Effect on a third party of a settlement agreement between the project owner and a supplier of materials. Aggregate Construction, Inc., v. Aaron Swan & Associates, Inc. Supreme Court of South Dakota (2015), by Hugh Anderson

Aggregate Construction was a supplier to highway contractors. The specifications for a South Dakota DOT project required aggregate that would meet a specific sodium sulfate soundness level. Aggregate retained Swan to test aggregate from a particular pit, and after testing Swan informed Aggregate that the material met the sodium sulfate requirement. Aggregate offered to supply this material to various contractors bidding for the work, at a specified price, and subsequently entered into a purchase  order with the successful bidder. As construction commenced, the DOT conducted its own sodium sulfate soundness test and determined that the material that Aggregate was preparing to supply did not meet the requirements.

To mitigate the problem, Aggregate blended the non-compliant aggregate with compliant aggregate. The DOT tested again, and determined that the blended aggregate was not acceptable. The frustrated contractor secured a different aggregate supplier, and charged its increased costs to Aggregate. Aggregate subsequently demonstrated to the DOT that the DOT’s testing of the blended aggregated had not been conducted correctly, and that the rejection of the blended material was not justified. Aggregate obtained a settlement payment from the DOT, and then turned its attention to Swan, which had erroneously approved the initial source of materials. Aggregate sought additional damages from Swan, since the settlement payment from the DOT was less than Aggregate’s full damages. Swan obtained a copy of the settlement documents and noticed that the DOT had required Aggregate to release not only the DOT but also “all others directly or indirectly liable.” Swan argued that it was within that classification, and hence had already been released. The trial court agreed, and Aggregate appealed.

Decision: The primary basis for the appeal was wording that appeared to limit the scope of Aggregate’s release to issues that arose from the “2008-2009 construction season”—whereas the erroneous testing by Swan had occurred earlier, before the construction season, when the work was being bid. The South Dakota Supreme Court determined that the release should be read more broadly, as generally releasing claims arising from any act “up to the present time,” as well as specifically releasing claims from the 2008-2009 construction season.

Comment: The release that the DOT obtained was undoubtedly broad. The release of all liable parties was probably intended by the DOT to prevent claims against the prime contractor, which could end up entangling the DOT, and generally to put the entire matter to complete rest. If Aggregate already intended at the time of the settlement to pursue Swan, Aggregate should have negotiated an exception to the release that would have allowed Aggregate to pursue its rights with Swan, perhaps coupled with a commitment to DOT to indemnify DOT if Swan attempted to involve the agency.