Good Faith Settlements

Law Talk

Sam K. Abdulaziz
Attorney at Law

Construction disputes quite often involve numerous parties. A recent case highlighted how California law looks at settlements where there are multiple parties and at least one of them would like to settle the case and get out. I am not going to follow the facts of the case. However, the facts are going to be relatively close.

In this case, Geocon contracted to provide geotechnical services on a parcel of real property that was being prepared for construction of an apartment complex. Geocon contracted with Sunbow. However, Geocon would not enter into a contract unless its liability was limited. Accordingly, they entered into an agreement wherein… Sunbow agreed to limit Geocon's liability to Sunbow and to all other parties for claims arising out of Geocon's performance of the service described in the agreement. The total limits of liability for negligence professional acts, errors and omissions, including attorneys fees was limited to $50,000.00. Sunbow agreed to indemnify and hold Geocon harmless from any and all judgments against Geocon in excess of the $50,000.

As would be the case, a dispute arose and there were multiple parties involved. The damages alleged by the parties amounted to a few million dollars, well in excess of the limits of liability of Geocon.

Geocon and Sunbow agreed to settle for the $50,000 limitation of liability. However, what happens to the Cross-Complaints of the other parties? As an example, lets assume that there are four other parties. If Geocon's liability is limited to $50,000 yet its damages are alleged to be much greater than that based on indemnification agreements, Geocon may seek a determination of a "Good Faith Settlement" and be absolved from further liability and thereby hurt the other Defendants. This is where a good faith settlement rule comes into affect.

Geocon and Sunbow went to court to have the good faith settlement affirmed. If the court agreed, Sunbow's liability would be limited to $50,000 for the entire project. All of the other parties would have to make up the difference. If the court upheld the agreement, then the court would have to determine that the settlement was in good faith.

The other parties disagreed and fought the good faith settlement because they stated that the $50,000 to be paid was not close to Geocon's proportionate share of liability. They stated that Geocon's liability to the other Defendants should not be affected. They also argued that Geocon was primarily responsible for approximately $3.4 million of damages. This brought into the determination of what a good faith settlement is.

The good faith settlement law essentially says, "... that any party to an action in which it is alleged that two or more parties are jointly liable on a contract can agree to a settlement that would absolve them from any further liability as to any other parties. However, a judge would have to make a determination that the settlement was made in good faith. This would keep all of the other parties from coming after the settled Defendants. A finding of good faith by the court also reduces the claims against the non-settling defendants by the amount of the good faith settlement.

In making a determination as to whether a settlement is a "good faith settlement" some of the factors that the court looks at are the rough approximation of the Plaintiffs total recovery and the settling contractors proportionate liability, the amount paid in settlement for that liability, and the allocation of the settlement proceeds among Plaintiff's, and the financial condition and insurance policy limits of settling defendants as well as the existence of collusion, fraud, or tortuous conduct aimed to injure the interests of the non-settling parties. Therefore, a key factor a trial court should consider is whether the amount paid in settlement bears a reasonable relationship to the settler's proportionate share of liability. One of the parties presented evidence that Geocon was responsible for approximately $3.4 million in damages. However, Geocon only paid $50,000 in settlement or 0.8% of the damages the prime contractor claimed.

In this case, the court looked at the percentage that would have been required to be paid by Geocon and determined that it was not a good faith settlement because Geocon settled its liability for $50,000, which is much less than the proportionate share of all of the other potential defendants.

The settlement was not in good faith.