Third Party Settlements
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KEYWORDS: |
Third Party settlements, reasonableness, measure of quantum, Coulson J. |
There are usually many participants and various arrangements in construction projects which can give rise to multiple disputes. It is commercial sense for claims to be settled without recourse to expensive legal proceedings but when this happens it is often without the detailed analysis a feature of legal proceedings. The settlement amount may not always be based precisely on the measure of damages likely to be awarded by a judge or arbitrator. It may instead take into account the cost of defending the claim and the need to complete the particular project with the necessary goodwill.
The commercial settlement with a third party will not be relevant to the issue of liability between the main two parties, but may be relevant to the quantum of damages. The main question is: if a Plaintiff P settles with a third party T, what is the relevance of the third party settlement amount to P's claim against the Defendant D? The usual scenario is that P is a main contractor and T is a subcontractor or supplier and D is the Employer. This is not always the case, but the principles which apply are the same.
The leading case is Biggin & Co Ltd v Permanite Ltd [1951] 2 KB 314. The Court of Appeal held that if the third party settlement was reasonable, even if it was at the upper limit, it should be taken as the measure of damage between the parties. Assuming that the plaintiff proved that the loss attributable to a payment in settlement was not too remote, the plaintiff then only had to prove that the amount of the settlement was reasonable in all the circumstances. The defendant could seek to demonstrate that it was not reasonable. If the Judge was satisfied that the damages was somewhere around the settlement figure, he would be justified in awarding that figure as damages.
Colman J provided a legal theory for the decision in Biggins v Permanite in General Feeds Inc Panama v Slobodna Plovidba Yugoslavia [1999] 1 Lloyds Law Rep 688 in terms of causation, remoteness and mitigation. He recognised that if the plaintiff failed to prove the reasonableness of the settlement then he would have failed to establish that the loss was caused by the relevant breach of contract by the defendant. In that case the loss was caused not by the breach but by the plaintiff’s voluntary assumption of liability under the settlement. He considered that this was consistent with the duty to mitigate a loss. He stated that if and to the extent that a plaintiff was unable to establish that the settlement on which his claim was based had been reasonably entered into, he had to that extent failed to mitigate his loss.
He expanded the theory in terms of causation by considering the decision of the Court of Appeal in Comyn Ching & Co Ltd Oriental Tube Co Ltd [1979] 17 BLR 47. There were two requirements to satisfy the test of causation:
Colman J considered that it was not necessary to prove that the claim was likely to succeed to establish that it was reasonable to settle it. There were claims which appeared to be intrinsically weak but which common prudence suggested should be settled in order to avoid the uncertainties and expenses of litigation. He observed that even the successful defence of a claim in complex litigation was likely to involve substantial irrevocable costs.
Colman J considered that unless it appeared on the evidence that the claim was so weak that no reasonable party would take it sufficiently seriously to negotiate any settlement involving payment, it could not be said that the loss attributable to a reasonable settlement was not caused by the breach
HH Bowsher QC in P&O Developments Ltd v Guys and Thomas’ National Health Service Trust & Ors [1999] BLR 3 considered that the reasonable settlement of claims was a matter which the parties may be held to have had in reasonable contemplation under the second limb of Hadley v Baxendale (1854) 9 Ex 341.
The issue that came before Coulson J in the recent case of John F Hunt Demolition Limited v ASME Engineering Ltd [2007] EWHC1507(TCC) was whether a settlement with a third party could ever be considered reasonable if the plaintiff had no liability to the third party.
This issue had been addressed by Colman J in General Feeds. He considered that in order to recover in respect of a settlement it was not necessary to prove that the claim settled would have succeeded or would probably have succeeded. It was enough to establish that it had sufficient substance for the settlement of it to be regarded as reasonable. He observed that in Comyn Ching & Co Ltd Oriental Tube Co Ltd the trial Judge concluded that the settling party was not liable and therefore could not recover the settlement amount as damages. In the face of that finding, the Court of Appeal held that it was sufficient to show that the third party had a case or might reasonably have established a case. The question was whether the claim was so weak that no settlement can be reasonable or that the amount of the actual settlement was not reasonable. These were questions of fact.
