How to avoid some common pitfalls when settling disputes
Anyone who works in the construction industry will know how common disputes are. These can occur at any time in the job but are especially common at the end when the valuation of the works needs to be concluded.
Parties often choose to settle their disputes by way of a settlement agreement or final account agreement which spells out how they will resolve their issues and move on.
But beware: not all settlement agreements are created equal. Some settlement agreements can backfire if they are not drafted properly. They can leave you exposed to further claims or settle claims that you did not mean to settle.
We will look below at some of the ways in which settlement agreements can catch you out, and some of the ways in which you can protect yourself.
Settling claims in one direction only
One of the biggest mistakes you can make when drafting a settlement agreement is to settle only the claims you have against the other party, but not their claims against you.
This can easily happen when a document says something like “the Sub-Contractor accepts X amount in full and final settlement of all of its claims arising out of or in connection with the Sub-Contract”. This may sound like a good deal for the Sub-Contractor, but the effect is:
- The Sub-Contractor gets paid X amount.
- The Sub-Contractor cannot make any further claim against the Contractor.
- The Contractor has not given up its rights to make further claims against the Sub-Contractor.
This leads to the unfortunate situation where a Sub-Contractor thinks that the account has been settled and has moved on, but then finds that a claim is made against them later.
This type of wording is very common where the Contractor has its own standard ‘final account agreement’ form prepared for Sub-Contractors to sign. The Contractor is well aware that it can get the upper hand this way, and it is important that you check the wording very carefully.
To avoid falling into this trap, you need to make sure that the wording of the settlement agreement is appropriate. You might want wording releases both parties from all claims, whether they know about them or not, that they have or may have against each other arising out of or in connection with the Sub-Contract (or whatever else it is that is being settled).
In practice, Contractors may not agree to a settlement this wide as it means that they have no recourse if there are future defects to the work. A common compromise is that claims for patent defects (i.e. those which are known about now) are settled, but claims for latent (future) defects are not settled.
Settling specific claims
Sometimes, you may want to settle only some of your claims against the other party, such as specific variations, but not others, such as the associated delay or disruption. Or you might want to ‘draw a line in the sand’ part-way through a project. This can be a sensible way of resolving part of your dispute. If however you are not careful about how you settle these claims, you may inadvertently compromise your other claims.
Likewise, it is common for parties to want to settle certain known defects as a part of a wider agreement. The scope and extent of these defects must be very clearly defined, otherwise you risk them being opened up again. This means having a further dispute over the wording of the settlement agreement, which is what the settlement agreement was intended to avoid in the first place!
We have been involved in many disputes where the parties disagree on what their settlement agreement actually meant. The key is to ensure that all aspects of the settlement agreement are clear and define what claims are being settled and what claims are not.
Disputes over settlement agreements
Hopefully once the settlement has been reached, that will be the end of the matter. However, if there are any problems that arise out of it, then those problems may need to be resolved by a third party. Ideally, this would be by adjudication which is a reasonably quick and inexpensive process compared to other methods.
To be sure that adjudication is available as a method of dispute resolution, it is safest to include express wording in the settlement agreement explaining that either:
- disputes under the settlement agreement may be resolved by adjudication; or
- disputes under the settlement agreement may be resolved in the same way that they would under the original contract. This assumes that the original contract allowed for adjudication.
Depending on how the settlement agreement is drafted, it may be a variation to the existing contract, or it may be a new contract in its own right. Either way, it is a good idea for it to explain how disputes arising out of it are to be dealt with.
Some simple steps to help protect yourself
- If you have been given a settlement agreement to sign by the party you are in dispute with, make sure that you check it carefully before signing it. They may have made mistakes and are unlikely to have had your best interests in mind when preparing it. Make sure that the document accurately reflects what you have actually agreed.
- Make sure that all elements of the agreement are clear, particularly what is being settled and what is not being settled. Consider including schedules or photographs or other information as part of the agreement if that helps make things clearer.
- Make sure any settlement agreement is clear on what needs to happen and when.
- Consider what you want to happen if the other party does not keep up their end of the bargain. How do you want disputes to be resolved and how does it affect what you are entitled to?
How CCC can help you
If you are not sure how to draft a settlement agreement or need advice on its terms, or need any other assistance, do not hesitate to contact our team. We have extensive experience helping parties negotiate settlements, drafting settlements, and assisting parties if things go wrong.
