Mitigation of Loss in contract and tort cases (reducing damages in legal claims)

Mitigation of Loss Meaning

Mitigation of loss is an area of law which operates to limit the amount of damages that can be recovered for breach of contract or commission of a tort.

When a person suffers a legal wrong, they are not entitled to sit back, let damage accrue and then recover all the damage in money from the defendant.  They must take reasonable steps to avoid avoidable loss.

Nor is the person entitled to:

• reap the additional benefit of spending or other events which diminish their loss
• spend excessively beyond what is reasonable to reduce their loss and expect that those sums,

and expect to recover all of the damages that would otherwise be recoverable.

The duty to mitigate damages exists an operates to reduce damages in breach of contract and cases tort cases to what is seen as fair between the parties at law.

 

Mitigation of Loss in Contract Law

A claimant which has a legal right infringed - suffers a breach of contract or a tort - is entitled to recover damages.

The truth is that the claimant does not have any positive legal duty to mitigate its loss in breach of contract cases and tort cases, such as negligence, conspiracy or conversion.

A claimant may act as it wishes.

A claimant is completely free to act as it may judge to be in its best interests. It’s an independent commercial decision.

It does not owe any obligation or “duty” to the defendant to mitigate its loss.

However:

1. The claimant may not do so at the expense of the defendant
2. If a claimant doesn't mitigate its loss, it is not entitled recovery of damages which could have been reasonably mitigated.
   In the law of damages, the claimant is taken to have mitigated its loss, even if it doesn't.

 

Perspectives 

The amount of damages - the quantum of loss - awarded by courts is restricted by three main areas of law:

• causation
• remoteness of loss: the loss is not too remote, and
• mitigation of loss.  Mitigation of loss is a specialised subset of legal principles which operate within the law of causation.

Each of these areas of law have longstanding legal tests which apply to limit the amount that might be recovered. There are two different perspectives to awards of damages:

1. The claimant’s perspective: the defendant must pay to make the situation right for far as money can do it. That’s the broad principle of damages, and
2. The defendant’s perspective:
   1. The defendant shouldn’t have to pay for loss suffered that could have been avoided by the claimant, and
   2. Where the claimant has overspent or received a benefit from the breach, that the claimant should have to compensate them for the benefit received. Damages should be offset to the extent of the benefit and the defendant should not be made to pay for overspend on the part of the claimant.

Overall, the purpose of loss mitigation is to avoid avoidable loss. Doing so:

• may bring about a situation in which the loss of the claimant is partly or completely avoided, and/or
• means claimant's loss may partly or wholly avoided ... despite taking no steps to mitigate damages.

 

Mitigation of Loss: Meaning

If an innocent party doesn’t mitigate its loss, they’re not entitled at law to recover the loss that it could have taken reasonable steps to mitigate.

The level of reasonableness applied is not a finely balancing exercise; after all the claimant's predicament was caused by the defendant's wrongdoing.

The defendant bears the burden of proof that the claimant has not mitigated its loss. When that burden is discharged, the claimant it will not be entitled to recover the specified loss.  

The paradox is that doing nothing usually leaves the claimant - the innocent party - in the worst possible situation if it intends to maximise recoverable damage.

That’s because:

• if the contract breaker makes an allegation that the innocent party has not mitigated its loss, and the innocent party has not taken any reasonable step which was available to mitigate, the claimant has no defence to a claim that it has failed to mitigate its loss, when it should have
• it will be limited to recovering loss as if it had performed its “duty” and mitigated its loss.
  The legal claim for damages can be diminished whether or not the innocent party actually does take steps to mitigate its loss.
  The result is that courts assume that claimants have mitigated its loss, and assesses damages as if it had.

Also, the steps taken to mitigate loss are usually time sensitive. More on that below.

So where there are reasonable options available to the claimant to reduce their loss, the claimant should take them. It also means having an arguable defence to a claim that damage has not been mitigated.

 

Duty to Mitigate

The net effect of the law of mitigation is that is reduces the amount recoverable by an innocent party of breach of contract, whether those steps were taken or not.

Loss mitigation means that the claimant can’t let its situation worsen by:

• Standing by and allow damage needlessly accrue when reasonable steps are available
• Avoiding responsibility to reduce loss which is within its means to reduce
• Not expend reasonable resources to avoid avoidable loss from happening.
  What is reasonable will depend on such things are the resources available to the claimant and the steps available which may be taken to reduce loss
• Not taking steps to avoid unnecessary loss suffered which would elevate a damage claim.
  Conversely, the innocent party is not entitled to take advantage of the situation and spend money improving their situation arising from a breach of contract, and not account for a benefit to the defendant in the damages calculations.

