Showing that settlement costs are unreasonable is a difficult task, as the installer of a defective sprinkler found when Siemens chased it for payment

Construction disputes often involve more than two parties. Whether it’s the employer, the main contractor, subcontractors, sub-subcontractors or consultants, some or all can be sucked in. So it was in Siemens Building Technology vs Supershield, a case about which Tony Bingham wrote earlier this year (5 February, page 48).

A flood occurred in an office building in the City owing to a defective sprinkler system and electrical equipment was damaged. The landlord, tenant and occupier of the building sued the main contractor and then the claim passed down a chain of contracts to Siemens, the subcontractor responsible for the supply and installation of the sprinkler system. Siemens then passed the work on to Supershield, which installed the system under a subcontract with it.

The courts are most reluctant to criticise parties that have settled claims. trying to show that a settlement was unreasonable will almost always be an uphill task

Siemens settled the claims of all those above it and proceeded to claim from Supershield the amount it had agreed to pay in settlement. The case is useful in highlighting what to the layman may seem to be slightly odd rules that the courts apply in such situations and the difficulty that a defendant such as Supershield faces in trying to attack the settlement that has been made, and which it is being asked to pay for.

If A has settled a claim made against it by B and then claims the cost of the settlement from C, what does A have to prove to be successful in its claim? Take the case of the defective sprinkler. Siemens had settled with those above it in the contractual chain and claimed the cost of that settlement from Supershield. Obviously, for the claim to get off the ground Siemens would have to prove that the defect in the system was caused by Supershield’s breach of contract. However, one might think that Siemens would also have to prove that it (Siemens) was in fact liable to those higher up the contractual chain so that there was an unbroken chain of liability from Supershield through Siemens to those to whom Siemens had agreed to pay money in settlement.

Since at least 1951 and the case of Biggin vs Permanite, the courts have applied a much less rigorous approach. Once a settlement has been made, the burden on the claimant is to prove that it was reasonable. Sometimes the courts have divided this obligation in two. First, was it reasonable of the claimant to have settled the claim against it? Second, was the amount paid in settlement a reasonable amount? Usually these two questions merge into one another. As for when the reasonable test is to be applied, it is the date of the settlement itself. So if facts then unknown later come to light suggesting that the settlement was too high or even wrong, they cannot be relied upon by the defendant to avoid having to pay for the settlement.

This approach very much favours the party that has settled and then seeks to recover the cost of settlement. A “reasonable” settlement covers many possibilities. In this case, in the first instance, Mr Justice Ramsey reviewed the authorities, and the quotations he gave from some recent judgments demonstrate the wide ambit of the reasonable settlement test.

Recent judicial views include the following:

  • The settlement of an intrinsically weak claim to avoid the uncertainty and expense of litigation may well be reasonable
  • A claim will usually have to be so weak as to be obviously hopeless before it can be said that the settlement of the claim was unreasonable
  • There may well be cases where even though investigation of the underlying facts demonstrated that there was in truth no liability at all, the settlement of the claim that had been made might be found reasonable in all the circumstances.

Clearly the courts are most reluctant to criticise parties that have settled claims.

The result is that trying to show that a settlement was unreasonable will almost always be an uphill task - as Supershield found, both in the first instance and even more so in the Court of Appeal.

Tim Elliott is a barrister and arbitrator specialising in construction at Keating Chambers