If the various contracts and subcontracts do not contain arbitration clauses, it is possible that all the related claims will be heard in one court action. This is not always the case – if there are one or more contracts with an arbitration clause, the chain can be broken, as separate arbitration proceedings will be needed. Even in a consolidated action it can be sensible for the contractor to compromise a subcontractor’s claim long before trial, to limit costs and simplify the issues in the claim against the employer.
But is it safe to settle one claim before trial, assuming that the claim can be passed on? And, will the settlement be accepted as evidence of liability, or must the contractor prove that the subcontractor’s case was justified? The standard answer has been that all the contractor has to do is show that the settlement was reasonable, and the best way do that is by demonstrating that it had relied on legal or other professional advice.
A couple of recent hospital cases in the Technology and Construction Court – P&O Developments Ltd vs The Guy’s and St Thomas’ NHS Trust, and The Royal Brompton Hospital NHS Trust vs Frederick Alexander Hammon & Others – suggest that this standard approach is a little too fuzzy. More care may be required than has often been assumed.
The project at Guy’s was based on a management contract, which went wrong. Guy’s agreed a new completion date with the contractor. Guy’s had to pay some £83m, a sum that was deemed to include all delay and disruption claims to be brought by the management contractor and the works contractors. Guy’s had been advised by its QSs of the likely extent of each such claim.
The subsequent court action revolved around a claim by Guy’s against its professional advisers, whom Guy’s blamed for the delays. The defendants asked a number of preliminary questions about how the case should be argued and the degree of proof that the hospital would have to produce.
Judge Bowsher decided that Guy’s would have to go back to basics, and nothing should be assumed. The hospital would have to demonstrate that the breaches of contract by the professionals led to the delay and disruption, and that it was liable to the contractor in respect of the problems.
It would also have to show that the settlement figure was reasonable. The fact that lawyers had advised that it was reasonable was of some interest, but did not establish anything. Similarly, the fact that the hospital had a list of claim figures that lay behind the calculation of the settlement sum was relevant, but not conclusive.
The second case, involving the Royal Brompton Hospital, arose out of a similar problem. The contractor claimed £22m for all sorts of problems. An arbitration started in which the hospital counterclaimed £6.6m, and then settled, on the advice of its QSs, for a payment to the contractor of £6.2m. It claimed the cost of settlement, including legal costs incurred in the arbitration, from the professional team.
In arguing its case, the hospital had avoided saying that it was liable to the contractor for the money – it just said that it was arguably liable. The defendants said that this was not enough, and that the hospital should establish that it had in fact been liable in respect of each head of claim that it now sought to recover from the team.
Judge Hicks did not accept this. He said that the hospital did not have to allege or prove that the contractor’s claim would have been successful if taken through to a full trial or arbitration. It only had to prove that there was a chance that it would have been successful. It then came down to deciding whether the settlement had been reasonable. Presumably, if the contractor had only a small chance of success, that would have to be reflected in the settlement figure in order to satisfy the reasonableness test.
There are subtle differences between Judge Hicks’ approach and that of Judge Bowsher in the Guy’s case. In particular, Judge Bowsher seems to have required a higher degree of proof of the merits of the contractor’s claim against the employer, before turning his attention to the actual figures involved.
But, in both judgments it is clear that there is no automatic right to recover. At the very least, the employer is being required to address the question of whether or not the claim would have succeeded in the first action, and then to demonstrate that it was sensible to settle. The same will be true of attempts by main contractors to include subcontract claims in claims against employers. It is no good relying on the fact that the QS or lawyer recommended the settlement.
- A client that settles with a contractor has no automatic right of recovery from its professional team
- The terms of the settlement will be tested by the courts in any subsequent action
John Redmond is a partner at solicitor Laytons.