Settlement Agreements

Section 1

Purpose

Settlement Agreements are the formal legal documents that record the terms on which parties agree to resolve a construction dispute, extinguishing all outstanding claims and counterclaims between them. A settlement agreement is the most cost-effective resolution of a dispute — it avoids the cost, management time, and reputational risk of adjudication, arbitration, or litigation, and it enables both parties to move on. The QS has a central role in reaching settlement: quantifying the agreed settlement, advising on the commercial case for settlement versus proceeding to adjudication, and ensuring the settlement agreement accurately reflects the financial terms agreed.

RICS Conflict Avoidance and Dispute Resolution (2024) identifies negotiation as the first pillar of dispute resolution — most construction disputes are resolved by negotiation between the parties' QSs without recourse to adjudication. The QS who can negotiate effectively, quantify the cost of proceeding versus settling, and advise the client on the reasonable settlement range is providing high-value professional service.

Settlement agreements have specific legal requirements to be binding and enforceable — they must satisfy the basic requirements of contract (offer, acceptance, consideration, intention to be bound) and must be sufficiently clear in their terms to be enforceable. The QS must understand what makes a settlement agreement enforceable and what risks arise from poorly drafted settlements.

Section 2

Key Principles

Basic contract law: a settlement agreement is a contract; it requires offer and acceptance, consideration (the mutual concession of claims), and intention to create legal relations; a settlement agreement signed 'subject to contract' is not binding until the formal contract is executed.
RICS Conflict Avoidance and Dispute Resolution (2024): negotiation is the preferred first step in dispute resolution; a surveyor should proactively seek to resolve disputes without formal proceedings where possible.
Without-prejudice communications: settlement negotiations should be conducted without prejudice to preserve privilege; but a without-prejudice offer that is accepted constitutes a binding settlement even if the formal agreement has not yet been signed (Harvey v Lawrence [2009]).
Calderbank offers: a written offer to settle that is marked 'without prejudice save as to costs' — the Calderbank offer is admissible only on the issue of costs after the decision is made; if the offeree fails to beat the offer, they may face an adverse costs order.
Tomlin orders: in court or TCC proceedings, a settlement can be recorded as a Tomlin order — a court order staying proceedings on agreed terms scheduled to the order; the terms are private but the settlement is enforceable as a court order.
Tax and VAT: settlement payments may have tax and VAT implications; the QS should not provide tax advice but should flag potential tax issues to the client's advisers before the settlement is concluded.

Section 3

Practical Application

Step 1

Before entering settlement negotiations, prepare a settlement analysis for the client: the QS's assessment of the likely range of outcomes if the dispute proceeds to adjudication; the estimated cost of adjudication (legal fees, expert fees, management time); the likelihood of success on each issue.

Step 2

Identify the client's BATNA (Best Alternative To a Negotiated Agreement) — the outcome if negotiations fail; the settlement analysis should show whether settling within the identified range is better than the BATNA.

Step 3

Conduct settlement negotiations — work through the outstanding issues methodically; where positions are far apart, identify areas of agreement first to build momentum; use objective criteria (contract rates, BCIS benchmarks, RICS methodology) to support positions.

Step 4

When a settlement in principle is reached, confirm the agreed terms in writing immediately — summarise the key financial terms, any non-financial terms (e.g. release of claims), and the deadline for executing the formal agreement.

Step 5

Ensure the formal Settlement Agreement covers: the parties; the contract; the outstanding claims and counterclaims being settled; the settlement sum (or payment arrangement); the full and final nature of the settlement (releasing all outstanding claims on both sides); the date of the agreement.

Step 6

Review the draft settlement agreement for completeness: does it release all claims on both sides? Does it cover retention? Does it cover any related subcontract disputes? Does it deal with interest? Are there any outstanding issues that are NOT covered and should remain open?

Step 7

Once the settlement agreement is executed, process the settlement payment; confirm in writing that all claims are resolved; update the Final Account; file the settlement agreement in the project records with a note of its effect on the Final Account.

Section 4

Common Mistakes to Avoid

Settling for an amount without quantifying the cost of proceeding — a settlement that seems reasonable in isolation may be worse than the likely adjudication outcome; the QS must provide the client with a structured settlement analysis before agreeing to settle.
Failing to ensure the settlement agreement is 'full and final' — if the agreement does not expressly release all outstanding claims and counterclaims, either party may be able to re-open settled matters.
Signing a settlement agreement 'subject to contract' and treating it as binding — a 'subject to contract' agreement is not binding until the formal contract is executed; do not process any payment until the formal agreement is signed.
Failing to deal with retention in the settlement agreement — if both moieties of retention are outstanding, the settlement agreement must confirm how retention will be treated; failure to address retention can lead to a dispute about whether it was included in the settlement sum.
Not seeking legal advice on the settlement agreement for high-value or complex disputes — the QS can advise on the quantum and commercial aspects; the legal drafting of a settlement agreement for a high-value dispute should involve the client's solicitors.

Section 5

APC Competency & Quick Reference

Conflict Avoidance, Management and Dispute Resolution Procedures Level 3 — settlement negotiations, settlement agreements, Calderbank offers
Contract Practice Level 3 — full and final settlement, release of claims, Tomlin orders

What commercial analysis should the QS prepare before advising a client whether to settle a dispute?

Settlement analysis: (1) the QS's assessment of the likely range of outcomes in adjudication (best/worst case); (2) the estimated cost of adjudication (legal fees, expert fees, management time, distraction cost); (3) the settlement sum being offered/demanded; (4) comparison of (3) vs (1) net of (2). If the settlement sum is within the realistic adjudication outcome range net of adjudication costs, settlement is usually the better commercial option. The analysis should be presented to the client in writing.

What is a Calderbank offer and what is its strategic significance?

A Calderbank offer is a settlement offer marked 'without prejudice save as to costs'. It is protected from disclosure to the tribunal during the proceedings but can be disclosed after the decision on the issue of costs. If the offeree fails to beat the Calderbank offer at adjudication/arbitration, the tribunal may order the offeree to pay the costs from the date of the offer. Calderbank offers encourage realistic settlement and penalise parties who unreasonably reject reasonable offers.

What must a valid settlement agreement contain to be binding and enforceable?

The parties; the contract being settled; the outstanding claims/counterclaims being released; the settlement sum (or payment terms); a full and final release of all claims on both sides (or clearly identified carve-outs for claims NOT released); the effective date; and signatures of authorised representatives of both parties. It must not be 'subject to contract' unless the parties intend to execute a further formal agreement. For TCC proceedings, consider recording the settlement as a Tomlin order.

Section 6

Dispute & Claims Checklist

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Task

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Settlement analysis prepared: likely adjudication outcome vs settlement sum vs adjudication cost

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Client BATNA identified and documented

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Settlement negotiations conducted and agreed terms confirmed in writing immediately

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Formal Settlement Agreement reviewed: all claims and counterclaims released

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Retention position addressed in settlement agreement

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Agreement executed by authorised representatives of both parties

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Settlement payment processed and Final Account updated

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Settlement agreement filed in project records

Section 7

CPD Learning Outcomes

Prepare a structured settlement analysis for construction clients, comparing the likely adjudication outcome range against the settlement offer, the cost of proceeding, and the client's BATNA.
Conduct commercial negotiations to settle construction disputes, applying objective criteria (RICS methodology, contract rates, BCIS benchmarks) to support settlement positions and achieve commercially justified outcomes.
Review draft settlement agreements for completeness and accuracy — ensuring all claims and counterclaims are released, retention is addressed, and the agreement is not expressed 'subject to contract' before it is intended to be binding.

Section 8