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Legal Opinion – Recovering Settlement Sums

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Recovering Settlement Sums

Can a party in a contractual chain settle a claim against it by another and then recover the amount of that settlement from another party further down the chain? Shourav Lahiri, a Partner in the international law firm Pinsent Masons LLP, finds out

 

In the recent case of Siemens Building Technologies FE Ltd v Supershield Ltd, the High Court of England and Wales considered whether a party in a contractual chain could settle a claim against it by one party in the chain and then recover the amount of that settlement from another party further down the chain. This is an important and problematic issue in the construction industry. Let us consider the significance of the Court’s findings.
It is not uncommon for the main contractor on a project to compromise or settle claims made against it by the employer and to then seek a contribution from the relevant subcontractor. The issue in most of these main contractor/sub contractor disputes is proof of how much of the settlement sum related to claims for which the sub contractor is liable, and whether the settlement for those claims was reasonable.
There is quite a lot of case law and discussion on this issue, which is not limited only to main contractors and subcontractors and applies to any set of parties in the contractual chain. A recent addition to the corpus is the decision of the High Court of England and Wales in Building Technologies FE Ltd v Supershield Ltd [2009] EWCH 927.

What happened
It all started with flooding in the basement of a new office building in London for the law firm Slaughter and May. The main contractor for the building works was Skanska. Skanska entered into a subcontract with Hayden Young for the MEP Works. Hayden Young engaged Siemens as its subcontractor to supply and install the sprinkler system. Siemens supplied the system and engaged Supershield Ltd (as its subcontractor) to install the system.
An insufficiently tightened nut and bolt connection linked to the sprinkler system caused the water tank for the system to leak and flood the basement of the premises in which it was located. Proceedings were commenced by both the owner and the occupier of the premises against Skanska. Skanska roped in Hayden Young, who then brought Siemens into the action.
Siemens managed to settle the claims with the parties up the contractual chain for a sum just less than 50% of the amounts being clamed, and then sought to recover the settlement sum from its own subcontractor, Supershield. The Court found on the facts that the circumstances leading to the flood were caused by a failure of Supershield in installing the sprinkler system. Supershield was, therefore, contractually liable to Siemens under an indemnity for loss resulting from breach of contract and the loss suffered by Siemens in settling the claims against it was held to be the result of Supershield’s breach of contract.
The Court then had to establish whether this meant that Siemens was entitled to recover from Supershield the settlement sum it had paid to Hayden Young. The case primarily turned on whether the settlement reached was ‘reasonable’. There was an issue raised by Supershield as to remoteness of damage, but the Court was quite clear that it would, in general, be foreseeable to a sub-contractor that, if it was at fault, the contractor up the chain may be held liable for any damage resulting from that fault and may therefore have to settle claims further up the chain.

The ‘reasonableness’ of the settlement
Siemens argued that it was entitled to recover the settlement sum as long as the settlement was reasonable. Supershield claimed that Siemens could not recover anything more than what it would have actually been liable to pay had the case gone to trial. Supershield contended that the settlement was not reasonable as it did not reflect the strength of potential defences in relation to remoteness of damage and causation, which the parties up the chain had against the claims made against them.
Supershield argued that the defences were straightforward and could have been determined quickly and cheaply and therefore, a settlement of just under 50% of the amounts claimed was not reasonable.
The Court said that, given that:
i) it had established Supershield’s breach of contract had caused the loss incurred by Siemens in satisfying the settlement; and
ii) Supershield was liable to Siemens under an indemnity, provided that the settlement was ‘reasonable’, Siemens could recover from Supershield the sums it had paid out in settlement. In accordance with the
judgment in the case of Biggin v Permanite, Siemens did not have to show that it would have been held liable to pay at least the settlement amount at trial.
Although the Court found that Siemens should have considered the arguments of causation and remoteness before settling, it went on to state that the arguments on causation were not as straightforward, strong and
complete as Supershield contended and that the arguments on remoteness would not have defeated the claims. As such, the arguments in relation to causation and remoteness did not warrant a finding that the
settlement was unreasonable.

The lessons to be learnt
The Court said that, as a general principle, in order to establish whether a settlement is reasonable, one would look at whether the settlement was within the range of reasonable settlements that reasonable people in the position of the settling party might have made.
In deciding this in the Siemens case, the Court considered factors such as the strength of the original claim against Siemens, whether legal advice had been given in respect of the settlement reached, the uncertainties and expenses of litigation and the benefits of settling the case rather than proceeding to litigation to resolve the dispute. In accordance with previous authorities, these factors were assessed as at the date of settlement and the Court concluded that the settlement was reasonable.
The Siemens case has lessons for both the main contractors and subcontractors.
It would be advisable for main contractors to carefully review this decision and take advice before reaching a settlement to ensure that it has taken all proper steps to avoid a successful challenge to the reasonableness of its conduct in settling the claim, and of the settlement sum.
There is now a good body of case law dealing with this issue and it would be advisable for the main contractor to create a ‘checklist’ of to-dos and comply with them before reaching settlement. It may be a good idea to give the subcontractor notice of the impending settlement and allow it to participate in the process of settlement, not least to remove any possibility of an argument from the subcontractor later that, had it been involved, the settlement sum would have been lower.
Sub-contractors on the other hand should realise from this judgment that sums paid out in settlement by parties higher up the contractual chain will be recoverable against them where the claims being settled arise from sub-contractor’s fault, and the settlement reached is reasonable.
The Court in this case said that it would be hard to think of many circumstances where it would not be reasonable to settle a case. This was particularly so in complex multi-party disputes where costs can be a huge deterrent to continued litigation. A further – and hard – lesson for sub-contractors is that they will not only be exposed to the settlement sum, but also to the costs incurred by the main contractor in arguing and resolving the claims against it.
Well over a third of the monies payable by Supershield to Siemens in this case related to costs incurred by all other parties in relation to their claims. Sub-contractors should therefore be aware of this risk and encourage early settlement if possible before substantial costs are incurred.

The author wishes to thank Ms Laura Wilson of Pinsent Masons LLP for her assistance with this article. The author can be reached at shourav.lahiri@pinsentmasons.com. Pinsent Masons LLP has been selected as the Global Construction Law Firm of the Year 2009 by Who’s Who Legal and as one of the Top 10 international firms doing India work by the India Business Law Journal in June 2009

The opinions expressed in this column are of the author and not of the publisher.

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