England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
(His Honour Judge David Wilcox)

		Royal Courts of Justice Strand London WC2 Thursday 3rd May, 2001

1. LORD JUSTICE ALDOUS: I invite Lord Justice Rix to give the first judgment.
2. LORD JUSTICE RIX: This is an application for permission to appeal, with appeal to follow if permission granted, from a judgment of His Honour Judge David Wilcox of 20 October 2000.
3. The applicant is the defendant, PJ Pipe & Valve Co Ltd ("PJ Pipe"). PJ Pipe was a sub-contractor under a contract for the supply of valves for a North Sea gas project. That project was operated by the first claimant, Mobil North Sea Ltd ("Mobil"). Mobil entered into a head contract with the second claimant, Fluor Enterprises Ltd ("Fluor"), and did so on behalf of all those within the project consortium.
4. In essence what happened was that the valves were supplied by PJ Pipe to Fluor under the sub-contract and by Fluor to Mobil under the head contract. There were in fact four sub-contracts, but nothing turns on that. The valves were supplied in June to October 1997. The contractual date for mechanical completion of the project as a whole was 31 March 1998, and not long before that, in January 1998, the valves started to fail. As a result of some extremely hard work, as the claimants' evidence would suggest, the valves were completely replaced in time to prevent that completion date being missed. In consequence of what are claimed to be these defective valves, both Mobil and Fluor have brought a claim against PJ Pipe in these proceedings. Their claim is for the cost of replacing the valves in a sum of approximately £1.3 million.
5. PJ Pipe has sought to use the procedure under CPR Part 24.1 to bring an application in advance of trial for the dismissal of the whole of Fluor's case, while leaving in place Mobil's claim, on the basis that, even if the valves were defective and there was a breach of contract under the sub-contract, nevertheless Fluor has no substantial claim for damages, but at best a nominal claim for damages, because in June 1999, before the commencement of these proceedings, it made a settlement agreement with Mobil under which, so the submission of PJ Pipe goes, it avoided all the loss claimed.
6. I will need to say something about the structure and terms of the main- and sub-contracts - but I do not think it will be necessary to cite in detail from them - and I will also need to refer to the settlement agreement relied upon by PJ Pipe.
7. The judge below rejected this application on the basis that the settlement agreement was a collateral matter and, in the well-known phrase (even if it is Latin), something res inter alios acta, a wholly independent transaction.
8. In requesting permission to appeal and in seeking to bring this appeal Mr Colin Reese QC, on behalf of PJ Pipe, has made it clear that he wishes what he calls a short point of construction to be decided once and for all. He does not want the matter simply to go off on the basis, were he to be unsuccessful, that there was an arguable case which entitled Fluor to go to trial. For that reason – and, for my part, I would say for that reason only – I would grant permission to appeal on the basis of the submissions which Mr Reese has addressed to us today, although he will hear in the course of my judgment reasons why, in my view, his appeal must fail. If, however, the matter was simply to be dealt with as an interlocutory matter and the only question was whether there was a properly arguable case on the part of Fluor which was fit to go to trial, I would not have been prepared to give permission to appeal.
9. Let me say something about the sub-contract and head-contract before reverting to the settlement agreement. Under the sub-contract, of course, PJ Pipe had obligations to supply valves which, in the terms of the contract, were fit and within specification. Under the head contract Fluor had similar obligations, but the relationship between Mobil and Fluor was more complicated. In particular I refer to Article 10 of the head contract, which it will suffice if I simply say – because Mr Reese in the course of argument accepted this analysis – that it rendered Fluor liable to Mobil for defective valves; that Fluor was obliged to obtain a proper sub-contract under which the sub-contractor would be liable in turn for providing defective valves; that Fluor was obliged to take proceedings to enforce that sub-contract in the event of something going wrong; that if, as a result of those proceedings, Fluor was unable to obtain any recovery against the sub-contractor, then Fluor had no liability itself (save in circumstances where Fluor was responsible for some personal failing), and that such provisions against it was to be regarded simply as a mere conduit for the supply of defective valves coming from a sub-contractor. I put the matter very broadly, perhaps for that reason somewhat inaccurately, but I think it will suffice for present purposes. I am certainly not seeking to construe that contract in detail if any point upon it remains live at trial.
