractor). Further, a third party may be in the odd situation of having had no hand in the settlement negotiations and having been unable to influence the settlement value achieved. Again, this could be problematic with a sub-contractor of smaller means.
Overall, however, it is considered that this is a welcome clarification and will encourage settlement. The only thing left to bear in mind is that if you are a party which has recently settled a claim or was held liable to a claimant in damages, you must bring your claim for contribution within two years.