Contract Damages Mitigation

Overview of Mitigation

A party must take reasonable steps to mitigate his loss arising from the other party’s wrong or breach of contract. He may not recover damages for a loss which he suffers, which he could have avoided by taking reasonable action.

A person who has suffered a breach of contract, cannot delay and simply expect the defendant to cover all his cost.  He should take immediate steps to minimise his loss. He cannot recover for additional loss which arises by reason of his failure to take reasonable steps to mitigate.

If the party fails to mitigate his loss, the damages awarded are reduced, by the amount by which it would have been reduced, if he had done, what he ought reasonably to have done. Where he does take reasonable steps to mitigate his loss, and a greater, or other loss, is incurred, he may recover that other loss.

The onus of proof is on the defendant in a claim (the party in breach) to show that the claimant (the innocent party) should have mitigated his loss in a particular way.  It is generally a question of fact as to what would, or would not have been reasonable in the circumstances.

The time for measuring loss is at the date of the breach of contract.  This accords with the rules on mitigation.  A person who hesitates by waiting for the market to rise or fall is likely to be limited to the loss which he would have suffered, had he mitigated promptly.

Mitigation applies to most Civil Claims. The same broad principles apply to a breach of a contract for the sale of goods, employment and for services. The buyer or sell must seek an alternative sale or purchase of the goods.  A dismissed employee should seek to obtain alternative employment.  A person providing services should seek to provide them elsewhere.

The principle of mitigation applies both to claims for breach of contract and civil wrongs.  A person who suffers physical injury must generally seek medical treatment.  He should return to work when it is reasonable to do so.  Where goods have been damaged or destroyed, they should be repaired or if this is uneconomic, they should be replaced with comparable goods.

Reasonable Mitigation

The burden is on the defendant to show that the claimant could have avoided the loss or the extent of the loss or that his conduct was unreasonable. What is reasonable to do or to omit, depends on the circumstances of the case.  What is reasonable is a question of fact in the circumstances.  It is said that the claimant is not obliged to do anything that is not in the ordinary course of things.

Where the defendant can point to a reasonable course of action, which the claimant could, and should have taken to mitigate the loss, compensation is reduced by the amount to which it would have been reduced, had the relevant steps in mitigation been taken.

The party who has suffered a breach of contract may recover expenses reasonably incurred in mitigation even though they aggravated and did not mitigate the damage. The chain of causation is not broken where the action taken is such that a reasonable and prudent person would take in the ordinary course of business. Reasonable mitigation is not a new or intervening act.

Action taken which in fact reduces the loss will reduce the damages payable by the party in breach, even though there was no duty to mitigate in the circumstances.

Limits to Mitigation

A claimant need not risk his money too much. If the alleged measure in mitigation is speculative or risky, he is not obliged to undertake it. He need not take litigation against third parties which is uncertain or risky. A claimant need not damage or destroy his own property, rights or interests.

A person need not jeopardise his health or take unnecessary risks.  In the case of personal injuries, he need not place his life or health at risk by undergoing risky procedures.  The claimant need not prejudice or damage his own reputation or injure innocent third parties.

The claimant is not adversely affected by his financial inability to take steps in mitigation.  It is reasonable for him not to do that which he cannot afford to do.

Mitigation required post Breach

Generally, a person need not mitigate until there has been an actual breach of contract.  Where circumstances show an intended or very likely future breach by the other party, the “innocent” party is not expected to take steps in mitigation until the actual breach occurs.  Similarly, in cases of so-called anticipatory breach where a party indicates an intention not to perform an obligation when due, the other party may generally wait and see, whether the other party person in fact performs.

Where one person unilaterally repudiates the contract, the other party may have an option to accept the repudiation or not.  If he does not accept it, the contract continues to exist and the other party may ultimately perform.  If he accepts the repudiation, there is an anticipatory breach of contract and the “innocent” party must mitigate.

Where the claimant does not accept the repudiation of the contract, even after the defendant’s performance has fallen due, he may perform his side of the contract, where this can be done without the defendant’s assistance and may claim in debt for the contract price.  This may be so, even, though the expenditure is futile.

Limits to Non-Mitigation pre- Breach

It is not clear what limits apply to the general right to ignore a repudiation. In many cases, the party will not be able to perform without the defaulting party’s assistance, in any event.

Some cases hold that the innocent party must have a legitimate interest in performing the contract in the circumstances. On this view, he should not be permitted to enforce, in effect, a penalty for taking one course when another is equally advantageous.

Therefore, it may be the case, that if the claimant has no legitimate interest, financial or otherwise, in performing the contract (rather than claiming damages), he ought not to be allowed to saddle the other party with an additional burden, with no benefit to himself.