10. For the purposes of this Article 10, Mobil would, through the mechanism of a zero account, provide the finance with which Fluor could carry out such replacement or repair as defective supply might make necessary. Mobil also agreed under Article 10 to bear the costs of Fluor's litigation. Any recovery from that litigation from the sub-contractor would go to Mobil in extinction of the finance provided and Mobil's liability in general.
11. I should say something about Mobil's part in these proceedings. Mobil claims to be entitled to a contractual remedy directly against PJ Pipe on the basis of collateral warranties, which it alleges were brought into existence between it and PJ Pipe as a result of its general terms being incorporated into the sub-contract. Forensically it would seem that the purpose of PJ Pipe's application is to see whether it could first knock out Fluor on the basis submitted, ie due to an absence of substantial loss, and then, if it succeeded in that, it would, no doubt, turn its attention to seeking to knock out Mobil as well on the basis that there was no direct contractual responsibility owed to it. I say that that was forensically the purpose, because otherwise it is difficult to see what advantage there might be to PJ Pipe in undertaking this interlocutory enterprise. Without knocking out Mobil at an interlocutory stage as well, there is no way that PJ Pipe would be able to avoid the no doubt time-consuming and expensive process of investigating at trial the technical issues which arise on the complaint that defective valves had been supplied.
12. I turn now to the settlement agreement, where Mobil again represented all its consortium partners. This provides, in essence, as follows. First of all it is stated that, subject only to some detailed provisions which would come into play if the claim against PJ Pipe were compromised in circumstances where one out of Mobil and Fluor wished to settle but the other did not, Fluor was guaranteed what is called a guaranteed minimum payment of £250,000, plus interest from the beginning of 1999. It is then provided that any monies recovered from PJ Pipe in a sum greater than twice that guaranteed minimum payment should be split 50/50 between Fluor and Mobil. Mobil would continue to pay all the costs of litigation, at any rate so far as external lawyers are concerned. Each side would bear its own internal legal costs. There were detailed provisions to deal with various possibilities as to settlements at various levels and the willingness of one party to proceed in circumstances where the other party wished to withdraw. I need not go into all those details.
13. The agreement concluded with clause 10, which provided as follows:

"The agreement set out in this letter is in full and final settlement of any claim that Mobil, SAGE [SAGE was the name of the consortium] or Fluor Daniel may have against each other in connection with the defective materials supplied by PJ Valves."

14. The agreement said nothing expressly about whether Fluor was obliged to carry on litigation against PJ Pipe in the absence of a joint decision not to do so, nor did it deal expressly with what was to happen with the first £500,000, taking that as the figure up to twice the guaranteed minimum payment of any recovery from PJ Pipe. In my judgment that is because the underlying premise of the settlement agreement was that Fluor would continue to be under an obligation, in the absence of a joint decision not to proceed, to carry on litigation against PJ Pipe and that the recoveries from such litigation would continue to go to Mobil, subject to the express term that a recovery over twice the guaranteed payment allowed was to be split 50/50. It was also, in my judgment, the implicit premise of this whole agreement that, pending resolution of the prospective litigation against PJ Pipe, Fluor remained liable to Mobil and that it was in part that liability which might be the subject matter of Fluor's claim against PJ Pipe. This settlement agreement varied but did not entirely supersede the main contract in relation to the problem of the defective valves. Although the agreement was "in full and final settlement" of inter alia any claim against Flour, that did not mean that the agreement itself did not mean that the agreement itself did not mention a liability of Flour to Mobil subject to its own terms.
15. Against that background I turn to the submissions made by Mr Reese. His essential point is that by reason of clause 10 of the settlement agreement, stating that that agreement was in full and final settlement of any claim that Mobil or Fluor might have against each other in connection with the defective valves, Fluor had avoided any loss which it could claim against PJ Pipe in the current proceedings, and indeed had done so before those proceedings had even commenced.
