Dos and don'ts: Settling a dispute

Settling disputes is usually far more preferable than resorting to litigation or arbitration, in terms of both cost and certainty. This is even more likely to be the case for those in the construction industry. In large complex projects there may be a number of different claims and potential liability at several different levels in the supply chain. How do you deal with these so that you can settle claims at one level, but still recover the settlement sum from the party that is ultimately liable?

There are several ways in which parties can do this on major projects where the need to progress the construction activities in a commercial way must be balanced with resolving disputes quickly and efficiently. Here are a few reminders of what to do and what not to do in order to preserve the possibility of future recovery of the money paid out.

• Do ensure that you take legal advice on the merits of the settlement. You should take account of the same factors that a court will consider when deciding if the settlement was reasonable:

– the strength of the claim;
– the inherent uncertainties and expense of litigation; and
– the benefits of settling the case rather than disputing it.

In order to recover the settlement sum you have paid out to party X from a third party Y, you must be able to demonstrate that Y is liable to you. For example, if you are a contractor, this may arise where the actions of your subcontractor, in breach of its contract with you, puts you in breach of your contract with the employer. You may then settle with the employer (X) and seek to recover your losses from the subcontractor (Y).

Don’t assume that the other person signing the agreement automatically has authority to do so

• Don’t make a “global” offer to settle without a comprehensive breakdown of the separate sums making up the overall settlement figure. In the above scenario, it may be that party Y is only responsible for part of the settlement reached with party X. Therefore any settlement agreed with party X should be broken down to reflect the different elements that make up the total settlement. If this is done, the specific part for which party Y is liable can easily be identified and claimed. If the figure cannot be clearly identified, this may prevent any recovery from party Y.
• Do make provision in any confidentiality clause in the settlement agreement for an exception that will allow you to rely on the agreement for the purposes of pursuing a claim against a third party. This is very important as you may need to rely on the express terms of the agreement in seeking to recover from another party, but will be prevented from doing so unless the confidentiality provisions permit this.
• Don’t assume that the person signing the settlement agreement from “the other side” automatically has authority to do so. Always check this. This is particularly important for overseas entities, where local laws may be different from English law.
• You should consider asking for an undertaking or representation confirming the signatory’s authority to bind the company and enter into the settlement agreement.
• Don’t forget about the possible tax implications of the settlement. VAT may be payable on the sums agreed in settlement and you will need to take account of this. There may also be other tax implications and you should consult an appropriate adviser in relation to this.
• Do think about including a general assistance clause in the settlement agreement. This should be done where you are seeking to rely on the claimant’s documents or reports for the purposes of pursuing a claim against another party. You might also want to instruct the claimant’s expert who has already undertaken some analysis of the issues relating to the claim. This is likely to mean that you can avoid the additional cost of instructing an expert with
  no knowledge of the issues from the outset.

There are many important issues to consider when agreeing a settlement. However, by taking account of these points, you should put yourself in a good position to recover at least some of the money paid out in settlement of a dispute, from another responsible party. This is likely to be an important factor for anyone involved in a large-scale construction project where disputes can occur at every level of the supply chain.

Tom Bain is an associate at Berwin Leighton Paisner