Settling claims: beware the pitfalls

14 February, 2018

Whether we like it or not, construction contracts routinely give rise to disputes.  Some get as far as adjudication or court or arbitration proceedings.  More often than not, parties manage to resolve their differences prior to reaching that stage, a way is found to compromise claims and get on with the job.

Where a settlement is reached, it has to be documented.  The parties are, after all, changing what they have already agreed.  The settlement terms constitute, or should constitute, a legally binding arrangement so that those terms themselves can be enforced if required.

Formalities need to be observed.  There should be ‘consideration’ for the settlement, it should contain all the terms agreed and it should be capable of interpretation in accordance with its ordinary meaning without reference to extrinsic evidence.

So far so good.  However, settlement agreements can be extremely difficult to get right.  Crucially, the parties have to be clear as to precisely what it is they have agreed.  For example, a contractor and an employer may agree that the contractor will waive all claims for extensions of time in return for a payment of £X.  Is that agreement only in respect of delays that have occurred prior to the settlement date?  If there is a subsequent relevant event that would normally entitle the contractor to an extension of time, is that claim precluded by the waiver?  Or is it only precluded to the extent that it is attributable, in whole or in part, to an earlier event to which the waiver did apply?  Does the waiver only prevent claims for extensions of time leaving the contractor free to pursue claims for loss and expense?

The courts were recently faced with a dispute over a settlement agreement in Fluor v Shanghai Zhenhua Heavy Industry [2018] EWHC 1 (TCC).  The facts were extremely complicated and the judgment runs to some 600 plus paragraphs.  In essence, however, certain steel monopiles and transition pieces supplied by a steel fabricator for an offshore wind farm contained cracks in their welding, rendering them unfit for purpose.  The parties in a settlement agreement had agreed that the additional costs of retesting and repairs arising from a non-conformance report would be waived.  The claimant sought to recover losses and it was disputed as to whether they were losses the  claimant had already settled.  The court found that where the settlement letter waived losses resulting from the particular report, it did not automatically mean that other losses could not be recovered.  In fact the defendant’s position was prejudiced because the settlement agreement had named the report and focused on it as the heart of the settlement.  By implication, therefore, the parties had not intended to exclude other losses. 

The lesson is the need for the wording of a settlement agreement to be precise.  In this case, the settlement agreement had settled some, but not all, of the consequences of the breaches of contract.  The defendant may have thought that it had settled the matter but it remained exposed to further claims for damages.