Mobil North Sea Ltd & Anor v P J Pipe & Valve Company (t/a P J Valves or P J Valve Ltd)

A settlement between a claimant and another contracting party does not, without more, extinguish the claimant’s direct claim against the party responsible for defective performance. The mitigation principle applies to benefits arising from steps taken in response to the breach, even where the claimant went beyond its duty to mitigate. It does not apply to an independent collateral transaction, which is res inter alios acta. Whether loss has been avoided therefore depends on the character and connection of the transaction, not simply on the fact that the claimant has received financial support or altered its internal accounting arrangements. A claim for replacement costs remains substantial where the costs were incurred and paid, although later arrangements may modify how the parties account between themselves.

A subcontractor supplied valves for a North Sea gas project. After the valves allegedly failed, the claimant companies replaced them and claimed approximately £1.3 million from the subcontractor. The defendant applied under Civil Procedure Rules Part 24.1 to dismiss the second claimant’s claim, arguing that a settlement between the two claimants had eliminated any loss or liability. His Honour Judge David Wilcox rejected the application on the basis that the settlement was collateral to the defendant’s liability. The Court of Appeal was asked to determine whether the settlement discharged or avoided the second claimant’s recoverable loss.

Disposition. The application for permission to appeal was allowed so that the substantive construction point could be decided finally. The substantive appeal was unanimously dismissed, with summary costs of £20,000.

1. Nature of the claim. Lord Justice Rix held that the second claimant’s pleaded claim was a direct claim under the subcontracts for the cost of removing and replacing defective valves. It was not confined to an indemnity claim based on liability under the head contract. The fact that the head contract regulated the parties’ internal liabilities did not exclude the direct claim.
2. Effect of the settlement. The settlement agreement varied, but did not wholly supersede, the contractual arrangements. Its terms contemplated continuing liability, continued litigation against the subcontractor, and accounting for recoveries. The guaranteed minimum payment also reflected a compromise of a separate contractual claim concerning the project’s Total Installed Costs. Even if the claim had been framed as an indemnity, the settlement did not completely discharge the second claimant’s liability.
3. Mitigation and independent transactions. Rix LJ treated the principles discussed in British Westinghouse Electric Co Ltd v Underground Electric Rys [1912] AC 673 as principles of mitigation. Benefits resulting from attempts to mitigate must be brought into account, but a wholly independent and collateral transaction is outside that rule. R Pagnan & Fratelli v Corbisa Industrial Agropacuaria Limitada [1970] 1 WLR 1306 illustrated mitigation because it concerned the same goods, the same parties, and a continuous course of dealing.
4. Application. Replacement of the valves was the act of mitigation and occurred before the settlement. The later agreement merely reorganised the relationship between the two claimants and did not avoid the loss caused by the subcontractor’s alleged breach. It therefore created no defence to the claim for substantial damages.
5. Costs observations. May LJ and Aldous LJ emphasised, obiter, the need for the court and parties to manage litigation in accordance with the overriding objective. Costs exceeding £800,000 on a claim worth about £1.3 million, with a possible 20-day trial, appeared difficult to justify, particularly given the parties’ unequal financial positions.

1. Court of Appeal (Civil Division): Permission to appeal allowed for final determination of the legal point; substantive appeal dismissed with costs.
2. High Court of Justice, Queen’s Bench Division, Technology and Construction Court: His Honour Judge David Wilcox rejected the defendant’s application under Civil Procedure Rules Part 24.1 on 20 October 2000.