Settlement Agreements for Construction Dispute
The construction industry often faces disputes that can halt progress and increase costs. Settlement agreements are a practical tool for resolving such disputes efficiently. They address common issues like contractual breaches, delay penalties, and quality concerns. They provide a legally binding solution that satisfies all parties involved.
Below we explore the critical elements of settlement agreements and what to consider when drafting one. Given the complexity of drafting such agreements, seeking tailored advice from legal professionals is essential. For professional assistance on construction dispute resolution, get in touch with Helix Law’s Construction and Adjudication specialists and we will be happy to help.
What Is a Settlement Agreement in a Construction Dispute?
In construction disputes, a settlement agreement is a formal document outlining the terms for resolving conflicts outside of court. Parties typically opt for a settlement agreement in the construction industry to avoid the high litigation costs, save time, maintain their professional relationships and mitigate the stress of lengthy legal battles.
Effective settlement agreements must explicitly state what is being settled and the applicable terms, to prevent any unresolved issues from resurfacing and leading to additional disputes. These are contracts that ensure all parties have a clear understanding and agreement on the resolution of their dispue.
Considerations When Drafting and Negotiating a Settlement Agreement
While disputes are often unwelcome, addressing them effectively is crucial. To ensure a clear and enforceable resolution, you and the other party must conduct thorough negotiations and carefully draft a settlement agreement.
Settlement itself doesn’t simply happen because one party decides it is time to resolve differences, or because ‘X’ time has arrived. Settlement requires by its nature a compromise and meeting of minds and negotiations take place because the parties have both reached a position where there is a mutual willingness, or simply need to avoid the alternative – a continuing dispute, continuing problems, continuing costs.
An often overlooked but fundamentally important aspect to achieve a good settlement, is how you position yourself before embarking on settlement negotiations. Anyone can settle badly, or on poor terms. A usual mistake is to assume that everyone prices in all risks at the same level or amounts, and that X outcome is ‘inevitable’, that Y is ‘just’ or ‘fair’, or that Z is ‘inevitable’.
In reality talk is cheap and it is rarely sufficient to say XYZ are foregone conclusions or outcomes, or are even going to happen in part. If you want certain elements to be priced in, you will usually need to position yourself so that you’re actually seen to be taking those steps- the other side need to actually see there are going to be consequences that impact them in a very real way, unless an agreed compromise is reached. In very simple terms it is only if your opponent is also having sleepless nights that its likely you will achieve a good settlement. Practical steps in advance of a negotiation might include threatening litigation, issuing court proceedings, taking enforcement steps, pursuing insolvency, issuing or defending applications, obtaining statements and preparing evidence, all with a view to positioning you positively so that in any settlement you can meaningfully say with credibility ‘if you don’t do X now, this is going to be the consequence’.
Only after all the above positioning work has been done can a settlement negotiation take place, and only if heads of terms are agreed, can a settlement agreement (a contract) be drafted.
The content of a settlement agreement will always vary from case to case however we would usually recommend and expect to see the following clauses appearing or being considered.
The Parties
A settlement agreement must clearly identify all individuals and entities involved in the dispute. It may involve subcontractors, suppliers, or any third parties whose actions have impacted the dispute. You should include the full legal names, addresses, and roles to ensure there’s no ambiguity about who is bound by the agreement.
Properly drafting this clause is crucial, as any misidentification or omission can lead to enforceability issues and potential future disputes.
The Dispute
The agreement must clearly define the nature of the construction dispute and include detailed descriptions of the issues at hand, such as delays, non-compliance with contractual specifications, or payment disagreements.
Clearly defining the scope ensures that all parties understand the exact matters being settled, preventing misunderstandings or future conflicts over unresolved issues.
What’s Being Settled
Specify the exact terms of each party’s agreement to perform. This includes payment terms such as the amount to be paid, the payment schedule, the method of payment, and any conditions before payment is made.
Additionally, it may include specific actions to be taken by one or both parties, such as rectifying defects, completing unfinished work, or other remedial measures. The details must be articulated clearly, including deadlines and performance standards, to ensure all parties understand their obligations and to minimise the risk of subsequent disputes.
If there is any delay in payment it might be that security needs to be considered- such as personal guarantees or a charge over assets.
Consequences of Breach
Unless payment is being made in full at completion, there is risk of further dispute arising. There’s always the possibility that the other party might breach the terms of the agreement. These need to be clearly considered and dealt with including, for example, that the party in breach might be liable for an additional sum and/or might indemnify the costs the other side will/might incur.
Default and Enforcement
A default and enforcement clause might specify what constitutes a breach of the settlement agreement (e.g., failure to make a payment on time) and outlines the steps the non-defaulting party can take to enforce the agreement. It may include provisions for seeking court orders or other legal remedies.
Handling of Court Proceedings
When drafting a settlement agreement, it’s vital to explicitly outline how ongoing legal proceedings will be managed as part of the settlement process. This section of the agreement should specify whether any current court proceedings will be paused (stayed) or completely terminated (dismissed) upon the execution of the settlement.
If the proceedings are to be stayed, the case can be reactivated if there’s a breach of the settlement terms, providing a safety net without initiating a new legal case. On the other hand, if proceedings are dismissed and a breach occurs later, this would require filing a new lawsuit to address the breach, which could lead to additional legal expenses and delays. Beyond the technicalities of the agreement, it’s essential to approach the settlement to maintain or improve commercial relationships.
The tone and wording of the agreement should not be adversarial; instead, it should reflect a mutual desire to resolve the issue and move forward. Excessive haggling over minor details can strain relationships and detract from the primary goal of resolution.
Need Advice? Contact Helix Law.
If you are involved in a construction dispute we’re happy to assist you. We work nationally in construction litigation and adjudications, positioning our clients’ on the front foot to ensure the best possible outcomes, including negotiation of settlements. We offer quick advice to ensure your position is protected and improved as soon as possible after we are instructed. Our construction dispute solicitors provide dedicated, cost-effective assistance to protect your interests and keep your projects on schedule. We’re experienced and have considerable strength in depth as one of if not ‘the’ largest firm of specialist litigation firms in the South East. Our construction team would love to hear from you.
