Fluor Ltd v Shanghai Zhenhua Heavy Industry Co, Ltd

[2018] EWHC 1 (TCC)

The dispute here arose out of a contract for a 140 turbine wind farm in the North Sea. There were faults with the turbines supplied by SZH to Fluor. Fluor settled the claim up the line with CGOWL and sought to recover the settlement sums from SZH. Mr Justice Stuart-Smith recalled that:

“It is settled law that, in principle, C can recover from a contract breaker, B, sums that it 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 an objectively reasonable settlement and, if it is, that sum represents the measure of C’s damages in respect of B’s breach of contract (assuming that there were no other heads of loss). Even if C can show that its settlement with A was at an undervalue, the settlement sum still represents a ceiling on the amount that it can recover from B.”

The Judge noted that the position is more complicated where several heads of claim have been settled between an employer and a main contractor but where a defendant subcontractor is alleged to have been responsible for only one of them. This was not a case where Fluor refused to explain how the settlement sum was to be apportioned, but SZH did not accept the explanation given by Fluor. Amongst the questions the Judge had to consider were: what claims were actually settled by the payment made by Fluor, what amounts should be apportioned to them and how was that apportionment affected by the fact that Fluor sacrificed some other claims of its own? The approach of the Judge was to establish what proportion of the sum paid (or foregone) by Fluor was attributable to breaches of contract by SZH and, of those, what was in respect of costs or delays which had not been waived.  Having established that, the court then had to consider whether or not that proportion of the settlement sum was reasonable. Here, Fluor had assumed a very substantial potential liability under a warranty, albeit the risk was thought to be low.

The Judge was of the view that Fluor’s settlement was intended to embrace all claims relating to the project. Therefore it was necessary for the court to establish exactly what claims were “on the table” at the time of the settlement. When considering a global settlement the court was, in the words of the Judge “bound” to look at all the material available to it. This was a matter of elementary fairness.  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. The Judge then considered the circumstances leading up to the settlement agreement. He identified which items were claims arising out of defects in the welds, which had not been compromised by a waiver letter. Of these, he concluded that:

“Overall, the settlement ... was the result of hard fought and protracted negotiations in which each side had the benefit of informed legal advice.  None, 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.   The analysis that I have carried out shows that the reasonable settlement value of CGOWL’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.”

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