When things go wrong in a construction project, multiparty contractual relationships almost inevitably increase the difficulty of achieving a negotiated settlement. On the other hand, the motivations for settlement may remain strong, often in the hope of avoiding significant legal costs, saving time and preserving existing business relationships.

For example, if the main contractor wishes to settle the employer's claim for defective work, but the defective work was carried out by a sub-contractor and not the main contractor, an issue the main contractor will have to carefully consider is whether it can recover the settlement sum it pays from the subcontractor. The sub-contractor may well argue that the main contractor settled at too large an amount, and therefore it should not be liable to repay the whole of the settlement sum to the main contractor. A recent English court case provides much needed guidance on this situation. In Siemens Building Technologies FE Ltd v Supershield Ltd [2009] 2 All ER (Comm) 900, the English Technology and Construction Court determined a dispute caused by a failure of a sprinkler system. Briefly, the contractual basis was that Haden Young (sub-contractor) was retained by Skanska (main contractor) for mechanical and electrical works. Haden Young sub-contracted the supply and installation works of the sprinkler system to Siemens (sub-sub-contractor) which in turn further sub-contracted to Supershield (sub-sub-subcontractor) the installation works. Siemens settled the claims with the parties up the contractual chain with a payment of about 48% of the sum claimed, but was unable to reach a settlement with Supershield and therefore pursued its claim against that company. Supershield contended that Siemens settled for an "unreasonable sum" which Supershield was not obliged to indemnify in full.

What constitutes a reasonable settlement sum

The court rejected Supershield's argument. In his judgment, Mr Justice Ramsey derived from past authorities the following principles for assessing the reasonableness of a settlement sum. Assuming the main contractor settled the employer's claim which was due to a sub-contractor's default:

• The question of whether a settlement was reasonable is to be assessed at the date of the settlement (that is, no consideration is to be given to subsequent facts that come to light).
  
  
• For the sub-contractor to be liable to the main contractor in respect of the main contractor's liability to the employer which was the subject of a settlement: it is not necessary for the main contractor to prove on the balance of probabilities that it was or would have been liable to the employer or that it was or would have been liable for the amount of the settlement. That is, it is sufficient for the main contractor to show that it was arguable that it would have been liable to the employer.
  
  
• For the sub-contractor to be liable to the main contractor for the settlement, the main contractor must show that the breach of the sub-contract has caused the loss incurred and the loss was not too remote.
  
  
• The claim needs to be of sufficient strength to reasonably justify a settlement, and the amount paid in settlement is reasonable having regard to the strength of the claim. And importantly: in assessing the strength of the claim, unless the claim is so weak that no reasonable party would take it sufficiently seriously to negotiate any settlement involving payment, it cannot be said that the loss attributable to a reasonable settlement was not justified.
  
  
• The test of whether the amount paid in settlement was reasonable is whether the settlement was, in all the circumstances, within the range of settlements which reasonable people in the position of the main contractor might have made. The circumstances will generally include:
  
  
  • the strength of the claim;
    
    
  • whether the settlement was the result of legal advice;
    
    
  • the uncertainties and expenses of litigation; and
    
    
  • the benefits of settling the case rather than disputing it.

Upheld on appeal

Supershield appealed the decision of Mr Justice Ramsay, and Lord Justice Toulson in the unanimous judgment of the Court of Appeal (129 Con LR 52) upheld the trial court's decision against Supershield. It further observed that the "settlement value" of a claim is a matter of subjective opinion, which is to take account of all relevant variables:

"It has to be borne in mind that the 'settlement value' of a claim is not an objective fact (or something which can be assessed by reference to an available market) but a matter of subjective opinion, taking account of all relevant variables. Often parties may have widely different perceptions of what would be a fair settlement figure without either being unreasonable. The object of mediation or negotiation is then to close the gap to a point which each finds acceptable… The issue which the judge has to decide is not what assessment he would have made of the likely outcome of settled litigation, but whether the settlement was within the range of what was reasonable."

Key points to note

The court's pronouncement of the matters to consider when deciding whether a settlement sum is reasonable and therefore recoverable from a sub-contractor would surely be welcomed by contractors who might be 'caught in the middle'.

The principles set out in the judgments should be borne in mind when agreeing a settlement sum, particularly as the Hong Kong courts are likely, now more than ever, to view a settlement figure as reasonable as it increasingly encourages parties to settle since the Civil Justice Reforms in April 2009.

On the other hand, the sub-contractor in a situation like this will need to consider what it can do to protect its interests. For example, it can participate as much as possible in the settlement process, to obtain information about the basis for negotiating the settlement sum and to provide the necessary technical and/or legal input. If excluded from the negotiations, it could potentially rely on such exclusion to support its contention that the settlement payment made without its necessary input resulted in an unreasonable settlement sum and therefore should not be recovered in whole by the main contractor.