Sub-contractors and third party sums paid 1 Feb 2010

The key to successfully recovering from a third party sums paid in a settlement is proving that the settlement is reasonable. The Court of Appeal has this month offered further guidance on the meaning of reasonable in this context.

What happened?

The dispute arose out of a flooded basement at a law firm caused by a defective sprinkler system, which caused extensive damage to electrical equipment. The lessee, occupiers and freeholder brought claims against the contractor (Skanska) who brought its M&E subcontractor into the claim, who in turn involved its sub-subcontractor (Siemens), who claimed against Supershield (whom it had engaged to supply and install the sprinkler system). At a mediation Siemens settled out-of-court, having agreed to pay 48% of the total amount claimed.

Last summer the TCC was asked to decide whether Siemens could recover from Supershield the money it had paid out in settlement of the claim made against it up-the-line. The question came down to whether Siemens’ settlements up the chain were reasonable. Having found that Supershield was liable to Siemens for failing to install the relevant part of the sprinkler system properly and that Siemens’ settlements were reasonable, the TCC held that Siemens could recover these sums from Supershield (plus interest).

Supershield appealed on the grounds (among other things) that Siemens’ settlements were not reasonable because it had complete defences to the claims it faced.

What did the Court of Appeal say?
The Court upheld the TCC’s decision and found that Siemens’ settlements were reasonable. It commented as follows:

* Because of its uncertainty and expense, prudent parties usually try to avoid litigation

* The settlement value of a claim is not an objective fact but a matter of subjective opinion, taking into account all the variables

* The Court only has to consider whether the settlement was within the range of what was reasonable rather than deciding what assessment it would have made if placed in the parties’ shoes.

* The Court was unpersuaded by Supershield’s argument that Siemens should have raised defences to the claims brought against it by drawing attention to the failure of other flood protection methods in the basement (such as the drains). The Judge said that Siemens had undertaken a contractual duty to prevent water damage and so was liable even though a flood may have been avoided if the other flood protection methods had been in operation.

Implications - In interpreting broadly the meaning of a reasonable settlement, this decision provides further comfort to the paying party to a settlement that it will be able to recover those sums from a third party who caused the damage.

Equally, this decision should act as a reminder to parties to construction projects that a breach of contract may generate claims up the contractual chain, which are likely to work their way back down to the party who caused the loss or damage.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com