Settlement agreements – part of NEC or not?

NEC contracting parties sometimes enter into a settlement agreement at the end of a contract to help close out the final account. However, depending on the drafting of the agreement, this could be seen as a variation to the original NEC construction contract or an entirely separate commercial agreement. This is a vital distinction if the parties wish to use statutory adjudication to resolve a future dispute over the settlement.

The issue was highlighted in recent case at the UK Technology and Construction Court (TCC). J Murphy & Sons Limited, which was carrying out shaft and tunnel work on a project at Trafford Park in Manchester, UK, appointed W Maher & Sons Limited in February 2014 to remove spoil from the site in February 2014 under an NEC3 Engineering and Construction Subcontract (ECS).

The ECS activity schedule identified a lump sum of just over £406,000 for work to three shafts and tunnels as well as four rates for materials from other activities. Option W2 provided that, ‘Any dispute arising under or in connection with this subcontract is referred to and decided by the Adjudicator’. Part 1 of the contract data referred to the ‘TCC’ as the adjudicator nominating body, but this must have been an error as the court does not provide that service.

Settlement agreement broken
During the works Maher made 16 applications for payment (compared to the nine set out in the payment schedule) and claimed a final balance of around £300,000. In November 2015 the parties entered into settlement negotiations and the final account was agreed at £720,000, leaving a net sum due to the subcontractor of just over £253,000.
The parties exchanged correspondence confirming the terms of the settlement and Murphy suggested it would prepare paperwork to close out the account. However, Maher never received this and no money was paid. In March 2016 Murphy wrote to Maher advising that its gross valuation of the final account was now a little under £484,000, did not refer to the previous agreement of £720,000 and made no further payment.

The letter obviously gave rise to a dispute between the parties but also a dilemma. Was the settlement the parties had reached an entirely separate commercial agreement, which was not a construction contract, or was it a variation to the original ECS? This distinction was highly relevant in terms of whether Maher could seek the statutory adjudication provided in ECS option W2.

Dispute over adjudication
In early April 2016 Maher referred the payment dispute to adjudication in accordance with the contract. After being redirected by the TCC, Maher applied to the Royal Institution of Chartered Surveyors (RICS) to nominate an adjudicator.

However, Murphy then challenged the adjudicator’s jurisdiction on the grounds that Maher had no contractual basis for applying to RICS for an adjudicator as that was not stated in ECS option W2. Murphy also said the dispute arose under the settlement agreement and therefore could only be resolved via the courts as the agreement did not constitute a construction contract.

Maher started the adjudication afresh in mid-April 2016 following the Scheme for Construction Contracts as it believed this was implied in the ECS due to the error regarding the TCC. In response, Murphy applied to the TCC for declaratory relief arguing that the adjudicator still did not have jurisdiction as the dispute did not arise under the construction contract.

ECS does cover settlement
The TCC said in May 2016 that the key question was whether the settlement agreement was a variation to the contract or was a standalone agreement.

It was held that the original reference to adjudication had been properly made as the relevant parts of the ECS complied with the Construction Act. There was no need to imply the Scheme for Construction Contracts, and the reference to disputes ‘arising under or in connection with’ was wider than the Act and would have covered disputes arising out of the settlement agreement.

The court also said that while the reference in the contract to the TCC was not helpful as it was not an adjudicator nominating body, the Construction Act did not strictly require specification of an adjudicator nominating body anyway. It was accepted that errors like this generated confusion and costs, but they did not mean that contract adjudication provisions had to be abandoned in favour of the Scheme.

The result is that Murphy’s claim failed and Maher was entitled to proceed with its reference to adjudication.

The case makes plain that if NEC parties do not wish adjudication to be available in relation to disputes under settlement agreements, then it is imperative that the definition of disputes referable to adjudication under the original construction contract is checked, drafted narrowly and that settlement agreements are drafted to be standalone documents.

Conversely, if parties want it to be clear that settlements are just variations to the construction contracts with all associated 
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