Settlement agreement: Crossing the line

Murphy & Sons Ltd vs W Maher and Sons Ltd [2016] saw the return of (Building columnist) Sir Robert Akenhead as a visiting judge in the Technology and Construction Court (TCC). He addressed what I suspect is a recurring consideration when preparing settlement agreements to resolve disputed accounts. If the settlement is not honoured, can you refer that to adjudication or has your right to adjudication in the underlying construction contract been washed away after you’ve drawn the line in the sand?

Murphy engaged Maher as sub-subcontractor. At the end of the works, the parties differed over the value of the account, but managed to reach agreement following discussions. That agreement was recorded through an exchange of email. However, Murphy didn’t pay the agreed sum so Maher referred the matter to adjudication. Murphy challenged Maher’s ability to enforce the decision on two points.

The first was that the contract offended the mandatory requirements of the Construction Act by naming the TCC as the adjudicator nominating body. Murphy argued this meant the scheme applied wholesale. The judge disagreed. The act requires that adjudication rules provide a timetable to secure the appointment and referral within seven days of the notice of adjudication. That did not mean a nominating body had to be specified and so the drafting error identifying the TCC did not breach mandatory provisions.

The second is what has generated greater interest around this case. Murphy claimed that Maher’s claim was in respect of a separate settlement agreement and was not “under” the sub-subcontract. As such, the adjudication provisions of the original contract did not apply and the adjudicator lacked jurisdiction.

The sub-subcontract incorporated the NEC’s standard form adjudication provisions (Option W2). This allowed any dispute arising under or in connection with the contract to be referred to adjudication.

This is compared to the equivalent provisions of the scheme, which provide for the reference to adjudication of disputes “just” under the contract. The question was whether Maher’s claim was “under or in connection” or just “under” the sub-subcontract, to trigger a right to adjudication and whether “or in connection” made a difference.

The judge decided that Maher’s claim could be referred to adjudication pursuant to the adjudication provisions of the original contract. He followed the approach of the House of Lords’ in Fiona Trust & Holding Corporation & Ors vs Yuri Privalov & Ors [2007], which considered the same issue in respect of arbitration agreements. The House of Lords decided it would be against commercial common sense to apply a narrow application of the wording of the arbitration clause. It should be assumed the parties agreed the arbitration clause with the intention that it would apply to disputes arising out of their relationship (both under the original contract or about it) so they could be decided by the same tribunal.

Mr Justice Akenhead decided these principles should apply to the interpretation and application of adjudication provisions in construction contracts. In his judgment, a dispute as to whether parties had reached a settlement on the final account is a dispute arising “under” the construction contract and can be referred to adjudication. He found this logical “because what is supposedly settled is the alleged entitlement to be paid ‘under’ the original sub-subcontract.” Were that not the case, the parties to a construction contract would never be able to adjudicate on a final account.

The judgment considered earlier cases dealing with a similar point which drew a distinction between settlement agreements that varied the original contract and those that gave rise to a new set of rules for the parties’ relationship (with the former preserving the right to adjudication under the original contract). Given the intervening decision of the House of Lords, Mr Justice Akenhead didn’t need to answer that particular question, but offered the view that Murphy and Maher’s oral agreement and exchange of emails in effect varied the original sub-subcontract.

I wonder though where you might (if indeed you now can) draw the line between a variation/side agreement to an original contract and the creation of a new contractual relationship. If you are going to create the latter, you might be more concerned by potential invalidation of bonds or warranties relating to the original contract, rather than your preferred forum for subsequent disputes. Why should this bother the parties (other than perhaps presenting the opportunity to challenge an adjudicator’s jurisdiction when all else fails)? Does it matter that adjudication is an available route to settling a dispute?

A claiming party under a settlement agreement (most often, I would have thought, pursuing unpaid amounts from the settlement sum) can still choose whether to refer the matter to adjudication or (absent an arbitration agreement) apply for summary judgment before the court. And if the dispute concerns defects, is not adjudication arguably the cheapest and more efficient forum?

James Clarke is a partner in the construction and engineering team at Berwin Leighton Paisner