What's the damage?

Two recent cases involving hospitals have cleared up the question of when a settlement reached with one party can be used as the basis of a claim against another.

If a breach of contract renders the plaintiff liable to a third party, it has usually been thought able to sue whoever caused the breach. So, if a subcontractor puts the main contractor in breach of its main contract, it is liable for any losses suffered. The amount of any agreement between the employer and the main contractor is admissible evidence as to the loss caused by the subcontractor's breach – although further evidence may be advanced to determine the extent of the actual loss.

This principle, from a case in 1951 (Biggin & Co Ltd vs Permanite Ltd), became known as the Permanite principle. It is usually regarded necessary to prove that any settlement is made with the benefit of legal advice as to liability, although evidence of the legal advice is not usually relevant.

So far, so good.

In October last year, Judge Bowsher revisited this point (P&O Developments Ltd vs Guys & St Thomas National Health Trust). The case involved a preliminary issue and the extent to which Guys Hospital could rely on a settlement it had reached with a main contractor, Higgs & Hill, emanating from advice that Guys had received from a leading QS as to what would be a safe settlement for a wrap-up deal. Guys duly did its deal, which was essentially a global settlement, and tried to use it to found its case against consultants retained on the project.

Judge Bowsher concluded that Guys could not rely on the apparent reasonableness of its global settlement to pursue the consultants. To prove the global settlement was reasonable, Guys would have to prove primary liability. He held that Permanite is not the authority for the proposition that a settlement made between two parties, however reasonable, can affect the position of a third party that had no say in it. This judgment indicates that Permanite relates chiefly to the sum at stake, as the liability must be established in principle.

A settlement made between two parties, however reasonable, can not be used as the basis of action against a third party that had no say in it

The most recent review of these legal principles came in a second hospital case, this time from Judge Hicks (Royal Brompton Hospital, National Health Trust vs Frederick Alexander Hammond and others). This concerned the refurbishment of Brompton Hospital, with substantial claims and counterclaims between client and main contractor. Those disputes were settled in arbitration on payment of £6.2m to the contractor. The hospital sought to recover this sum from its consultants.

On a preliminary issue, the defendant contended that the hospital's claim should be struck out because it relied on its conduct in reaching the settlement, rather than its objective reasonableness.

Furthermore, the defendant argued that Permanite could not be extended to cover multiple defendant cases. Judge Hicks reviewed the authorities, approving the Guys case, yet concluded that Permanite extends to cases where there are several defendants against whom a settlement is relied on, and cases where that settlement involves issues of liability as well as amount.

So, the relevance of Permanite was found to extend to liability as well as the amount awarded. The decision was, however, on a preliminary issue.