If you have completed a project or you’re seeking to reach an interim agreement, then you’ll be looking to agree a final account. However, there may be some contentious claims that you’re working through, add to that you have an eye on the next development and you don’t want to fall out with your approved supply chain if there is some disagreement as to the value.
Reaching a commercial settlement is important, but you want to ensure you protect yourself and that any agreement is full and final, removing any exposure to future claims. What is the best way to tackle this for the benefit of all parties in order that any agreement is unambiguous?
Where settlement can be reached, it must be well documented with a clear intent for it to be watertight. You are, after all, creating a new legally binding agreement so that the terms can be enforced i.e. if at a later date one party makes a new claim, the other can refer to an agreement whereby all claims where settled as full and final whether they were brought about at the time or not.
Here in lies the problem with settlement agreements; they need to be precise and cover what has been agreed, and ensure that each party, including those indirectly linked, are unable to make future claims. A classic example is that you may provide a settlement agreement that waives the right of the other party to claim for any more extensions of time, but is this only linked to any that they are aware of, or any that were in play at the time of the settlement agreement? If there is a subsequent event that occurs and the party is entitled to an extension of time, have you hamstrung yourself by the settlement agreement? Do you need to draw up another or, by agreeing to one, are you by your conduct making the first settlement agreement null and void?
What is the best way to pull such an agreement together?
Early intervention is important and closing out the heads of terms for an agreement between the parties will:
- Assist in maintaining an amicable commercial relationship
- Avoid the time and cost involved in launching formal dispute resolution proceedings where needed
- If the project is in the public eye, it will avoid unwanted negative press associated with a public falling out
A structure for the heads of terms will need to cover:
The parties involved
Who are the parties to the agreement and what are the details as to how are they bound by the agreement, including any third-party rights. This important as the Contracts (Rights of Third Parties) Act 1999 means that you should give consideration as to any third parties who could be affected by the settlement agreement and whether they should also be limited in their ability to launch future claims. For example, these third parties could be subsidiary companies, parent companies, and subcontractors. For a client, it’s prudent for any connecting parties to be included in the agreement and that a settlement for all and any claims, whether past, present or future, also extends to third parties.
The scope of the settlement
Settlement agreements should be considered like any other contract; their true scope can only be determined by the coverage and context in which they were drawn up. You’ll need to be precise in stating whether the settlement agreement covers the entire project, including all claims in full, part of the claims, an interim agreement, any counter claims, and any third parties.
Take take specific measures to deal with future claims by stating, as part of the settlement agreement, you are settling any potential future claims including any that are known and unknown at the time of the agreement, therefore neither party can revisit the account at a later date.
Think about the agreement that is being drawn up and what would happen if it fell apart and one party did not service their obligations then what are your options. Check what the options are to resolve this and ensure they been well defined ideally with a timescale or detailed process to follow through for resolution.
Structure this in a way that reflects the agreement i.e. payment will be made in part or in full once an action is taken and once payment is made this will be binding in terms of the settlement agreement. Also, you should include terms that list the options available in the event of non-payment, which could include the parties being free to continue pursuing claims against the other. If the payment is triggered by a future event, such as commissioning of plant, then make sure to include this.
Allocation of costs
In a settlement agreement, either party typically bears their own costs assuming the settlement does not contain any contentious claims, but it is still important to include wording that reflects this approach. If one party agrees to pay for the others legal costs in preparing the agreement, ensure you have express provisions that deal with this.
Confidentiality is standard practice, but you should still cover this off in the agreement with wording to the effect that either party is not allowed to make public the terms of the settlement agreement or the scope that it covers.
What are the pros and cons of a settlement agreement?
A settlement agreement can be a mutually acceptable way to draw a line under a project, or set of projects, that are between the developer and the contractor, or contractor and subcontractors, and it can be a good alternative to more formal legal dispute resolution proceedings. If the heads of terms can be agreed through negotiations in mediation, there is no reason why the costs cannot be minimised.
In terms of the pros:
- A settlement agreement can avoid costly legal disputes, which are not only expensive but time consuming and damaging to relationships
- Once heads of terms are agreed it may be possible to utilise such an agreement again if future works are carried out between the parties
- Reaching a settlement can provide a final position for the parties and allow them to focus on completion or new contracts
- Settlement agreements can preserve the existing commercial relationships
In terms of the cons:
- When drawing up your settlement agreement, you may need to rely on previous legal precedence. Any previous judgements or ruling that you can rely on will certainly bolster your case, but equally if it falls into dispute then the lack of any previous examples can be detrimental
- Dependent on the terms of your individual contract, you may be restricted in terms of how you can draw up your settlement agreement against the main contract and ensure there are no conflicting terms
Can you preserve the existing contract terms, such as defects?
The answer here is that it depends on the wording included in the settlement agreement. If the agreement refers to covering all works being included and any outstanding matters being settled on a full and final basis, then you can see how one party could deduce they are off the hook for literally any further issues including latent defects.
If the agreement is not sufficiently certain, in the event of a dispute the courts will not uphold it. This is reflected in the case of Willis Management Ltd vs Cable & Wireless Plc (2005) where the High Court initially ruled that the case letters and emails did constitute an enforceable agreement, but at the Court of Appeal they said there was not sufficient certainty so as to be enforceable. The Judge stated that whilst the courts can strive to give legal effect on the evidence put in front of court, they could not fill in the gaps so as to make a legally binding agreement.
If you draw up the settlement agreement and be precise as to what it covers, there is no reason why defects, be it current or future latent defects, should not sit outside and therefore limit the contractor’s ability to settle their liability entirely.
Even if a settlement agreement is in place, it does not detract from the ability of the parties of a construction contract to refer a matter to adjudication at any time. However, it is likely to complicate matters as in the case of J Murphy & Sons Ltd vs W Maher & Sons Ltd (2016); once a settlement agreement was reached, it was not paid and therefore Maher referred the matter for adjudication, but Murphy claimed the settlement agreement was another new agreement and as such could not be referred to adjudication.
The ruling in this case was that the settlement agreement was a variation to the existing contract and therefore referring to adjudication was allowable. However, the point to note here is that the settlement agreement should have included express provisions for how to treat non-payment, which could have been followed as opposed to referring to adjudication.
If a settlement agreement is deemed to be misrepresentative of the facts, or there is a mistake that affects the intent of the agreement that can be evidenced, then it could be set aside. However, with this level of ambiguity, you could well end up in court in an effort to resolve it or enforce the true legal intents.
When entering into negotiations concerning settlement agreements, they can be viewed positively if there is a will to resolve matters quickly and amicably. Ensuring that any such agreement has the correct provisions for what to do in the event of a breach, should the relationship falter, should also be viewed with equal importance.
Complex agreements involving third party rights or multiple projects with different funding sources will need careful consideration before they are translated into enforceable and accurate settlement agreements. It’s the courts advice that settlement agreements are to be construed like any other contract in that their true scope can only be determined by reference to the context in which it was made, which in construction will be the original contract to provide the works.
The court will therefore examine the contract that sits behind the agreement and seek to ensure the settlement is reflective of this and that a binding agreement can be established. If there is no binding agreement they will not step in and fix this.
Any settlement agreement should be a flow down from the header contract for it to be successful and, where it does deviate, it should be well documented.