Settlement agreements promise greater certainty but should be handled with care

It is a common occurrence for parties to effect a wrap-up deal either before or at final account stage through a separate “settlement” agreement.

The desire for certainty around the final account figure, loss and expense, revised completion dates, liquidated damages and liability for defects is often seen to outweigh the risks involved in such a process, especially if it is pre-completion. But it is important to ensure that:

  • The settlement agreement sits with the underlying building contract
  • Discharges of rights and claims, both past and future, are appropriately dealt with
  • The agreement caters for what is to happen if one of the parties goes back on the deal.

A two-page settlement agreement is unlikely to replace the underlying building contract, particularly if the works are not yet complete and parties still need to have access to the contract terms for the day-to-day working of the contract.

Any settlement agreement must therefore state what is to happen to the underlying contract - typically, to remain in full force and effect except as expressly amended by the settlement agreement. If that is the case, any conflicting provisions between the contract and settlement agreement need to be resolved.

For example, a contractor agreeing a final account figure in advance will sensibly preserve a right in specified circumstances to additional sums (calculated under the original contract conditions) over and above the finally adjusted contract sum.

The next question is how the settlement agreement deals with discharge of parties’ respective rights and claims, present and future. The employer will be looking to ensure it is not going to be faced with more claims and the contractor will be looking to protect itself against the unknown.

History tells us that if parties want to discharge all claims, including those they could not have known about at the time of settlement, clear words will be required.

If the employer wants the agreement to cover and therefore discharge all claims both current and future, this must be spelled out. This was confirmed in Bank of Credit and Commerce vs Ali (2001), where the words “in full and final settlement of all or any claims… of whatsoever nature that exists or may exist” was not enough to exclude certain claims, the rights to which had arisen post-agreement.

A contractor agreeing a final account figure in advance will preserve a right in specified circumstances to additional monies calculated under the original contract

But this may not apply to every situation. In one case, an undertaking not to raise proceedings against a firm of surveyors that was “in relation to matters arising from Capita’s appointment as surveyors” was found to exclude a right to sue the firm in respect of latent defects discovered after the undertaking was granted (Priory Catering Services vs Capita Property Services, 2010). At the time of the undertaking, the employer was aware of alleged concerns about Capita and it was openly contemplated that that might lead to claims against the company.

In any event, usually liability for latent defects is carved out of any settlement agreement and a statement made that the underlying building contract applies to these matters.

What happens if one of the parties to a settlement agreement doesn’t comply with its terms? Do the claims the agreement settled revive or is the injured party left to sue for breach of the settlement agreement? What would happen to an employer’s right to liquidated and ascertained damages, waived in an agreement, if the revised completion dates of the agreement were missed? Could parties go back to pre-existing claims?

It depends on how the agreement has been drafted. If the agreement made the claims’ settlement conditional on performance, and that performance does not happen, the original claims can be revived. Take the case of Robertson Construction Central vs Glasgow Metro (2009). Robertson was constructing an 11-storey development of 46 flats and a commercial unit in Glasgow. The contract had run into difficulties, so the parties agreed that Robertson would complete the works and make good certain defects and Glasgow Metro would pay an agreed sum and waive claims under the contract.

Glasgow Metro then sought to terminate the settlement agreement, claiming Robertson had failed to complete the works on time and sought to revive the settled claims. The court refused to allow this as the settlement or waiver of Glasgow Metro’s claims had not been made conditional on Robertson performing its obligations under the settlement agreement. The parties could easily have linked the two but given that they hadn’t, the claims could not be revived.

Settlement agreements must be carefully scrutinised to ensure they achieve the desired aims, and that protections are built in in the event that one party defaults.

Lindy Patterson is a partner at Dundas & Wilson