Coulson J held that unless the claim was reasonably considered to be of sufficient strength reasonably to justify a settlement, and the amount paid in settlement was reasonable having regard to the strength of the claim, it could not be shown that the loss has been caused by the relevant breach of contract. On the other hand, the settlement of an intrinsically weak claim in order to avoid the uncertainties and expenses of litigation may well be reasonable. A claim would usually have to be so weak as to be obviously hopeless before it could be said that the settlement of the claim was unreasonable.
Coulson J agreed with the analysis of Comyn Ching by Colman J that it was not necessary to prove that the claim settled would probably have succeeded. He held that the test by Coman J applied; it was enough to establish that the claim had sufficient substance for the settlement of it to be regarded as reasonable.
Coulson J also referred to the associated problem of the time at which the weakness (or otherwise) of the claim was to be ascertained and on what evidence a court might conclude that, because the plaintiff was not liable to the third party, the settlement was unreasonable. He observed that the authorities suggested that the question of reasonableness was to be judged at the time of the settlement, not at a later date, although this point had not been definitively decided.
Coulson held that there was no rule or principle of law that the Plaintiff must prove that he was liable to the third party before recovering against the defendant the sums which he paid to the third party by way of settlement. He considered that this was entirely in accordance with normal rules of foreseeability and remoteness of damage. He held that it was reasonably foreseeable, at the time that the contracts were made between the plaintiff and the defendant, that the plaintiff might settle a claim brought by a third party arising out of the same subject matter, even if, on a detailed analysis, the plaintiff’s legal liability to the third party might actually be hard or even impossible to establish.
The question that then arose for Coulson J was whether an unreasonable settlement was irrelevant altogether or whether it could still be relied upon up to the amount that would represent a reasonable settlement. This was a type of ‘near-miss’ theory, in which a party who had paid out pursuant to an unreasonable settlement might not be able to recover the excessive sum that he paid, but could instead ask the court to identify a hypothetical reasonable figure as the measure of loss between the plaintiff and defendant.
Coulson J accepted that there may be many cases where the court will conclude, on the facts, that some discrete items of a settlement might be payable as the measure of damages and others not. In that case a lesser sum made up of the allowed discrete items may then be identified as the reasonable sum which was recoverable by the plaintiff against the defendant. Coulson J considered that it was the sort of case that Colman J had in mind when in General Feeds he used the phrase "if and to the extent that…".
Coulson J held that in this case Hunt’s claim against ASME would be for those sums for which they were liable in law to the third party, and that ASME’s liability should not in principle be increased by reference to negotiations in which they did not participate, and which led to a settlement which, on this hypothesis, was unreasonable.
The decision of Coulson J and the review of authorities provides a useful summary of a difficult area of law. In practice a party considering a third party claim is still left with the difficulty of deciding whether it is reasonable to settle the claim and if so the reasonable settlement amount. The best evidence of the reasonableness of settlement is a legal opinion of the merits of the case as presented by the third party including consideration of the possible improvement of the case in any legal proceedings and the effect that this may have on the prospects of success.
Such an opinion would have to take into account the likely fees involved, the cost even if successfully defended and the commercial realities. The opinion should then state the reasonable range of settlement.
The two processes are not distinct but will overlap.
It is entirely possible that the settlement amount with the third party is for a reasonable amount on the predicted merits of the case together with a commercial premium for disposing of the third party claim early. Although not decided by the authorities, it may be prudent to identify separately the two amounts. In that case the main claim by the plaintiff will be for the settlement amount on the merits. The issue then will be whether the commercial settlement amount (presumably less than the amount on the merits) is a foreseeable part of the damages to be paid by the defendant as damages.