16. As for the judge's finding that the settlement agreement was a wholly independent transaction and therefore could not give rise to such avoidance of loss, Mr Reese submitted that the avoidance of loss by any means whatsoever, whether in the course of mitigation or not, entirely and generally prevented any substantial claim, and also that in any event it was wrong to say that the settlement agreement was independent or collateral. It was part of a continuous course of dealing which began with the head contract and ended in the settlement agreement. Mr Reese developed those submissions in detail, but what I have stated represents their essence.
17. In my judgment Mr Reese's submissions face three critical hurdles. In the first place they assume that Fluor's pleaded claim against PJ Pipe is solely for an indemnity against Fluor's liability to Mobil under the head contract. All his submissions have been premised upon that basis, as is clear from the terms of his skeleton argument, and it is the reason why he submits that, in the absence of any liability to Mobil under the head contract, Fluor can have no claim by way of indemnity to pass on against PJ Pipe. But is he right to make this assumption, or is it rather the case that Flour sues in respect of its own loss under the sub-contract.
18. Mr Reese's second hurdle is that, for reasons which I have already sought to set out, he is in any event in difficulties in finding in the settlement agreement itself a complete discharge of any liability on the part of Fluor to Mobil.
19. His third hurdle, whatever be the validity of those first two points, is in showing that the settlement agreement is an entirely independent transaction, res inter alios acta. Let me say something further about each of those three points.
20. The basis of Fluor's claim is, of course, to be found in its pleaded case. I have not reread the whole of that to see whether the head contract is not mentioned at all in the particulars of claim. I suspect that it probably is mentioned somewhere. But it is quite clear from beginning to end of the particulars of claim that the claim is not a claim for an indemnity; it is a claim under the four sub-contracts for the cost of replacing the valves. The subject of that loss and damage is dealt with specifically under paragraph 32 of the particulars of claim, where it is said that both Mobil (who also sues under a direct contract) and Fluor have suffered loss and damage particularised as being the "costs of the removal of the valves as installed, the purchase of replacement valves and the installation of the replacement valves together with associated loss and expenses all as itemised in Schedule 2 served herewith." It is what I would call a straightforward claim, solely and directly, so far as Flour is concerned, under the sub-contract for the consequences of the supply of defective valves.
21. So, in my view, the first and essential premise of Mr Reese's argument fails. This is not a claim for an indemnity by reason of liability under the head contract. Nothing whatever to support such a plea appears in the pleadings. Even if it did, it would not exclude the primary claim, for the cost of replacing the valves.
22. Mr Reese submits that it makes no difference that that is the case; that there is no difference between a claim for an indemnity against liability and a direct claim under the sub-contract if the loss in question has been avoided, and that the loss directly claimed by reference to the sub-contract has been avoided by means of the settlement agreement. I cannot agree. It is common ground that the valves were removed and replaced and new valves had to be installed, if not at the pleaded cost at any rate at some substantial cost. I do not say that it is common ground that the valves were defective or that that was necessary, but it is common ground that that was done, and it is common ground that that was paid for by Fluor, albeit financed by Mobil. To read two sentences from Mr Reese's supplementary skeleton argument:

"The Second Claimant's pleaded loss is for the cost of replacing the allegedly defective valves. In fact it is now common ground that whilst the Second Defendant originally met those costs, it was immediately reimbursed by the First Claimant pursuant to the contractual arrangements between them."

23. The fact that Fluor was immediately reimbursed by Mobil is not, I emphasise, the ground upon which Mr Reese seeks to make good his application. It is only after the settlement agreement, and because of the settlement agreement, that PJ Pipe founds its defence. However, the settlement agreement simply does not deal at all with Fluor's independent claim under the sub-contract for the cost of replacing the valves. It therefore follows that if there was, in theory, a good claim to substantial damages before the settlement agreement, there is a good claim for substantial damages after the settlement agreement. It is simply that the terms upon which the cost of replacing the valves has been financed have been amended; not obliterated entirely, but amended.
24. The second hurdle I mentioned depends upon the construction of the settlement agreement. I have already dealt with that. In my judgment, even if the claim were a claim for an indemnity in the respect of Fluor's liability under the head contract, it would not be right to say that that liability had been completely removed. It had been settled, but it had been settled on all the terms of the settlement agreement, and those terms were premised upon the basis both that Fluor had a continuing liability to Mobil and a claim against PJ Pipe, and indeed was obliged to take through its claim against PJ Pipe, and to account to Mobil on the basis set out in or inherent in the settlement agreement.
