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Mitigating your loss - what does this really mean?

Posted on Jun 17, 2015 by  | 0 Comments

A recent case brought before the Commercial Court case represents the commercial reality of many contracts for the supply of goods in which the supplier fails to fulfil their end of the deal so that the buyer must seek an alternative to be able to continue their business. The case considered damages recoverable in this situation, damages being the monetary value that represents the difference between the financial situation of the claimant because of the breach and their financial situation had there not been a breach. Of central importance to the calculation of the extent of the damages recoverable was the responsive action the claimant had taken so that their loss, in the long term, would be minimal. This is what is referred to in legal terms as the mitigation of loss.
The case provides helpful guidance on the law of the mitigation of loss; the action or inaction of a victim to a breach of contract in an attempt to minimise the financial impact of that breach. Functionally, the doctrine of mitigation of loss distinguishes between what is attributable to the defendants wrong and what is not. The doctrine establishes that this distinction must be drawn to determine what is a reasonable action and an unreasonable action and damages will be calculated as if the claimant had acted reasonably in response to the breach of contract.
In the case Leggatt, J. puts it succinctly in the following terms:
“The basic test which the doctrine of mitigation involves is whether the claimant has acted reasonably in response to the defendant's wrong. Insofar as the claimant has acted reasonably, costs and benefits accruing to the claimant are included in the calculation of damages. Insofar as the claimant has not acted reasonably, the claimant's damages are assessed as if it had.” (at para 33)
The decision of the Commercial Court in Thai Airways International Public Company Ltd v KI Holdings Co Ltd [2015] EWHC 1250 (Comm) clarifies the position of a claimant in a claim for damages for breach of contract whose mitigation efforts are successful. In particular, the court considered how successful attempts at mitigation of loss can affect the extent of damages recoverable.
The claimant in this case, Thai Airways and the defendant KI Holdings or “Koito” (as formerly known) concluded a contract for the supply of aircraft seats. In breach of contract Koito failed to deliver some of the seats on time, if at all to which they admitted liability. The parties continued to be in dispute about the extent of Koito’s liability for the breach. Koito’s contention was that, as a consequence of Thai Airways’ mitigation attempt they incurred a substantial increase in profit and made significant savings and these benefits should be offset against the damages payable for loss suffered as a consequence of the breach and for the cost of mitigating those damages. Further, Koito claimed that the seats ordered to replace the seats that they had failed to deliver were lighter and, as a matter of fact, resulted in substantial savings for Thai which should be taken into account in the calculation of damages. They argued further that the benefits gained outweighed any loss that would have resulted from the breach of contract and cost of mitigation.
The dispute was considered against a background of the already well-established doctrine of mitigation of damages. It was observed that a claimant is expected to take all reasonable steps to mitigate avoidable loss; he may claim to recover costs for those reasonable attempts but he cannot recover for steps taken which were unreasonable to take or for some other commercially driven purpose, such as in this case the decision to lease replacement seats for a time over and above what was strictly required.
It is important to bear in mind therefore that there is an expectation that a victim of a breach of contract should do all that is reasonable to avoid loss. To put that in context, it is necessary where there is a problem with the supply of the product for the loss to be avoided by taking advantage of the available market to obtain a substitution. Furthermore it is indicated that failure to do so will be taken into account in the calculation of damages.
Central to the decision was whether ‘betterment’ or beneficial gains arising from the mitigation efforts were to be offset against the calculation of damages payable. Koito contended, on the basis of British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 that it was the case that benefits as well as costs should be taken account of. Thai’s argument in response was that the benefits gained were completely incidental and additional to the only available route of mitigation and thus should not be accounted for.
The court made clear that such benefits were to be included in the calculation of damages regardless of whether it was a profit or a saving or whether it was incidental to the only available route of mitigation:
“ I conclude that, in assessing damages for breach of contract, credit must be given for any monetary benefit, whether chosen or not, which the claimant has received or will receive as a result of an action reasonably taken to mitigate its loss.” (Leggatt, J. at para 81)
It should also be borne in mind that the case illustrates that the burden of proof lies with the party attempting to prove that there has been a consequential benefit arising from mitigation as a result of their breach of contract. It should be mentioned that this is not an easy task.
In summary, businesses should be aware of their obligations where a contract of supply is breached and the effects of their actions when it comes to mitigation of loss arising out of such a breach. Firstly, there is an assumption that a party falling foul of a breach of contract will reasonably take steps in order to mitigate avoidable loss and failure to do as such will be taken account of in calculating damages payable. Secondly, that any benefits derived from those efforts may be taken account of in the measure of damages, perhaps resulting in a substantially reduced claim.
What this means practically for a small business is that they should be careful in their consideration of reaction to a breach of contract. It is their “duty” to reasonably mitigate the loss but the case law suggests that this test of “reasonableness” is not terribly onerous. Fundamentally, businesses should be aware that their mitigation efforts may be taken into account in the measure of damages and decisions should be made on an informed basis.

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