A reasonable settlement?

A considerable proportion of construction litigation these days concerns a client taking action against its professional advisers to recover moneys paid to a contractor in respect of a claim for delay and disruption.

The extent to which a sum reached in negotiated settlement with a contractor can form the proper measure of damages against a professional party is the subject of much debate.

The 1951 case of Biggin -v- Permanite is often cited in support of the contention that where the client can show that the settlement with its contractor was a reasonable one, the amount of that settlement may be taken as the correct measure of damages in the third-party proceedings.

This issue was further clarified in the case of P&O Developments -v- The Guy's and St Thomas' National Health Service Trust recently heard in the Technology and Construction Court.

contracts

The action arose out of a part of a new building development at Guy's Hospital in London. The employers, Guy's, had employed Higgs and Hill as management contractor who in turn had entered into numerous works contracts.

Guy's also employed a management team which included P&O Developments as project managers and Austen Associates as mechanical and electrical services engineers.

There were delays to the project in respect of which the architects granted extensions of time. By 1994 the project was in disarray with costs rising.

At that point Guy's took advice from Davis Langdon and Everest who recommended a commercial agreement or 'wrap-up deal' with Higgs and Hill.

Following that advice an agreement was made between Guy's and Higgs and Hill in December 1994 by which Guy's agreed to pay Higgs and Hill £83.9 million.

The agreement made no reference as to how that money was to be applied by Higgs and Hill, and in particular did not dictate what sums, if any, were to be paid to individual works contractors. The report of Davis Langdon and Everest had, however, made provision of individual sums for the claims made by the works contractors.

Guy's claimed against P&O and Austen for having caused a part of the project delays by producing late and inadequate information.

It was contended on behalf of Guy's that the settlement figure was primarily derived from the advice of Davis Langdon and Everest and that was as far as Guy's needed to go in order to establish the reasonableness of the settlement.

The provisions made by Davis Langdon and Everest should thus be taken as the starting point for the computation of the damages claimed against the consultants.

The consultants on the other hand contended that that would be far too simple an approach and that a much deeper enquiry should be made to establish the relevant damage incurred by Higgs and Hill and its works contractors.

In other words it would be necessary to look behind the face of the advice to examine the workings and working papers of Davis Langdon and Everest and to investigate whether the advice given was in fact correct.

A series of preliminary issues were agreed to be tried in front of his Honour Judge Bowsher QC.

reasonable

Judge Bowsher was asked to consider how Guy's might prove that the global settlement was reasonable. Was it sufficient that Guy's relied on advice given by competent advisers, or would it be necessary to investigate whether the advisers themselves acted reasonably in giving that advice?

Judge Bowsher confirmed that both strands of evidence would be relevant to arriving at the correct measure of damage.

In answering these questions Judge Bowsher was particularly wary of the term 'reasonable' in this context. He emphasised that the question was not whether the plaintiff had acted reasonably in settling the claim, but whether the settlement was a reasonable one.

Furthermore it was necessary to clarify the rule in Biggin -v- Permanite. The rule was firstly one of evidence. In other words, the settlement may provide some evidence of the value of a third party claim, but it may not be conclusive. Such a settlement did, however, set a maximum to the third-party claim.

valid

The second rule in the case Hadley -v- Baxendale was also apposite. This meant no more than that the parties may be held to have had in reasonable contemplation those damages that flowed from the settlement of legally valid third party claims.

Finally it was asked, if Guy's are able to prove that the £83.9 million global settlement was reasonable, does it follow that the components of that sum allocated by its advisers to the individual works contractors represented Guy's actual loss with respect to those works contractors?

If not, would it be necessary for Guy's to prove that the sums allocated against each works contractor were in fact reasonable sums?

If this latter proposition were true, would it then be material to investigate the settlement figures that Higgs and Hill had subsequently adopted to close down the accounts with the works contractors?

Judge Bowsher was clear that the allocation against works contractors deriving from the Davis Langdon and Everest report could not be used to determine Guy's actual loss. He held that it would be necessary for Guy's to prove those sums as reasonable amounts in respect of each works contractor.

The actual settlement figures as between Higgs and Hill and the workscontractors would merely be evidence of that reasonableness or otherwise.