Settlement agreements are themselves prone to generating disputes. Solicitors Digby Hebbard and Christian Charles report.
Disputes and differences arise in connection with most construction projects, large or small. In our experience, a majority are resolved by the parties without recourse to formal dispute resolution, particularly while projects remain ongoing. Moreover, even the minority which become subject to dispute resolution proceedings appear to us to be settled before determination. In essence, therefore, more disputes settle than ‘go the distance’.
Settlements should normally be committed to writing to ensure clarity and that they are binding. Indeed, settlement agreements are common in construction projects. Readers will be familiar with ‘full and final’ wording, such as: “Aaccepts payment of the sum of £x from B in full and final settlement of, and a release of any and all liability in respect of, the claims and disputes”.
Entering settlement agreements requires careful consideration because, despite their prevalence, (further) disputes frequently arise and/or centre on the meaning and effect of the settlement agreements themselves. This often occurs when ad hoc settlements are reached during the substantive works and circumstances have since changed. For example, a contractor may incur additional costs and losses, as a result of a variation or instruction, to those contemplated at the time of the agreement. Alternatively, an employer may discover that rectification of defective works is more expensive than originally thought.
Issues regularly encountered regarding settlement agreements include whether (i) a particular dispute was included in the scope of the settlement and (ii) disputes arising under a settlement agreement can (also) be referred to adjudication.
The scope of the settlement
Identifying precisely what it is settled is fundamental before agreements are signed. Historical claims and disputes should be readily identifiable. The same cannot be said for matters that may arise in the future, which a party who wants to conclude a project in absolute terms will want to settle. This is a common pinch point in negotiations because the other party will resist waiving entitlements or rights to pursue losses that it may suffer in the future and does not yet know about. There could be a significant commercial difference to a party agreeing to settle claims which are “known or should have been known at today’s date” and “claims, demands which may arise in the future”.
As ever, clarity of drafting is paramount. Courts will interpret settlement agreements in the same way as any other commercial contract, and will therefore strive to give the words their ordinary and natural meaning. So, if the agreement includes a comprehensive “full and final settlement of all claims and potential claims, whether known or unknown”, the courts would normally give effect to that. In Khanty-Mansiysk Ltd v Forsters LLP  EWHC 522 (Comm), the claimant had agreed to settle an invoice dispute with its solicitors and the settlement was expressed to cover any and all claims, whether known or unknown to the parties at the time of entering into the settlement agreement. The claimant subsequently sued the defendant solicitors for professional negligence, based on evidence that only came to light later on, after the date of the settlement agreement.
The court upheld the release provisions because it was clear and unambiguous – it did not matter that the claimant was not, and could not have been, aware of the existence of the claim at the time of the settlement.
In short, it is recommended that settlements be approached by first taking time to detect, recognise and assess the issues that may be settled and, with that scope in mind, to then forensically approach the wording of the settlement scope and exclusions provisions of the settlement agreement.
Disputes under settlement agreements?
An additional drafting consideration for settlement agreements is whether you want to be able to refer any disputes arising in connection with the settlement agreement to adjudication. If so, it is advisable to make express provision for it. If not, then because settlement agreements are not “construction contracts” for the purposes of the adjudication legislation, there is a possibility that parties could only refer such disputes to (the generally more expensive and lengthy) litigation or arbitration.
In the recent case of J Murphy & Sons Ltd v W Maher and Sons Ltd  EWHC 1148 (TCC), the court decided that a dispute arising in connection with a settlement agreement could be referred to adjudication because the dispute arose ‘under or in connection with’ the underlying contract and therefore fell within the underlying construction contract’s adjudication provisions.
Although this decision is clearly of interest, it would be prudent to include adjudication provisions in settlement agreements.