25. I would also add that inasmuch as there is in any event a guaranteed minimum payment of £250,000 in favour of Fluor built into the agreement, on the evidence that represents a compromise of a quite separate claim that Fluor would have had, in the absence of any problem arising out of the defective valves, to a special uplift in payment under the head contract under provisions concerning the "Total Installed Costs" (TIC) of the project. The effect of those provisions was that if the project came in at under the projected figure, then Fluor had a claim to, I think, 45 per cent of the amount saved.
26. Thirdly, there is the question of whether in any event, and upon any analysis of both the basis of Fluor's claim and the construction of the settlement agreement, PJ Pipe can successfully say that the whole of Fluor's loss has simply been avoided.
27. For these purposes the basic law cited to this court by Mr Reese is contained in two paragraphs of Chitty on Contracts, 28th edition, 1999 at paragraphs 27-093 and 095. They provide as follows:

"27-093 Loss which is avoided cannot be recovered. The second rule of mitigation concerns potential loss which is not actually suffered. If, by taking steps which could not reasonably have been required of him, the claimant has in fact avoided the potential loss resulting from the defendant's breach of contract, he cannot recover damages in respect of such potential loss. `When in the course of his business [the claimant] has taken action arising out of the transaction which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.' The claimant is entitled to damages only for his actual loss, which is assessed by taking account of all the items in his notional `profit and loss' calculation for the whole transaction. The court is required to decide whether the claimant's actions arose out of his attempts to mitigate the potential loss resulting from the breach, or whether his actions were `independent' of his mitigating steps, so that any benefit to him should not be used to reduce the damages payable by the defendant. ...

27-095 Advantages gained by the claimant from wholly independent transactions, especially those entered into before the defendant's breach of contract, as for example, a sum due under an insurance policy, cannot be relied on in mitigation of loss arising from the defendant's breach. So where the claimant, by another contract with a third party entered into before the defendant's breach of his contract with the claimant, has made an arrangement which should or does in fact prevent loss to the claimant from the defendant's breach, the defendant cannot rely on that other contract to reduce his damages; it is res inter alios acta, or an extraneous circumstance. Even where a benefit to the claimant arises in the course of his mitigating action, there may not be a sufficient causal connection between the defendant's breach and that benefit to justify taking it into account in assessing the claimant's damages."

28. In the context of that summary of well-known principles, Mr Reese particularly relied upon the dictum of Viscount Haldane LC in British Westinghouse Electric Co Ltd v Underground Electric Rys [1912] AC 673, at 689, itself set out within paragraph 27-093.
29. Mr Reese also relied on the immediately following paragraph in the speech of Viscount Haldane, where he referred at 689-690 to the case of Staniforth v Lyall 7 Bing 169 as illustrating the rule. That was a case of a chartered ship which the charterer had refused to load. The ship then went on to do a substitute, if somewhat circuitous, voyage, and it was held that the owner had to bring into account, for the purposes of ascertaining the damages arising from the breach, all the credits and debits arising from that voyage in mitigation in loss.
30. In my judgment these are standard and classical principles arising in the context of mitigation. Everything that the learned editors of Chitty in those passages say, everything that Viscount Haldane was talking about in British Westinghouse relate to the context of the rule of mitigation and steps arising out of attempts to mitigate. Of course, in this matter of mitigation an innocent party may either fall behind his obligation or may meet his obligation or may go much further than his obligation. If he falls behind his obligation, then he cannot complain of the loss caused by his unreasonable conduct. Mitigation, although not being the same as causation, is a very closely allied concept. If he meets his obligation of mitigation, then the consequences of his so acting have to be brought into account for good or ill. But if in his attempts to mitigate he even goes beyond his obligation, the position remains the same: he is entitles to bring his loss into account but must give credit for any benefit. If one considers how closely allied the concept of mitigation is with that of causation, one can understand why that is so. As a result of a breach of contract a party is obliged to mitigate. In his attempts to mitigate he may go beyond his obligation, but that is his reaction to the problem caused by the breach and the consequences of the rules of mitigation follow. It is quite different if the transaction, which is relied upon as avoiding loss, is an entirely independent and collateral matter arising not in the context of mitigation at all.
