Can a settlement agreement be a construction contract?

Construction contracts are prone to emerging issues and disputes, and settlement agreements which aim to: (i) settle those matters and avoid proceedings; (ii) vary the contract’s operation; and/or, (iii) provide a ‘line in the sand’ or ‘reset’ for the contract’s delivery, are common-place.  

Whilst it is well-understood that the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) is incorporated into every construction contract, the potential for it to be incorporated into any settlement agreement is less so.  

The recent case of London Eco Homes Ltd v Raise Now Ealing Ltd ¹ has shone a light on this issue – considering the extent to which a settlement agreement: (i) can be a construction contract for the purposes of s.108 of the Construction Act; and (ii) might be subject to adjudication, in the absence of express terms providing for it.

Background

Raise Now Ealing Ltd (“RNE”) appointed London Eco Homes Ltd (“LEH”) to carry out construction work under a JCT Intermediate Building Contract with contractor’s design (the “Contract”). The Contract contained an express right to refer disputes to adjudication, and was also subject to the Construction Act. 

Various issues arose, which were the subject of a settlement agreement. This settlement agreement contained a schedule of payments to be made by RNE to LEH. RNE failed to make payment in accordance with the schedule, so LEH made a referral to adjudication.

RNE challenged the adjudicator’s jurisdiction on the basis that adjudication did not apply to the settlement agreement. The adjudicator rejected this challenge and decided in LEH’s favour, ordering RNE to pay the outstanding settlement sum and his fees. RNE failed to pay in accordance with the adjudicator’s decision and LEH sought to enforce the decision by summary judgment.

What did the settlement agreement say?

The relevant clauses were as follows:

• a mutual agreement that the Contract terminated with effect from 22 June 2023 (Clause 1);
• provision for LEH to carry out “all necessary work and modifications” to the basement of the property if the relevant warranty could not be provided by LEH to RNE (Clause 2.7); and
• governing law and jurisdiction clauses which provided that any disputes or claims arising out of or connection with the settlement agreement, its subject matter or formation would be subject to English law and dealt with exclusively by the courts of England and Wales (Clause 8 and 9)

There was no express provision for adjudication.

What were the parties' positions?

RNE argued that the settlement agreement was a free-standing agreement, which contained an entire agreement clause and it was intended to supersede and replace the original contract. The effect of the settlement was to terminate the Contract, so it could not confer jurisdiction on the adjudicator. It also highlighted that there was no ADR clause written into the settlement agreement, but that there was an exclusive jurisdiction clause submitting to the authority of the courts of England and Wales. 

LEH’s position was that the settlement agreement could not be understood or construed in isolation, but rather that it has to be seen in the context of the Contract.  As such, the use of ADR provisions in the Contract meant that the parties’ overall desire was to utilise ADR where possible. LEH also argued that the settlement agreement was a ‘construction contract’ pursuant to the Construction Act because LEH was required, pursuant to Clause 2.7, to carry out construction works in the event that it failed to provide the basement warranty. If, therefore, the settlement agreement was a construction contract for construction operations, the adjudicator had jurisdiction.

What did the court decide?

As RNE conceded that sums were due pursuant to the settlement agreement, the only issue before the Court was whether the adjudicator had jurisdiction to determine the dispute.  This turned on whether there was an adjudication clause implied by statute or, alternatively, whether the adjudication clauses in the Contract survived for the purposes of the dispute that was referred to the adjudicator.  

The Court considered whether:

1. The settlement agreement was a construction contract, thus engaging a statutory right to adjudicate at any time.

After revisiting ss. 104 and 105 of the Construction Act, the court accepted that clause 2.7 contained limited provisions for construction operations relating to the basement works.  

However, because the dispute did not arise out of the provision of the "necessary works or modifications", but rather out of the timing and/or acceptability of the provision of the basement warranty, “the dispute referred was not sufficiently connected with or related to construction operations to allow for section 108 to be engaged.”  As a result, there was no statutorily implied adjudication clause. 

2. The Contract’s adjudication clauses applied to the settlement agreement because it was a variation of the Contract.  

The Court found that there were a number of reasons for construing the settlement agreement as a variation to the Contract.  These included the settlement agreement’s: 

• explicit reference to the Contract's termination mechanism, with the parties having agreed that the applicable termination notices were deemed to have been accepted and served correctly “…in accordance with the JCT Contract…”; and
• variation of the Contract’s original mechanism for determining the final sum due, with RNE agreeing to pay the termination payment “in full and final settlement of the final account…”.

As the dispute referred concerned RNE’s payment obligations, which ultimately related to sums payable under the Contract, the right to adjudicate had arisen pursuant to the Contract and LEH was therefore entitled to summary judgment.  

In reaching this decision, the Judge focused on whether or not the dispute was one that was “under” the Contract, which in turn meant that ADR could be used to settle the dispute. The Judge rejected the argument that the governing law and jurisdiction clauses meant that disputes had to be dealt with exclusively by the courts of England and Wales, and not ADR.  Rather, these were standard provisions that made it clear that English law applied and that any dispute which reached the courts would be tried in the English Courts.  This is in line with the current approach by the Courts which, in any event, had the power to order the parties to engage in ADR.

Key takeaways

This decision turned on whether or not the settlement agreement was connected to the Contract.  Whilst this will depend on the specific facts and drafting, it is difficult to envisage circumstances where a settlement agreement is entirely unconnected to the underlying contract to which it relates.  When drafting settlement agreements parties should therefore be aware that the dispute resolution clauses of the underlying agreement may prevail and express drafting may be required if this is not the parties’ intention.  

The judgment also confirms that a settlement agreement can be a ‘construction contract’ pursuant to the Construction Act, where it contains an obligation to carry out ‘construction operations’ (and that the dispute relates to those operations). In such cases the statutory right to refer a dispute adjudication at any time will prevail over any alternative (or absent) drafting.

 

1 [2025] EWHC 1505 (TCC)