Sembawang Corp Ltd v Pacific Ocean Shipping Corp & Anor

A contractual reference to a duty to mitigate ordinarily incorporates the familiar common-law standard of reasonableness. The obligation requires reasonable steps to avoid costs that could reasonably have been avoided. It is not transformed into an absolute duty merely because the claim is contractual, concerns costs rather than damages, or arises from termination without established repudiatory breach.

Whether reasonable steps were taken is generally a question of fact. An appeal on law cannot be used to challenge factual findings or invite the court to prefer a dissenting arbitrator’s assessment.

The applicant shipyard appealed under the Arbitration Acts 1950 and 1979 from a majority interim award concerning the owners’ alleged failure to mitigate the costs of completing a vessel conversion after termination for the yard’s default.

The arbitrators unanimously construed article 37.2(b) as requiring reasonable steps to mitigate completion costs. By a majority, they found that the owners had acted reasonably in selecting a replacement yard and had not breached that duty. The central issues were the proper construction of the contractual duty and whether the arbitrators had committed an error of law in applying it.

1. Appeal dismissed. The arbitrators had not erred in law in construing article 37.2(b) as requiring the owners to take reasonable steps to mitigate the costs of completing the work.
2. The expression “duty to mitigate” was used as a legal term of art. It incorporated the essence of the general law of mitigation, adapted to costs arising from the exercise of an express termination right. The owners could not recover costs and expenses avoidable by reasonable steps. The contractual nature of the obligation, the fact that the claim was in debt, and the reference to costs rather than damages did not justify a different standard.
3. The proposed “absolute duty” was commercially implausible and practically uncertain. Properly analysed, it required qualifications which brought it close to a reasonableness test. The contract, read as a whole, did not establish several different standards for mitigation. Article 40.1, excluding consequential loss, did not require the owners to ignore commercial consequences when assessing completion options.
4. The burden of the duty was not heavier or more demanding than under general law. As explained in Payzu v Saunders [1919] 2 KB 581 and The Solholt [1983] 1 Lloyd’s Rep. 605, whether conduct is reasonable for mitigation is essentially a question of fact, although an unusual question of law may arise concerning the matters legally capable of consideration.
5. The arbitrators were entitled to regard access to records and the owners’ commercial interests as relevant. Their findings that Keppel lacked commitment and that Jurong was uninterested were factual findings supporting the conclusion that the owners’ conduct was reasonable. The appeal sought impermissibly to revisit those findings.
6. BMBF v Harland & Wolff [2001] EWCA Civ 862 was relevant only to the general observation that termination clauses may seek to achieve fairness between the parties; it did not decide the mitigation issue.

• High Court (Commercial Court): The appeal from the arbitrators’ Tenth Interim Award was dismissed. The court found no error of law in the construction of article 37.2(b) or in the majority’s conclusion that the owners had not breached the contractual duty to mitigate.