 

The Right to Damages: Starting Point

The aim of damages is to compensate the innocent party. It’s the sum of money which would put the party injured and suffered loss in the same position as it would have been in, if the wrong had not been sustained in the first place.

The claimant can only recover damages in respect of loss which it suffers as a result of the defendant breach of contract. This is causation of loss.

To put the duty to mitigate loss in its proper context in one case where it was said::

… causation and mitigation are two sides of the same coin … In every case where an issue of failure to mitigate is raised by the defendant it can be characterised as an issue of causation in the sense that, if damage has been caused or exacerbated by the claimant's unreasonable conduct or inaction, then to that extent it has not been caused by the defendant's tort or breach of contract.

The law of causation asks the question:

Did the defendant cause the loss?

Mitigation is a conceptual subcategory of causation which sets a legal standard to the question:

Did the claimant act responsibly after the breach?

The rules for mitigation facilitate a process to identify which losses of the claimant are:

• the consequences of the defendant's wrong, and
• to be treated as caused by the claimant's own action or inaction: a novus actus intervenus).

Put another way:

The claimant can recover no more than he would have suffered if he had acted reasonably, because any further damages do not reasonably follow from the defendant's breach.

The duty to mitigate does not apply to awards of damages arising from indemnity clauses and contractual debts. Different legal rules apply. Mitigation is only relevant where damages are at large: ie unquantified.

 

Factors in Mitigation of Loss

The steps that any particular claimant should mitigate depends on what has actually happened in the case. These include:

1. What the party in breach was required to do under the contract
2. The term(s) of the contract which were breached
3. The resources available to the claimant, including its financial resources and its ability to take steps – including those which do not involve spending money
4. The options available to the claimant to minimise the effect of the breach, which include:
   1. what has actually gone wrong – what the party in breach has done or not done to give rise to the breach
   2. the relative expense, time and effort of one or more steps or measures available to the innocent party to reduce the financial loss caused by the breach of contract thus mitigating the breach
5. the extent of information available and steps taken at the time of the breach.
   Minimal availability of information in a crisis and availability of few alternatives reduces options

Even then, a claimant is not required to act in way which would:

1. diminish its reputation, or would require it to behave disreputably or
2. be uncommercial .
   Also claimants are entitled to consider the effect of their conduct upon their business relations with other people and the effect of their actions on their reputation
3. mean that they risk their own capital in speculative ventures

Assessment of Reasonableness

Courts do not apply harsh burdens on claimants in decisions to mitigate loss.

Courts recognise that it was the defendant’s doing that caused the claimant to the position where it must mitigate.

Just because a less burdensome avenue was not chosen by a claimant doesn’t mean that the claimant was obliged to take some other more economical course.

Benefits obtained by Mitigation

In the classic case of British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, at 689 Viscount Haldane described the principle that the claimant cannot recover for avoided loss in these terms:

[W]hen 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 …

Collateral and Non-Collateral benefits

Not all steps taken to offset loss will reduce damages. Matters which are treated as collateral to the defendant’s liability and do not count in mitigation.

They include:

• contracts of insurance

Contracts of insurance give rise to payments by an insurer in the event of an accident or insured event. The payment arises due to a contract providing for the contingency, not the breach of contract or the tort committed.

• benevolent contributions and payments, such as funds to which members of the public contribute in a time of distress
• disability and disablement pensions

These are cases where the loss does not arise from the breach or the tort: they're collateral to it.

The transactions exist completely independently of (1) the relationship between the claimant and the defendant, and (2) the breach of contract or tort. Accordingly, they aren’t usually taken into account to set off damages claims.

But if the transaction giving rise to the avoided loss arises as a consequence of a breach and in the ordinary course of business it is more likely to be taken into account to reduce damages awards.

 

Common Mitigation of Loss Cases

When a contract is breached, courts assume that the claimant goes to the market and obtains substitute equipment at the time of the breach.

Common situations arise which require mitigation, such as:

• Supply of Goods: a buyer receiving defective goods or non-delivery is expected to obtain equivalent goods reasonably available on the market to obtain goods. .
  When the claimant has delayed obtaining goods in a rising market, the difference between the contract price and the market price is recoverable, on the assumption that the buyer obtained the goods within a reasonable time;

Where a greater profit is obtained by procuring substitute goods, the defendant is entitled to the benefit of that greater profit to pay less damages. The claimant must give credit for it.

