Settling construction disputes – the devil is in the detail

15 April, 2010
by: Cripps

In the cut and thrust of the construction industry, disputes that have arisen during a project are frequently settled via commercial negotiation.  In the spirit of the deal, and with the fear that being too “legal” will upset the apple cart, sometimes not every detail is specified, with a certain amount being taken on trust and a presumption that the other party will behave in a “reasonable” manner.  However even the simplest of points, if not clearly expressed, can come back to bite you, as some recent cases have shown. 

The case of Jim Ennis Construction Limited –v- Combined Stabilisation Limited (TCC November 2009) is a good example of how deals can go wrong.  The facts may sound familiar: the parties were negotiating CSL’s final account.  In a telephone conversation between the respective parties’ directors a final account figure of £707,500 was agreed and in a follow up e-mail the next day a payment sum of £142,901.13 was agreed.  The date for payment however was not. 

A week later, Jim Ennis sought to withhold £7,362.88 from the agreed sum due to a newly discovered defect in the works and subsequently paid CSL a reduced amount of £135,538.25.  CSL considered this a breach of the settlement deal and submitted a further final account claim.  Jim Ennis paid the outstanding balance of £7,362.88 but CSL still considered the settlement deal undone.  CSL commenced adjudication for their resubmitted final account application.  This was stayed by the court as Jim Ennis applied for a declaration that CSL were bound by the settlement agreement.  As well as the underpayment argument previously made by CSL, they also argued in court that the lack of agreed timing for payment meant that no agreement had actually been reached between the parties. 

The court found that Jim Ennis’ failure to pay the £7,362.88 was not a sufficiently serious breach of the settlement agreement to bring it to an end.  A payment of 95% of the agreed sum did not indicate an intention to abandon and refuse performance of the agreement and therefore CSL were not entitled to treat it as at an end.  Further, in the absence of an express agreement on timing of payment a term would be implied into it requiring payment within a “reasonable” time. 

This case does not mean that parties have carte blanche to only ever pay the majority but not all of agreed sums; it was clear in the case that if Jim Ennis had not eventually made the second payment that CSL would have been entitled to sue for it as damages.  However it does show that the courts will give effect to parties’ agreements wherever possible and also draws an important distinction between (1) a promise to pay and (2) payment being a condition of the deal. 

If there had not been a genuine reason for withholding the amount or if it had represented a larger percentage of the total sum, the decision may have been different and the settlement may not have been binding after all. 

So what is a “reasonable” amount of time for payment?  In Rok Building Limited –v- Celtic Composting Systems Limited (TCC October 2009), Rok were applying to enforce an adjudicator’s decision for payment to them.  The adjudicator’s decision, although directive of payment, did not specify a time for payment.  As the parties were still in an ongoing contractual relationship, rather than paying, Celtic Composting stated that instead they would provide for it in the next interim certificate.  The court, unimpressed by this tactic, made it clear that it was not essential for an adjudicator’s decision to specify a time for payment if it was clear from the wording of the decision and its context that payment was to be made.  Enforcement was ordered with a requirement for payment within 14 days. 

In the context of a procedure as swift as adjudication 14 days seems appropriate, however outside of this, courts are likely to make a decision based on a case’s particular facts and circumstances. 

To avoid such ambiguity, here are some key points to make clear (and record in writing) when doing a deal:

• Who is paying who?
• How much is being paid? (Does this include retention/VAT?)
• When must payment be made by? 
• If the settlement is conditional upon full payment say so!
• Is the deal in full and final settlement of an entire contract or just an element of it?
• Does the deal include latent defects?  (Such an onerous agreement is unlikely to be implied and must therefore always be explicit). 

 

It is essential that all agreed terms of settlement are recorded.  Evidence of without prejudice discussions leading up to a deal may not be admissible in court in the event of a later dispute regarding the settlement agreement even if it is relevant to the interpretation of the meaning of the agreement.  The case of Oceanbulk Shipping Trading SA –v- TMT Asia Limited (February 2010) in the Court of Appeal confirmed that it was more important to preserve the without prejudice principle than to allow it to be breached for the admission of arguably relevant background facts.  The policy reasoning behind this is that negotiating parties should not be discouraged from exploring potential settlement by a fear of subsequent litigation. 

Reviewed in 2015