| Date | 19 February 1997 |
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| Judgment | Spirotec Engineering Ltd -v- Chiltern Engineering Ltd, Court of Appeal 4 March 1996 |
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| The Issue | Whether a settlement between client and main contractor may be taken as the measure of damages in the related dispute with a sub-contractor. |
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| Implication |
Main contractor must establish a prima facie case that the settlement with their client is a reasonable one. If the sub-contractor fails to shake that case, the amount of the settlement may be taken to be proper measure of damages against the Sub-contractor. |
printA client and main contractor are in dispute. The dispute has arisen as a consequence of the failure of work undertaken by a sub-contractor. Whatever settlement the main contractor agrees with its client, they will therefore be determined to ensure that this can be passed down to the sub-contractor. The question of whether such a figure reached in a commercial settlement can be properly used as the correct measure of damages in a claim against a third party was examined in the recent case of Spirotec Engineering Ltd -v- Chiltern Engineering Ltd. The problems go back to December 1990 when Chiltern agreed with Nobel's Explosive Company Ltd, a division of ICI, to refurbish plant and equipment at Nobel's factory. In order to fulfil its contract with Nobel, Chiltern sub-contracted with Spirotec to supply certain critical parts. The parts were duly manufactured by the sub-contractor, installed by Chiltern and in due course an invoice in the total sum of approximately £22,000 including VAT, was submitted to Nobel. Unfortunately, shortly after rendering this invoice, things went wrong. The newly installed part had broken down inside the machinery causing production of the plant to cease and, so Nobel said, damaging some of the product which was in the plant at the time. Considerable discussions between the parties, their loss adjusters and insurers then ensued, which resulted in Chiltern agreeing to cancel their invoice of £22,000 in the face of a supposed claim from Nobel of the order of £24,000. Supposed, because it seems that the figure of £24,000 was never properly investigated by Chiltern and substantial elements of that claim had never been properly evidenced. Now we should turn to the dispute between the main contractor and sub-contractor, the subject of the present action. Spirotec had sued Chiltern in the County Court for the cost of the parts supplied by them, some £5,500. This was defended by Chiltern, who counter-claimed for £22,000, being the amount of the invoice to their client which they had foregone by settlement. Before turning to his judgment in the Court of Appeal, Sir John Balcombe referred to the case of Biggin -v- Permanite (1951) 2 KB 314 where rather similar problems had risen. At first instance in that case it was held that the amount paid under the settlement was wholly irrelevant and felt to be inadmissible. In the Court of Appeal it was held that the amount paid under the settlement, although it was admittedly an upper limit, should if reasonable, be taken as the correct measure of damage. To establish reasonableness, a significant factor was considered to be where a client might have taken professional or legal advice. Elsewhere in the judgment it was stated that if upon the evidence the judge is satisfied that the damages would be somewhere around the figure at which the plaintiffs had settled, he would be justified in awarding that settlement figure. Returning to Nobel and Chiltern, Chiltern had agreed to forego its claim for work it had undoubtedly done in the sum of £22,000, in view of a counter-claim from Nobel loosely quantified in the sum of approximately £24,000. On the face of it, that might not have been an unreasonable settlement provided that Nobel's claim for £24,000 was a reasonable claim. However, in their action against Spirotec, no evidence whatsoever had been led by Chiltern to the effect that the sums claimed against them by their client were reasonable. Therefore, according to the Court of Appeal, the counter-claim in the sum of £22,000 should have been dismissed. There was no relevant or admissible evidence to show that the settlement reached between Chiltern and Nobel was a reasonable settlement, so as to affect the sub-contractor Spirotec.
CJ-9707
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