31. In my judgment this is underlined by the other case that Mr Reese relied on, that of R Pagnan & Fratelli v Corbisa Industrial Agropacuaria Limitada [1970] 1 WLR 1306. There a seller providing defective goods in breach of contract under a May contract had the goods rejected upon their arrival in October. The buyer was thus in a good position to put in a very low bid for these goods, whose value he had further decreased in the market by making a judicial seizure of part of them to secure his claims. He was able to buy the goods so much more cheaply than the market price ruling at the date of his purchase that his profit on the purchase more than obliterated his loss by reference to the market price in May. In those circumstances, the Court of Appeal had no difficulty at all, whatever the motive of the buyer in buying these goods, in treating this matter objectively as an act of mitigation quite naturally arising out of the circumstances in which the buyers were placed by the seller's breach. The Court of Appeal emphasised, as indeed they were bound to do by the findings of the arbitration from which there had been an appeal, that this was not an independent or disconnected transaction. It was part of a continuous course of dealing between the parties. The self-same goods and the self-same parties were involved.
32. That case and the principles of mitigation which it reflects can be wholly compared with the present case. In the present case the act of mitigation of the alleged breach by PJ Pipe was the replacement of the pipes. That was all done by March 1998. The later settlement agreement was not an attempt at mitigation; it was merely a reformulation of the relations between Mobil and Fluor and, once the compromise of Fluor's TIC claim is excluded, it could well be referred to –as my Lord, Lord Justice Aldous, did in the course of argument – as being simply a reorganisation of the terms upon which those two parties were (or were not) going to conduct litigation against PJ Pipe.
33. Despite Mr Reese's submission that the same parties were involved, they were plainly not in the sense that was being talked about in Pagnan v Corbisa. For a transaction to be in that sense between the same parties for the purposes of this case, the transaction in question would have to be one between Fluor and PJ Pipe. That is the sense in which the Court of Appeal in Pagnan v Corbisa spoke about the same parties. In my judgment the very special facts of Pagnan v Corbisa, there emphasised by the Court of Appeal, illustrate the sort of thing which is needed to affect the normal rule that a buyer of defective goods is prima facie entitled to a substantial claim against his seller for the cost of replacement.
34. For all those reasons, in my judgment the settlement agreement does not create a defence to Fluor's claim against PJ Pipe on the ground that it eliminates Fluor's loss and, as invited by Mr Reese, I would decide that point once and for all, albeit against PJ Pipe.
35. LORD JUSTICE MAY: I agree that the application for permission to appeal should be formally allowed, but that the substantive appeal should be dismissed for the reasons given by my Lord, Lord Justice Rix, whose account of the facts and the relevant contractual terms I gratefully adopt. I also agree that it would, on the merits, have been appropriate to refuse permission but for the fact that we are invited to decide finally the substantive point which arises. I express my reasons briefly as follows.
36. It is accepted that, under Article 10 of the management contract, Fluor Enterprises were liable to Mobil for breaches by PJ Pipe of their sub-contract and that Fluor Enterprises were obliged to enforce the sub-contracts against PJ Pipe at Mobil's expense. Fluor Enterprises' liability to Mobil for matters which constitute breach of the sub-contracts and for which it is not itself liable for its own independent breach of its contract with Mobil was limited to that which was recovered from PJ Pipe. It is accepted that, apart from the submissions based on the settlement agreement, Fluor Enterprises would in principle have a substantial claim against PJ Pipe for the alleged breaches of the sub-contracts. In my judgment the settlement agreement did not, as Mr Reese submits, do away with that structure. It modified it. Fluor Enterprises remained liable to Mobil as before, and they remained obliged to enforce the sub-contracts against PJ Pipe if Mobil required it. Instead of having to account to Mobil for the whole of any recovery from PJ Pipe, Fluor Enterprises have to account in the result for part of it if there is sufficient recovery. There is every reason to suppose that this modification, superficially in Fluor Enterprises' favour, was not in reduction of its liability to Mobil for loss caused by breaches of the sub-contract by PJ Pipe, but in settlement (see paragraph 10 of the letter dated 11th June 1999) of all potential claims associated with the defective materials supplied PJ Pipe as between Fluor Enterprises and Mobil themselves. But that independent transaction, in my view irrelevant in law to PJ Pipe's liability to Fluor Enterprises, does not mean that Fluor Enterprises are no longer able to recover loss caused by PJ Pipe's breach from PJ Pipe.
