REUTERS | Jose Miguel Gomez

Passing a settlement along the contractual chain

In the recent case of Siemens Building Technologies FE Limited v Supershield Ltd, the TCC considered the circumstances in which a party may settle a claim against it and recoup the amount of that settlement from another party.

This is a common scenario in construction and engineering disputes, which routinely involve a large number of parties, some of whom are “stuck in the middle”, defending claims whilst at the same time seeking to pass on liability to others further down the contractual chain.

Where there is a risk of liability, it is often in a party’s best interest to settle a claim against it for a reasonable amount, in order to avoid incurring further costs, and then seek to recover the settlement from others who share responsibility for those losses.

How can a party recover settlement amounts from others further down the chain?

Some of the key considerations are set out below:

  • The starting point in any claim by a party (Party B) to recover the cost of a settlement with an original claimant (Party A) from another party (Party C) is to demonstrate that Party C is liable to Party B, either in damages for breach of contract or payment of a sum under an indemnity.
  • For Party C to be liable to Party B in respect of a settlement with Party A, Party B must also show that Party C’s breach of contract caused the loss incurred by Party B in agreeing the settlement or such loss was incurred in the manner set out in the indemnity.
  • To do this, Party A’s claim against Party B must be of sufficient strength to justify a settlement and the amount paid in settlement must be reasonable having regard to the strength of Party B’s claim. In other words, the settlement must be reasonable.
  • It is not necessary for Party B to prove it was, or would have been, liable for the amount of the settlement with Party A.
  • An amount paid in settlement will be reasonable if, in all the circumstances, it is within the range of settlements that reasonable people in the position of settling the claim might have made. These circumstances include:
    • the strength of the claim;
    • whether the settlement resulted from legal advice;
    • the inherent uncertainties and expenses of litigation;
    • the benefits of settling the case rather than disputing it; and
    • the question of whether a settlement was reasonable is to be assessed at the date of the settlement.



How to maximise your chance of recovering a settlement from others 

  • Take legal advice on the merits of any settlement. This is a factor the courts will consider when deciding if the settlement was reasonable.
  • Take account of the other circumstances referred to above when considering the level of settlement and keep a note of your conclusions for future reference.
  • If the settlement relates to a number of different claims, ensure you have sufficiently identified, within the settlement sum, those losses you intend to pass onto another party. This will help to establish that a settlement is within a reasonable range of settlements and avoid quantum arguments.
  • Ensure that any confidentiality provisions within your settlement agreement include an exception permitting you to rely on the agreement for the purposes of pursuing a claim against a third party.
  • Consider including a general assistance clause within your settlement agreement, permitting you to instruct the claimant’s expert or rely on the claimant’s documents and reports for the purposes of pursuing a claim against a third party.

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