Fluor v Shanghai Zhenhua Heavy Industries Ltd [2018] EWHC 1 is a recent case heard in the High Court to determine the damages that a supplier (Shanghai Zhenhua Heavy Industries Ltd (SZHI) should be liable to a contractor (Fluor) for. The case is a reminder of the importance of getting a settlement agreement right.

Background

Fluor contracted with Greater Gabbard Offshore Winds Ltd (GGOW) to build the foundations and infrastructure for a 140 turbine wind farm in the North Sea off the Suffolk coast.

SZHI contracted with Fluor to make the turbine foundations.

When the integrity of the first few batches of SZHI’s steel piles was tested by Fluor, the tests revealed extensive cracking in the welding on the piles. Fluor issued certificates of non conformance in respect of the steel piles and transition pieces delivered with them following which an extensive progamme of testing and repair began. Litigation ensued which resulted (in 2016) in SZHI being found liable for breach of contract with Fluor.

On 11 January 2018 Sir Antony Edwards-Stuart (sitting as a High Court Judge) gave judgment on the amount of damages that SZHI should pay Fluor.

The Judgment

The judgment is complex. One of the issues that was considered was the correct approach to delay analysis with the court concluding that some form of retrospective analysis was required in this instance.

The main point that we want to flag up from this case is the judge’s comments on and approach to the settlement agreement that Fluor entered into with GGOW (as prime contractor, Fluor was responsible to GGOW for the faults in the foundations supplied by SZHI). The judge had to consider the extent to which the settlement agreement limited the damages that Fluor could recover from SZHI.

Paragraphs 465 and 466 of the judgment are set out below:

“465.   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 cause by B’s breach of its contract with C.

466.   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 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.”

So, to put it another way, if your customer sues you for losses caused by your subcontractor then the amount that you agree to pay your customer under the settlement agreement that you make with him is the amount that the subcontractor must pay you provided that the settlement agreement is objectively reasonable.

If the settlement agreement is not objectively reasonable (perhaps because you agreed to pay your customer more than you should have done) then you may not be able to recover that amount from your subcontractor.

As ever, care and attention is needed when dealing with claims and settlement of claims.

In Fluor v Shanghai Zhenhua Heavy Industries Ltd the judge concluded that the settlement agreement between Fluor and GGOW was objectively reasonable.

For any questions you have concerning this case or if you are facing a breach of contract dispute please contact us.