Australia: Third parties left to foot the dispute settlement bill

Last Updated: 7 May 2018
Article by Aaron Bolton and Emily Brownlee

In brief - Biggin principle still mostly followed by Australian courts

Subcontractors may find themselves worse off in a claim against them if it is made after a settlement between the other parties. It would therefore be prudent, when parties are working towards settlements, to consider if any of the parties have direct claims against you and what actions you may need to take.

Biggin principle and the concept of reasonable settlement

A run-of-the-mill construction dispute may see a Principal sue a Head Contractor for loss actually caused, in whole or in part, by a Subcontractor or Consultant.

For commercial (or other) reasons it may be in the best interests of the Head Contractor to settle the dispute and seek to recover the amount paid to settle the claim from the Subcontractor as damages.

The Biggin principle confirms that in that scenario, the Head Contractor does not have to prove that it, or the Subcontractor, would have been liable had the dispute not settled. This extends generally to most third-party relationships.

In Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422, Biggin bought defective roofing adhesive from Permanite and re-sold it to the Dutch Government for reconstruction works following WWII. The Dutch Government brought proceedings against Biggin which were settled by a payment by Biggin. Biggin then sought to recover the full settlement from Permanite.

On appeal, it was found that Permanite had breached its contract with Biggin and the court ordered recovery of the full amount of the settlement. The court focused on the "reasonableness" of the settlement—which the party seeking to recover the monies bears the onus of proving—and held:

  • it was not necessary for Biggin to prove it or Permanite would have been held liable had the matter not settled
  • the settlement by Biggin created a ceiling of loss recoverable from Permanite, and
  • if the settlement is "reasonable", it may be considered as the measure of recoverable loss

Application in Australia - Unity Insurance Brokers v Rocco Pezzano

In Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38, Unity arranged insurance through its broker Rocco Pezzano which failed to disclose the full claims history to the insurer. The insurer later denied liability for non-disclosure. Unity commenced proceedings against the insurer and broker, and subsequently settled with the insurer. Unity then sought the difference between the settlement amount and what it would have received had the broker not erred.

The High Court held that Unity was entitled to recover the full difference between the settlement and what it would have been indemnified for as damages. The High Court also found that it was not necessary for Unity to prove it would have "lost" or been awarded less than full indemnity by the insurer had the dispute not settled.

Notwithstanding the above, the High Court criticised the Biggin principle and held that in Australia such recoveries should operate in accordance with the normal principles of reasonableness, remoteness and causation.

Application in Australia - UGL Rail v Wilkinson Murray

The High Court's approach was applied in UGL Rail v Wilkinson Murray [2014] NSWSC 1959. UGL as Head Contractor held a systems installation contract with the Principal. UGL subcontracted Wilkinson Murray to provide advice on the nature and extent of the sound absorbent panels to be installed.

The panels were defective and not in compliance with the specification. The Principal issued a defect notice. Following mediation the dispute was settled on the basis that UGL would perform certain work at no cost to the Principal. UGL claimed on its insurance recovering around $25 million.

UGL (in reality its insurer) commenced proceedings against Wilkinson Murray to recover the $25 million on the basis that Wilkinson Murray's advice was negligent and/or misleading or deceptive. The Court agreed and held that Wilkinson Murray was liable to effectively "reimburse" UGL, but it also held that the amount of $25 million was not reasonable because the cost of UGL complying with the underlying specification was likely to be less than the costs incurred in actively carrying out the rectification work.

Accordingly, the Court awarded damages based on its own assessment of what a reasonable settlement was in the circumstances, namely the extra-over costs of complying with the underlying specification and the costs of the dispute.

The central question for the Court was one of reasonableness - ie, if the settlement arose from a breach of duty and was reasonable then in the normal course of events the settlement was caused by the breach of duty. The Court also stated that the principle applies equally where the contract includes an indemnity, however, the terms of the indemnity may impact the amount that is recoverable.

Parties seeking to recover amounts paid in settlement need to prove causation, remoteness and reasonableness

While the Biggin principle has been criticised by some Australian authorities, it has been more or less followed by Australian courts.

Parties to Australian proceedings seeking to recover amounts paid in settlement are therefore required to prove:

  • the third party caused the loss (or part of the loss) the subject of the settlement, or alternatively the third party is obliged to indemnify that loss (ie, causation)
  • the settlement was within the reasonable contemplation of the parties at the time they formed their relationship (ie, remoteness), and
  • the settlement was objectively "reasonable" (ie, reasonableness)

Six actions to consider if any of the parties have direct claims against you

When parties involved in a dispute begin working towards settlements, it is worth considering whether any of the parties have direct claims against you. If so, it may be wise to:

  1. engage with the other parties early to ensure that you are kept in the loop
  2. attend any settlement discussions—even in circumstances where you do not intend to contribute to a settlement—as these discussions may help to inform arguments that the settlement is "unreasonable" at a later stage
  3. consider whether you have any defences against the party seeking to recover from you, including apportionment defences under Part 4 of the Civil Liability Act 2002
  4. bear in mind that claims for breach of contract have a six year limitation period from the date of the breach (see section 14 of the Limitation Act 1969)
  5. bear in mind that deeds have a 12 year limitation period which will apply where a deed is originally entered into or a party is subsequently novated to a contract via deed
  6. consider whether any estoppel issues may arise.
Aaron Bolton Emily Brownlee
Construction disputes
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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