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When to pass settlement sums down to subbies

Sarah Alexander

Dentons’ Sarah Alexander answers the question: when can sums paid under a settlement made with an employer be passed down to the subcontractor at fault?

The principle that one party may recover from a third party sums paid / claims waived in a settlement with another party, which represent losses caused by the third party, is long established.

What happens, however, when the settlement addresses a number of issues, only some of which can be attributed to the fault of the third party?

How do you apportion a global settlement in order to seek recovery from a third party – and what effect does abandoning claims as part of the settlement have on future recovery from a third party?

The case

A recent decision from the TCC – Fluor v Shanghai Zhenhua Heavy Industry Co, Ltd [2018] EWHC 1 (TCC) – has provided a useful reminder.

Fluor entered into a contract with Greater Gabbard Offshore Winds (GGOW) to engineer, procure and construct the foundations and infrastructure to support 140 wind turbines to be installed in the North Sea.

Fluor engaged Shanghai Zhenhua Heavy Industry (Shanghai) to manufacture and supply steel monopiles and transition segments. After the steel components had been manufactured and shipped by Shanghai, extensive welding defects were discovered.

Fluor entered into a settlement agreement with GGOW. It compromised on a number of issues, including losses arising from the welding defects. Fluor then attempted to recover its losses from Shanghai. It claimed those losses included damages it had to pay GGOW as well as claims of its own against GGOW, over which it had compromised in order to reach a settlement. 

When assessing damages for breach of contract, ordinarily the court will look to put the claiming party back in the position it would have been in had the contract been performed correctly. However, if the claiming party has compromised on the damages to which it would otherwise have been entitled in a settlement with another party, that compromised figure will be the maximum figure that is recoverable from the third party at fault.

Reasonable conclusion

The court concluded that the claimed losses (once identified as being attributable to Shanghai) were reasonable, and noted that “… the reasonable settlement value of GGOW’s claims was very close to the sum paid or foregone by Fluor, so on that basis alone that aspect of the settlement was self-evidently reasonable”.

So what does all of this mean?

When entering into any settlement agreement where you intend to recover all, or part, of what you are paying and/or compromising from a third party, it is worth bearing the following points in mind in order to give yourself the best opportunity for a successful recovery:

  • Draft your settlement agreement as clearly as possible, preferably identifying the elements (sums paid / claims waived) it is intended should be the subject of a claim against a third party.
  • If the settlement agreement is necessarily “global” in nature, retain separate documentary evidence to support the rationale behind the agreement and its component parts.
  • In any event, retain evidence of the negotiations leading to final settlement.
  • Retain any available evidence to help demonstrate that each element of the settlement reached was objectively reasonable.
  • If the sums at stake so warrant, take legal advice to minimise the risks of failing to recover.

Sarah Alexander is a senior associate at Dentons

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