37. Further, the loss arising from the need to replace the defective pipes was not avoided by the settlement agreement. On the contrary, it remained but became subsumed in modified accounting arrangements between Fluor Enterprises and Mobil which took account of other matters as well.
38. Accordingly, I do not consider that it is necessary to consider the effect of Fluor Enterprises' proposed amendment to its damages claim.
39. Finally, I share the concern expressed by my Lord, Lord Justice Aldous, during the hearing at the apparent cost of this litigation. It is, I acknowledge, all too easy for judges in this court, with slim knowledge only of the details of how the litigation has taken the course which it has, to express criticisms which those more closely involved may regard as uninformed and unfair. But it would take a great deal of explaining to persuade me that costs of more than £800,000 – which do not include the costs of a future trial estimated to take 20 days - spent by one party only on a claim worth £1.3 million plus interest are proportionate. It really does look as if the parties and the court have not succeeded in managing this litigation so as to achieve the overriding objective of the Civil Procedure Rules. It is the mutual duty of the court and the parties to take steps to save expense and to ensure that the costs of any litigation are proportionate within the terms of Rule 1.1(2).
40. Given that it seems likely, as Mr Reese for practical purposes accepted, that Mobil have their own direct claim against PJ Pipe any way, it is a little difficult to see why it was seen as sensible and economic to embark on the application which has become the subject of this appeal in the first place. If this application was not tilting at windmills, it looks as if it was a tactical move probably with an eye to the costs of the litigation and a substantial part of which should have not have been incurred in the first place. If PJ Pipe are liable to Mobil directly because the pipes were defective in breach of the sub-contracts, the real issue, whose determination seems to be necessary for a commercial resolution, is whether the pipes were indeed defective in breach of the sub-contract. On that issue, even at this stage, it may be possible to mitigate the future costs of this unduly expensive litigation by, for instance, seriously reconsidering whether it really is necessary and proportionate to take the luxury of a trial lasting as long as 20 days.
41. LORD JUSTICE ALDOUS: I agree with both judgments that have been given and there is nothing that I would wish to add on the merits of the appeal. I had in mind to make some observations on the costs incurred by the parties, but having heard the judgment given by Lord Justice May I can confine myself to a short statement.
42. PJ Pipe & Valve Company are the defendants to the claim amounting to about £1.3 million. They are not a company of the type or size of Mobil. The claim will have a substantial effect upon them. No doubt, the decisions that they have taken have been with a view to giving them every reasonable possibility of succeeding at the trial. But of course, as my Lord has pointed out, the costs that have to be incurred should be reasonable and proportionate taking into account the financial position of each party.
43. In this case the financial position of the parties are not weighted the same and it does not appear to me, despite not having been involved in the details of the case, that there has been any consideration to the disproportionate size of the parties. In my view, it is difficult to justify an expenditure of costs which after a 20-day trial would appear, on each side, to be the equivalent of or to exceed the amount of damages claimed. I hope, like my Lord, that every effort will be made both by the parties and the court to see that the overriding objectives are achieved, so that even at this late stage justice can be done which ever way the case will be decided.
44. For those reasons, and the reasons given by my Lords, permission to appeal will be allowed and the appeal will be dismissed.
45. LORD JUSTICE RIX: I would like to associate myself with the remarks on costs which have fallen from my Lords, Lord Justice Aldous and Lord Justice May.
ORDER: Application for permission to appeal allowed; appeal dismissed with costs assessed summarily in the sum of £20,000, to be paid within 14 days; any application for a stay to be made to the trial judge. (Order not part of approved judgment)