Settlement Of Disputes: Passing On Liability

A common situation arises where a contractor settles a dispute

with an employer in circumstances where the contractor's

liability to the employer results from the actions of a third party

(often a sub-contractor). Is the contractor entitled to recover

from the third party the sums paid out in settlement? The answer is

normally "yes", provided that the settlement was

reasonable. The recent TCC case of Siemens v Supershield

gives further guidance as to when a settlement will be

reasonable.

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A common situation arises where a contractor settles a dispute

with an employer in circumstances where the contractor's

liability to the employer results from the actions of a third party

(often a sub-contractor). Is the contractor entitled to recover

from the third party the sums paid out in settlement? The answer is

normally "yes", provided that the settlement was

reasonable. The recent TCC case of Siemens v Supershield

gives further guidance as to when a settlement will be

reasonable.

Facts

Siemens subcontracted for the installation of sprinklers in an

office block.

The sprinklers malfunctioned and the resulting flood did

extensive damage to electrical equipment in the block. The flood

was caused by a malfunctioning component installed by Siemens'

sub-sub-contractor, Supershield.

The owners and tenants of the block claimed £5.61m from

the main contractor. Siemens was brought into the proceedings, and

in turn brought in Supershield. Siemens settled out of court for

£2.72m.

Siemens subsequently tried to recover this sum from

Supershield. Supershield claimed that the settlement was not

reasonable because Siemens had good defences to the claim based on

causation and remoteness of damage. Supershield effectively

accepted that it was reasonable of Siemens to settle the claim but

not at the level claimed.

Passing on a settlement liability

A sum paid under a reasonable settlement between an employer and

a contractor can generally be recovered as damages from a third

party (often a sub-contractor) where the liability of the

contractor to the employer is caused by the default of the third

party.

However, just because there has been a settlement does not

necessarily mean that the contractor can pass on the full liability

to the third party – the law only allows liability to be

passed on if the settlement sum is both reasonable and causally

related to the third party's conduct.

Historically this has...