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Settlement Payments In Multi-Party Proceedings And More On Consequential Losses

Settlement In Multiparty Actions – Supershield v Siemens

When in a multi-party dispute can party A recover an amount paid to settle a claim made against it by party B from a third party, C?  The principles have been usefully revisited by the Court of Appeal in Supershield v Siemens. The case also has wider interest in relation to the recovery of consequential losses generally.

Once A has established liability against C, say for breach of contract, it is not necessary for A to prove on the balance of probabilities that it would have been liable to B or would have been liable in the amount of the settlement.  But A must show that the breach of contract by C caused the loss incurred by A in making the settlement payment; the claim by B against A must have been of sufficient strength to justify a settlement, the settlement must have been in a reasonable amount, and the loss must not be too remote.

The Background

In brief, a ball valve which had been defectively installed failed to prevent water overflowing from the storage tank of a sprinkler system when the system was activated in Slaughter & May's new office building. There was a walled bunded area in the tank room floor designed to retain any overflowing water, but drains in the floor leading to a sump from which any water would have been pumped away into the sewer, had unaccountably become blocked with packaging material.  The water overflowed the bund and passed outside the tank room, ultimately causing extensive damage to electrical equipment in the basement.  The experts in the ensuing litigation agreed that provided the pumps continued to operate, the drains would have been able to carry the escaping water indefinitely.

Proceeding were issued by Slaughters and others against the main contractor, and claims were made down the contractual chain, ultimately against Siemens, who had been sub-contracted to supply and install the sprinkler system, and by Siemens against  its sub-contractor, Supershield, who had been employed to install the system.  Following a mediation attended by all parties Siemens settled with the parties up the contractual chain but not with Supershield against whom it now sought recovery of the settlement amount.

The Court of Appeal upheld the judge's finding that Supershield was liable for the defective installation of the ball valve in breach of contract and then turned to the following issues:

Reasonableness Of Settlement, Causation And Remoteness

Supershield had disputed that the settlement (just under 50% of the claims against Siemens) was reasonable; it did not reasonably reflect the strength of the defences available to Siemens.  Supershield argued that the effective cause of the water escaping from the tank room was the blockage of the drains.  Alternatively, if the overflow of the tank was a partial cause, the escape of the water was too remote a consequence for Siemens to have been liable.

The Court of Appeal thought that it would have been a rash lawyer who would have advised Siemens that it was likely to succeed on the causation issue and agreed with the judge that the blockage of the drains did not take away the potency of the overflow to cause damage but rather failed to reduce it.

On remoteness the starting point was the rule in Hadley v Baxendale ((1854) 9 Ex 341) that the damages recoverable for breach of contract are those arising naturally from the breach in the usual course of things or which may reasonably be supposed to have been in the contemplation of the parties at the time of making the contract as the probable result of the breach.  The Heron 11 ([1969] 1 AC 350) confirmed that the loss must be 'not unlikely' to result from the breach.

However, although the Court of Appeal accepted that it may be right that a failure of the ball valve was 'very unlikely' to result in a flood, because the probability was that the water would escape through the drains, it nonetheless did not accept that this made the loss from the flood too remote to have been recoverable from Siemens.

Hadley v Baxendale remained the standard rule but it was intended to give effect to the presumed intentions of the parties and not to contradict them. Transfield Shipping Inc v Mercator Shipping Inc ([2008] UKHL 48) and South Australia Asset Management Corpn v York Montague Ltd ([1997] AC 191) had confirmed that there may be cases where, on examining the contract and the commercial background, the court decides that the standard approach does not reflect the expectation or intention reasonably to be imputed to the parties.  The result may be to exclude liability for loss, although some loss of the kind was not unlikely, or to result in liability for loss, even if it would not have occurred in ordinary circumstances, depending on whether or not the loss was within the scope of the contractual duty.  The question was whether this was loss from which the contract-breaker could reasonably be taken to have assumed responsibility to protect the other party.

Here there had been simultaneous failure of separate protection measures; multiple safety devices which it is not unusual to find in large construction or engineering projects. It was no answer to say that the damage which occurred was unlikely because other protection measures were in place – the mutual back-up they afforded depended on those responsible for each protection device complying with their obligations to ensure that it worked.

Siemens had been responsible for supplying and installing the sprinkler system in a way that the water was properly contained and it had thereby assumed a contractual responsibility to prevent its escape.  It was always possible, even if unlikely, that a second means of protection, here the drains, might fail.  The flood even if unlikely was within the scope of Siemens' contractual duty to prevent.

In the event the Court of Appeal did not need to go as far as that.  Siemens only had to show that it was reasonable to settle the claims against it, which the judge had concluded it was and the Court of Appeal agreed.  The court does not have to assess what would have been the likely outcome of the settled litigation, but whether the settlement was within a range that was reasonable.  In considering this the court would have in mind that 'prudent parties try to avoid litigation where possible' and that the settlement value of a claim is not an objective fact; parties may have widely different views without either being unreasonable and the object of mediation or negotiation was to close the gap between them to a point each finds acceptable.

Practice Points

  • Parties down the contractual chain should consider involving themselves in any settlement negotiations, as a settlement agreed between parties further up the chain may be higher than their anticipated liability and recoverable from them as long as within a reasonable range.
  • Parties looking to recover a settlement payment from a third party will however have to satisfy the court that it was reasonable and careful consideration should be given to the terms of any proposed settlement agreement.  If there is a global settlement sum, the amount to be passed on to the third party should be identified; any confidentiality clause should be drafted so as not to prevent such a claim being pursued and terms could be included to allow material on which the settlement was based e.g. experts' reports, to be used in pursuing the claim.
  • In claims for consequential losses generally, there is an increasing trend for the courts to look at the commercial purpose of the contract and the scope of the contractual obligation assumed by the parties in determining liability, rather than looking simply at the likelihood of the loss happening.

For further information please email Nick Bates or Janice McMullen.