In 2001 a simple nut and bolt connection on a float valve failed. Water from the sprinkler system storage tank overflowed into the basement of a new office building tenanted by a firm of solicitors in London. The ensuing flood caused extensive damage to electrical equipment.

As it had taken more than one party to fit the sprinkler system, the owners and tenants brought a claim against the main contractor, the M&E subcontractor, the sub-subcontractor and the sub-sub-subcontractor. This story concentrates on the last link of the chain, because the sub-subcontractor (Siemens) settled the claims up the contractual chain and tried to recover the settlement sum (£2.72m or 48% of the total sum claimed (£5.61m)) from the sub-sub-subcontractor (Supershield). Siemens said it was a reasonable settlement but Supershield disagreed.

The concept of a reasonable settlement stems from the Court of Appeal decision in Biggin v Permanite (1951) and over the years the court has set out a number of guidelines. In Siemens Building Technologies FE Ltd v Supershield Ltd, Mr Justice Ramsey reviewed the authorities and summarised the principles:

Principles

  • For C to be liable to A in respect of A’s liability t o B which was the subject of asettlement it is not necessary for A to prove on the balance of probabilities that A was or would have been liable to B or that A was or would have been liable for the amount of the settlement.
  • For C to be liable to A in respect of the settlement, A must 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 to remote.
  • 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.
  • 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 consequence 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.
  • 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:
  • The strength of the claim;
    • Whether the settlement was the result of legal advice;
    • The uncertainties and expenses of litigation;
    • The benefits of settling the case rather than disputing it.
  • 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.

Application

Mr Justice Ramsey decided, on the facts, that Supershield was responsible for the
installation of the float valve and that the leak was caused by its failure to tighten the
nuts and bolts sufficiently when it was initially installed. But was Siemens’
settlement reasonable?

Supershield said it was reasonable for Siemens to settle but not at a level of just under
50% of the sums claimed because, on the basis of its arguments as to causation and
remoteness, the claims were too weak to justify settlement at that level.

Mr Justice Ramsey considered it was reasonable to settle the case and even went so
far as to say that “it is difficult to think that there will be many cases where it would
not be reasonable to settle a case.” He concluded that the arguments on causation and
remoteness which Supershield had relied on would not have succeeded. In his view,
the claim was strong and the defences weak but, on any view, the case justified a
settlement in the mid range of around 50% of the sum claimed.

The claim was settled on legal advice. The judge also considered that the settlement
was within the range of settlements that reasonable people in the position of Siemens
might have made having regard to the strength of the claim, the uncertainties and
expenses of litigation and the benefits of settling the case rather than disputing it.

How to improve the prospects of recovery

To improve the prospects of recovering money paid under a settlement from a third
party, it is prudent to obtain a reasoned advice from legal advisers, showing how the
settlement sum has been arrived at, and if part of that sum is to be recovered from a
third party, the sum attributable to that third party.

Sequel?

An appeal to the Court of Appeal was heard as this update was finalised. A note on
the nuts and bolts of the Court’s judgment should appear in the next Update.