Accepting Performance in Breach to Mitigate I

The party in breach may make an offer short of contractual performance, which would reduce the loss which the innocent party would otherwise suffer.  It may, or may not be reasonable in the circumstances to expect the innocent party to deal with the party in default in order to reduce the loss caused by his initial breach. While the claimant need not attend exclusively to the interests of the defendant, he must bear the latter’s interests in mind, as well as his own.

The courts are not sympathetic to a party who has breached his contract and offers alternative defective performance in its place. For example, a buyer may offer a lower price, higher than the market price and lower than the contract where the market has fallen. The courts do not wish to incentivise strategic breaches of contract, which prejudice the innocent party. The innocent party may readily be he held to have acted act reasonably in refusing to deal with the party in deliberate breach.

Accepting Performance in Breach to Mitigate II

In many cases, it is unreasonable to require the claimant to continue to deal with the defendant.  This may be so, where there is a personal element in the services. In contrast, in the case of a larger organisation, it may be reasonable that they continue to deal. The relationship may not have broken down entirely by reason of the breach. However, in some cases, the breach may have fatally undermined trust a confidence between the parties.

The standard of reasonableness on the part of a party who has been wronged in a personal way is not high and considerable latitude is allowed. Where personal considerations arise, such as in the case of an employment contract, it is more likely to be reasonable to refuse alternative performance in breach of contract. It would be usually reasonable to refuse a reduced salary where the employer has dismissed the claimant in breach of contract.

External Relieving Factors

The claimant himself may have made advance provision which relieves the loss he might otherwise suffer.  He may be insured. Steps taken prior to the breach, are not mitigation in the true sense, although they might have the effect of mitigating the extent of loss that would otherwise arise.

The action taken and benefit received must be in consequence of the breach.   Where a person takes evasive action, which incidentally is profitable to him, this is not mitigation. Where the later action is independent, it is not taken into account in mitigation one way or the other.

A third party’s actions may reduce or release the claimant’s loss.  If the third-party intervenes as part of the same transaction, then it may be taken into account. Where it is collateral, it is not taken into account.

Where a third-party has assisted a person, who has suffered personal injuries, the benefits do not go towards mitigation of damages.  This may occur where ex-gratia payments are made or a voluntary or charitable fund is set up.  Financial precautions such as insurance are generally ignored.  This is confirmed by statute and the Republic of Ireland Civil Liability Act.

Sale of Goods Act Seller’s Default

The normal and presumptive measure of damages under the Sale of Goods Act for non-delivery is the difference between the contract price and the market price, where there is an available market.

Where the seller fails to deliver the goods, delivers defective goods or delivers late and the buyer seeks the normal measure of damages with no claim for loss of profit or consequential loss, he is not required to buy substituted goods in the market.

Where a seller fails to deliver conforming goods, the buyer who wishes to claim damages for loss of profit must show that he took reasonable steps to acquire substitute goods. The buyer must take steps to mitigate the loss by going into the market and buying alternative goods, provided that there is an available market.  If the buyer does not do so, he cannot claim to recover in relation to the rise in price.  His loss is fixed at the date of breach.  His decision as to whether to buy or not is independent of the breach.

If the buyer benefits from the acquisition of substitute goods, this must be taken into account and may reduce or eliminate his claim.

The other purchase must be in substitution for the failed transaction and must be taken in consequence of the breach in order to be taken into account in mitigation. It is irrelevant that the innocent party later benefits from another separate purchase.

Sale of Goods Act Buyer’s Default

The standard measure of damages for non-acceptance, is the difference between the market price and the contract price, at the time when the goods ought to have been accepted. Where the buyer fails to accept the goods, the seller should take steps to resell them. If he does not do so and the market falls, he may not recover against the buyer for the fall in price.

Where the claim by the seller is for loss of profit, it may be shown that the breach gave him the opportunity to take on other profitable orders. In this case, credit must be given for them.

There may be a loss of profit for the seller on the lost volume, where there is a ready market for all the goods he can produce. In the case of services, he may have been able to provide the services to two parties or to have subcontracted performance of the breached or an alternative contract.  This will not apply where the goods are unique.

The sale by the seller of goods, which have not been accepted, in a rising market is an independent transaction, so does not involve the mitigation of loss. Similarly, the purchase by a buyer of other available goods from a third-party in a falling market is independent.

The other sale must be in substitution for the failed transaction and must be taken in consequence of the breach in order to be taken into account in mitigation It is irrelevant that the innocent party later benefits from another separate sale.

Specific Performance

Where the goods are unique and the claimant has a bona fide claim for specific performance, he may not be obliged to mitigate.  Where a person acts reasonably in seeking specific performance, he should not be penalised for the fact that it is ultimately unavailable.

There must be a bona fide claim to specific performance. He must have a bona fide reasonable prospect of success.  In such a case, damages may be awarded in lieu of injunction under the Chancery Amendment Act. This may equally apply where specific performances are ordered but later withdrawn because it cannot be practically enforced.