Where a subcontractor claims against the main contractor for matters such as employer delay, is the subcontractor bound to accept payment measured by a settlement reached between the employer and the main contractor?
A main contractor settles with the employer over the subcontract work, and the subcontractor wants more. The subcontractor is not bound by that settlement, but a reasonable settlement is strong evidence of the loss the main contractor can recover for a breach the subcontractor caused.
Not automatically: a subcontractor that took no part in the settlement is not bound by it as a contract, and its entitlement is governed by the subcontract, but where the main contractor has reasonably settled a claim that the subcontractor caused, a reasonable settlement is good evidence of the loss recoverable down the chain, as Biggin v Permanite and John F Hunt Demolition v ASME establish, subject to proof of liability, causation and reasonable allocation
Not automatically. A subcontractor that took no part in the settlement is not bound by it as a contract, and its own entitlement is governed by the subcontract. What the authorities allow is narrower and runs down the chain: where a party has reasonably settled a claim, the settlement is good evidence of the loss it can recover from a party further down whose breach caused the liability. In Biggin v Permanite the Court of Appeal held that a reasonable settlement, though not conclusive, could be taken as the measure of the loss, so the claimant did not have to prove by strict evidence what the original claim would have yielded. John F Hunt Demolition Ltd v ASME Engineering Ltd held that reasonableness is almost exclusively a matter of fact and that the party recovering need not prove it, or the party below, would in fact have been liable for the settlement sum. To recover the settlement from a subcontractor, though, the main contractor must still establish the subcontractor's liability and causation under the subcontract and show the settlement and its allocation are reasonable; and whether the subcontractor's own claim is capped by the settlement turns on the subcontract wording, not on the settlement binding it.
| Not a contract | A subcontractor is not bound by a settlement it took no part in |
| Down the chain | A reasonable settlement is evidence of loss recoverable from the party at fault |
| Biggin | A reasonable settlement can be taken as the measure of the loss |
| John F Hunt | Reasonableness is a matter of fact; underlying liability need not be proved |
| Still required | Liability, causation and a reasonable allocation to the subcontract work |
The problem
A subcontractor delayed by the employer or its agent claims its extra cost from the main contractor, which passes the claim up in its own claim against the employer. The main contractor then settles with the employer for a sum that includes an amount for the subcontract work. When the subcontractor presses for more than the settlement allowed, can the main contractor hold it to the settlement figure, even though the subcontractor took no part in the negotiation?
Not bound, but evidence of loss
Start with what the settlement is not. A subcontractor that was not a party to the settlement is not bound by it as a contract. Privity means it cannot be held to terms it never agreed, and its own entitlement is governed by the subcontract, not by an agreement made over its head. What the authorities do is narrower, and it runs the other way, down the chain: where a party has reasonably settled a claim, the amount of that settlement is good evidence of the loss it can recover from a party further down whose breach caused the liability.
A seller of defective adhesive settled a claim from its buyer and then sought to recover the settlement from its own supplier. The Court of Appeal held that a reasonable settlement, though not conclusive, could be taken as the measure of the loss recoverable from the supplier, so that the seller did not have to prove by strict evidence what the original claim would have yielded. Even so, the claimant had to show what would probably have been proved had the claim run, so that the court could judge whether the settlement was reasonable.
How far it reaches
How far that reaches was tested more recently.
A fire started by a subcontractor's welding caused damage, and the demolition contractor settled the claim passed down to it for a sum it later sought to recover from the sub-subcontractor. The court held that whether a settlement is reasonable is almost exclusively a matter of fact, and that the party recovering does not have to prove that it, or the party further down, would in fact have been liable for the settlement sum; a claim would usually have to be obviously hopeless before settling it could be called unreasonable. A reasonable settlement is the measure of the recoverable loss, not a determination that binds the party below.
What must still be proved
So the subcontractor is not automatically fixed with the settlement, but nor can it ignore a reasonable one. The main contractor cannot simply present the settlement as a closed account. To recover the settlement sum from the subcontractor it must still establish the subcontractor's liability under the subcontract, show that the subcontractor's breach caused the loss, and show that the settlement and the allocation of the sum to the subcontract work are reasonable on the facts. Where those are made out, a reasonable settlement is strong evidence of the amount recoverable, and the subcontractor cannot defeat it merely by saying the underlying claim was never proved. Whether the subcontractor's own claim up the line is limited to what the main contractor recovered is a separate question that turns on the wording of the subcontract, not on the settlement. The practical lesson falls on the main contractor: when settling with the employer over work that includes a subcontract element, keep a full build-up of how the settlement sum was calculated. A bare lump sum with no build-up leaves little to work from when the main contractor later has to allocate the settlement to, or recover it from, a subcontractor.
Practical steps
As a main contractor, keep a detailed build-up of any settlement with the employer that includes amounts for subcontracted work.
To recover a settlement from a subcontractor, establish the subcontractor's liability and causation under the subcontract, not just the settlement figure.
Show that the settlement and the allocation to the subcontract work are reasonable on the facts; a reasonable settlement is the measure of the loss.
As a subcontractor, remember you are not bound by a settlement you took no part in; but once liability is shown a reasonable settlement is strong evidence of the loss, so a bare denial that the figure was proved will not defeat it.
Check the subcontract: whether your own entitlement is tied to the main contractor's recovery depends on its wording, not on the settlement itself.
Authorities
| Authority | Citation | What it decides |
|---|---|---|
| Biggin v Permanite | [1951] 2 KB 314 | A party that reasonably settled a claim could recover the settlement from a party further down the chain whose breach caused the liability; a reasonable settlement, though not conclusive, is taken as the measure of the loss, and the claimant need not prove by strict evidence what the original claim would have yielded |
| John F Hunt Demolition Ltd v ASME Engineering Ltd | [2007] EWHC 1507 (TCC) | Whether a settlement is reasonable is almost exclusively a matter of fact and does not depend on proving the settling party, or the party below, was in fact liable for the settlement sum; a claim would usually have to be obviously hopeless before settling it could be unreasonable, and the reasonable settlement is the measure of the loss, not a ruling binding the party below |