UK: Settlement Of Disputes: Passing On Liability

A common situation arises where a contractor settles a dispute with an employer in circumstances where the contractor's liability to the employer results from the actions of a third party (often a sub-contractor). Is the contractor entitled to recover from the third party the sums paid out in settlement? The answer is normally "yes", provided that the settlement was reasonable. The recent TCC case of Siemens v Supershield gives further guidance as to when a settlement will be reasonable.

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A common situation arises where a contractor settles a dispute with an employer in circumstances where the contractor's liability to the employer results from the actions of a third party (often a sub-contractor). Is the contractor entitled to recover from the third party the sums paid out in settlement? The answer is normally "yes", provided that the settlement was reasonable. The recent TCC case of Siemens v Supershield gives further guidance as to when a settlement will be reasonable.

Facts

• Siemens subcontracted for the installation of sprinklers in an office block.
• The sprinklers malfunctioned and the resulting flood did extensive damage to electrical equipment in the block. The flood was caused by a malfunctioning component installed by Siemens' sub-sub-contractor, Supershield.
• The owners and tenants of the block claimed £5.61m from the main contractor. Siemens was brought into the proceedings, and in turn brought in Supershield. Siemens settled out of court for £2.72m.
• Siemens subsequently tried to recover this sum from Supershield. Supershield claimed that the settlement was not reasonable because Siemens had good defences to the claim based on causation and remoteness of damage. Supershield effectively accepted that it was reasonable of Siemens to settle the claim but not at the level claimed.

Passing on a settlement liability

A sum paid under a reasonable settlement between an employer and a contractor can generally be recovered as damages from a third party (often a sub-contractor) where the liability of the contractor to the employer is caused by the default of the third party.

However, just because there has been a settlement does not necessarily mean that the contractor can pass on the full liability to the third party – the law only allows liability to be passed on if the settlement sum is both reasonable and causally related to the third party's conduct.

Historically this has generally been interpreted to mean that the paying party in a settlement can only recover the settlement sum from a third party if it can show that there was a reasonable prospect that the paying party would be held to be legally liable to the other party to the settlement.

There were benefits to this approach - it meant that a sub-contractor was not left holding the baby if a contractor made an ill-advised deal with an employer. Yet it also put contractors at risk, as a contractor would not be able to recover from a third party sums paid in settlement to an employer if on closer inspection it transpired that the contractor had a reasonable defence against the employer.

Biggin v Permanite

The leading case dealing with the concept of reasonable settlement is Biggin v Permanite (1951). Until the decision of Coulson J in John F Hunt Demolition v ASME Engineering(2007) it was generally thought that Biggin was only authority for the proposition that a settlement agreement could be used to establish whether or not the quantum of a settlement was reasonable.

On this view the mere fact there had been a settlement did not of itself establish that it was reasonable to settle the dispute in the first place. Before John F Hunt it was generally thought that the paying party in a settlement must prove its liability to the payee in a settlement before being able to use the principle in Biggin to recover the settlement sum from a third party (provided of course that the third party was liable to the paying party, typically for damages for breach of contract or for payment of a sum under an indemnity). This is no longer the case.

The current position is that the settlement sum is likely to be recoverable from a liable third party even if, on analysis, the paying party was not liable to the payee, provided always that on the facts reasonably known to the paying party the payee's claim against it had a reasonable prospect of success.

The judgment inSiemens v Supershield

Ramsey J held that Supershield was liable for the sums expended by Siemens in the settlement. Supershield had effectively accepted that a settlement of some sort was reasonable and in the circumstances a settlement figure of just under 50% of the value of the claim was reasonable.

The following principles can be derived from the judgment:

• In most circumstances it will be reasonable to settle a case given the uncertainty and expense of litigation. Unless a claim is so weak that no reasonable party would take it sufficiently seriously to negotiate a settlement, then it will be reasonable to settle it.
• In assessing whether or not a settlement was reasonable the Court will have regard to the following (non-exhaustive) list of factors:

Implications

• Whilst some observers (especially sub-contractors) will be uncomfortable with this decision, it undoubtedly strengthens the hand of parties to settlement agreements. Parties to settlement agreements can now be more confident that they will be able to recover the settlement sums paid from culpable third parties.
• If it was reasonable at the time for the parties to settle (because it was reasonable at the time for the paying party to think that it was liable, and that the liability was attributable to the third party), then the third party can be held liable despite the fact that on a strict interpretation a court might ultimately have found that the paying party had a good defence to the claim. This is particularly significant in the context of global settlements, which contractors have historically found difficult to pass on to sub-contractors.

Reference: Siemens Building Technologies FE Limited v Supershield Limited [2009] EWHC 927 (TCC)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 22/05/2009.