Construction disputes are often not limited to two parties. Even where two parties are considering settlement, the paying party will often be banking on recovering part if not all of the settlement monies from another part of the supply chain.

For example, if an employer makes a claim for defective work against the main contractor, the main contractor retains responsibility for all the contract works, but in reality the work may have been carried out by a subcontractor or caused by defective materials supplied further down the supply chain. In the interests of dealing with the employer’s claim quickly, reducing time and costs involved in resolving the dispute and getting on with new profit making work, the contractor may come to a commercial settlement with the employer to pay him a sum of money. The contractor may be happy to do this as he assumes he will be able to recover the sum he has paid from those actually responsible for the defect – a sub contractor. However, following the case of Hunt v Asme decided by HHJ Peter Coulson, the contractor should not necessarily be so confident.

In that case the employer (Kier (Whitehall Place))and the contractor (Kier Build) had brought a joint claim against the demolition sub contractor (Hunt) for damage caused by fire to facades. Hunt considered that the fire was the fault of one of its sub-sub contractors, ASME. Hunt came to a commercial agreement with the employer and contractor, paying out a sum of £108,987.12 to the employer and £43,512.88 to the contractor, all the time thinking that it would be able to recover such sums from ASME.

ASME claimed that although Hunt was liable to the contractor, Hunt were never actually liable to the employer due to the joint insurance in place and therefore should not have agreed to pay anything to the employer. ASME considered that the maximum sum Hunt could claim against them was £43,512.88. The Judge disagreed with this analysis although he did find that the settlement was unreasonable for other reasons and decided that the maximum Hunt could claim against ASME was £43,512.88. In reaching his decision, the Judge carried out a helpful review of the relevant authorities regarding settlements and the position can be summarized as follows:

  • The general principle from the earlier case of Biggin v Permanite is that if a settlement is reasonable and not too remote it can be taken as the measure of damages, even if it is at the ‘upper end’ of what is reasonable, for a subsequent claim against a third party. There is no need to show that the claim settled would have succeeded or been likely to succeed. However it must have sufficient substance to be reasonable to settle;
  • A settlement may still be deemed reasonable where there is no actual legal liability;
  • The question of whether a settlement is reasonable will depend on the facts of each individual case;
  • If a settlement sum is found to be unreasonable, it will be disregarded when calculating the measure of damages that the paying party may be able to recover from a third party and the paying party will only be able to recover the losses it can actually establish.

What should you do when considering settlement?

There are warnings here both for parties seeking to recover settlement sums and those seeking to resist them:

If you are seeking to recover a settlement sum from a third party, you cannot automatically assume that you will be able to do so. In an ideal world you would not settle a dispute without involving the party from whom you hope to recover the settlement sum. However where this is not possible you need to ensure that it is both reasonable to settle and that the settlement sum you agree is reasonable, bearing in mind the merits of the case, likely litigation fees involved and commercial reality. A legal opinion on these points is likely to assist in illustrating that the settlement was reasonable.

If you are seeking to resist a claim based on a settlement between other parties and consider that you have a strong defence, beware: you may find this more difficult than you first imagine. For public policy reasons the courts are keen to support the settlement of claims by negotiation. As mentioned above, in some circumstances a settlement will be considered reasonable and recoverable from a third party even where a court might hold that there is no liability.