Costs paid in settlement agreements: recovery from culpable third parties


Author: Frances Jenkins


The long awaited quantum judgment in the Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd[1] (ZPMC) case was handed down in January 2018.  It provides important guidance on the extent to which a main contractor’s damages against a subcontractor were limited by a settlement agreement it entered into with the employer.

This commentary is of interest to construction and commercial litigators alike, given the careful and detailed consideration of a settlement agreement containing numerous heads of claim where the subcontractor was responsible for only a fraction of them.

Brief factual background

Fluor was employed by Greater Gabbard Offshore Winds Ltd (GGOWL) to engineer, procure and construct the foundations and infrastructure to support wind turbines in the Greater Gabbard wind farm in the North Sea (BOP Contract).  Fluor contracted ZPMC to fabricate the steel monopiles (MPs) and transition pieces (TPs) which contained a number of welding defects. The defects caused delay to the project and necessitated a costly testing and remediation regime, causing further delay. This also put Fluor in breach of its contract with GGOWL.

The GGOWL Settlement Agreement in May 2013

In March 2011, Fluor referred to arbitration its claim against GGOWL in respect of the testing and remedial work demanded by GGOWL, whilst GGOWL counterclaimed for Fluor’s breach of the BOP Contract. Following a partial award in GGOWL’s favour in November 2012, Fluor and GGOWL attended mediation in early 2013 and settled their claims (GGOWL Settlement Agreement).  During the mediation, there were a number of claims on the table and GGOWL claimed £62.5 million from Fluor. Fluor eventually paid about £32.5 million in “counterclaim damages” and gave an extended warranty in relation to the unrepaired MPs (which included a liability for extended monitoring in the event of pile failure, capped at £28 million), as well as sacrificing its own claims against GGOWL.

The ZPMC Waiver Agreement in 2010

Prior to Fluor referring its claim against GGOWL to arbitration, Fluor and ZPMC entered into a settlement agreement in 2010 with a view to settling their dispute with regards to the welding and joining forces to recover their losses from GGOWL (ZPMC Waiver Agreement).  ZPMC assigned to Fluor its claims for the costs it had incurred arising out of the enhanced testing and remediation work and Fluor in turn waived its claims against ZPMC for additional costs and delay. [2]

The effect of the ZPMC Waiver Agreement is that significant limitations were imposed on the damages that could be recovered by Fluor.

Following the GGOWL Settlement Agreement, Fluor attempted to recoup its losses from ZPMC and in subsequent TCC proceedings (liability stage) brought by Fluor[3], it was held that the MPs and TPs fabricated and supplied by ZPMC were not fit for purpose and, as such, ZPMC was in breach of contract.  The quantum phase of the trial was then heard in May 2017.

The quantum trial

It is trite law that C can recover from B sums that C has paid to A in settlement of a claim made by A against C in respect of loss caused by B’s breach of its contract with C. However, C’s settlement with A must be “objectively reasonable”.

Fluor claimed approximately £50 million from ZPMC as the cost of settling GGOWL’s counterclaim in the Arbitration comprising:

  1. “counterclaim damages” in the amount of £32.35 million paid to GGOWL in respect of GGOWL’s claims for past and future monitoring of the MPs and TPs; and
  2. Fluor’s sacrifice of £20 million of claims against GGOWL.

The Judge, Sir Anthony Edwards-Stuart, decided[4] that the court needed to establish firstly what proportion of the sum paid (or sacrificed) by Fluor could be attributed to ZPMC’s breaches of contract, and secondly whether or not the settlement sum was reasonable having regard for the fact that Fluor had assumed a very substantial potential liability under the warranty given to GGOWL.

As the settlement was intended to be a global settlement in relation to all claims relating to the project that GGOWL had against Fluor, Edwards-Stuart J considered that a necessary preliminary step for the court was to establish exactly which claims were on the table at the time of the settlement. Edwards-Stuart J also accepted that prior negotiations between Fluor and GGOWL could be taken into account and noted that it was “a matter of elementary fairness” when considering a global settlement to “look at all the material available to it” as “a third party […] should be liable only for the direct consequences of its breaches of contract, and not consequences that are the product – or said to be the product – of an agreement between two other parties into which it had no input”.

Having reviewed the claims, Edwards-Stuart J considered the reasonable settlement value of GGOWL’s claims to be £40.675 million but, having removed the claims waived by Fluor under the ZPMC Waiver Agreement and the claims which were not caused by ZPMC’s breach of contract, the value which Fluor could claim against ZPMC reduced to £13.825m :

Claim £(million) Covered by ZPMC Waiver Agreement
1. Legal costs 10.850 Yes
2. Siemens claim 7.000 Yes
3. Other project claims 2.500 Not caused by ZPMC’s breach
4. Historic weld disputes 10.000 No
5. Costs to complete 6.500 Not caused by ZPMC’s breach
6. Compensation for reduced warranty 3.825 No
TOTAL 40.675 13.825

 Was the settlement reasonable?

Edwards-Stuart J did not hesitate to conclude that the settlement with GGOWL was reasonable and commented that it “was the result of hard fought and protracted negotiations in which each side had the benefit of informed legal advice”.

Having reviewed the various claims covered by the settlement agreement, Edwards-Stuart J stated that “[n]one, or at least very few, of the claims to which a value had been attributed by either party was so weak as not to be taken seriously”.  Edwards-Stuart J’s  analysis showed that the “reasonable settlement value of GGOWL’s claims was very close to the sum paid or foregone by Fluor so on that basis alone that aspect of the settlement was self-evidently reasonable”.

Edwards-Stuart J commented that although he had received careful and detailed submissions from the parties in relation to the various ancillary claims, it was not necessary to embark on a series of mini trials or evaluations. This is because “the question is not what would have been the outcome if the particular claim had proceeded to judgment, but how robust the claim would have been seen to be – in terms of both liability and quantum – by a reasonably well informed opponent. In settlement negotiations such as these, where there are numerous issues and claims, parties tend to take a broad and commercial approach”.  Edwards-Stuart J was unable to conclude that any of the claims “were plainly hopeless” though he regarded Fluor’s adverse weather claim as “coming fairly close to it”.

Practical points

When considering bringing a claim against a third party whose breach of contract has caused you to enter into a settlement agreement:

  • Remember that only heads of claim for which the third party is responsible will be ultimately recoverable.
  • Remember that the settlement needs to be “reasonable”.
  • Engage legal advice prior to any commercial negotiations regarding settlement taking place, as this will assist in ensuring that any settlement entered into is expressed such us to satisfy the requirement of reasonableness.

[1] Fluor v Shanghai Zhenhua Heavy Industry Co, Ltd [2008] EWHC 1 (TCC)

[2] [24]

[3] Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd [2016] EWHC 2062

[4] [480]

 

Frances Jenkins, Associate, Fladgate LLP (fjenkins@fladgate.com)

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