Where goods have been wrongfully rejected by a buyer, the seller is required to make reasonable attempts to sell the rejected goods

• Supply of Services: a supplier who has been had its contract to supply services repudiated such that there is no requirement to perform the services is required to offer its services elsewhere; damages may be mitigated by the loss of a chance.
  Reasonable steps are required to remedy loss suffered by defective work to properly mitigate.
  This not to say that the claimant is required to remedy all works, but may not go beyond that which is reasonable to minimise loss
• Employment contracts: in cases of unfair and constructive dismissal, employees are expected to seek employment elsewhere with an allowance for a reasonable time to gain alternative employment and the salary.
  The effect of mitigation means that damages will not usually be awarded for an extended period of time of unemployment where the skillset is readily in demand in the industry in question

 

Time for Mitigation of Damage

The relevant time to mitigate loss is when the claimant becomes aware of the breach or should have known that a breach had taken place. A reasonable time is allowed after the breach to the claimant to decide what steps should be taken to mitigate loss.

The options available may include:

• Goods: keeping goods safe, cease to use them and seek alternative goods, or repair them.
• Services: seek out alternative or substitute services repair or replace defective services.

 

Examples: Mitigation of Loss 

In these examples, we’ve used relative amounts and simplified sets of facts. Mitigation cases are never this simple.

• Defective boat: a purchaser spends £10,000 on a boat. During use of the boat they discover that the bung in the boat is defective and boat leaks: the boat is defective. The supplier is liable for defect, because it was not constructed with reasonable skill and case. The bung costs £10. The boat owner notices the leak and does nothing to replace the bung or fix the leak. The boat sinks. The purchaser sues the vendor of the boat for the £10,000.

Applying principles of mitigation of loss, the boat owner is entitled to recover £10 for the bung and the labour to fit it, not the entire value of the boat.

• Software project: a software developer is engaged to develop a new website for £1,000. They set about the project but failed to deliver it on time, and have a series of cost overruns.
  There is no question that they are in breach of contract and entitled to terminate it.

The innocent party sets about finding another developer. They tell them to start from scratch and develop the website from scratch. This time it costs £1,500, because there is a lack of ready website developers that are capable of implementing the requirements.

It turns out that the defective website could have been fixed for £300. The claimant is not entitled to recover for the costs to have the site redeveloped, because it is reasonable to incur the cost of having it fixed rather than rewriting the entire site.

Also, by mitigating loss a claimant may bring about a situation in which its loss is partly or completely avoided.

• The claimant purchased a property which was worth £100,000 less than they paid for it. There was planning restriction of which they were unaware.
  After the purchase and before the trial, an application was made to lift the restriction. The application cost £250 and was successful.
  Removal of the restriction meant that the buyer had suffered no loss and there is nothing in respect of which they required to be compensated.

Another Example:

In British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Ltd [1912] AC 673, the Underground bought steam turbines from British Westinghouse to generate electricity. The turbines were defective.  

The Underground replaced them with new turbines from another supplier. It claimed as damages the cost of the extra fuel consumed while the British Westinghouse turbines were in use and the cost of buying the replacement turbines.

The Underground got it the wrong way around.

Replacing the turbines was a reasonable step which avoided the losses which would have continued to have been suffered if the original (defective) turbines were used.

The new turbines were so much more efficient, that it was to its financial advantage to replace the British Westinghouse turbines when it did: even if the British Westinghouse turbines had complied in every respect with the contract and continued to function.

The financial benefit obtained from the new turbines (less fuel) had to be brought into account when assessing damages. The damages claim of the Underground had to give credit for the financial advantage obtained. If the reduction did not take place, the Underground would have been over-compensated.

Assessments of Loss and Mitigation

Where a claimant fails to mitigate loss, the process of assessment of damages which the claimant is entitled to recover is a notional assessment of the claimant's loss. Court effectively runs a profit and loss account discounting the damages award where the claimant fails to mitigate or does not take all reasonable steps to mitigate the loss.

Where the claimant properly takes steps to mitigate, the actual profit and loss account would match the notional profit and loss account.

Conclusion

A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase "duty to mitigate".

Claimants are completely free to act in what they see as their best interests. 

At the other extreme, a defendant is not liable for all loss suffered by the claimant as a consequence.  A defendant is only liable for such part of the loss as is properly to be regarded as caused by the defendant's breach of legal duty.

Mitigation is closely related to the law of causation. Although the party in breach of the contract may have beached the contract, the innocent party is not entitled to recover loss which could have been avoided if they took reasonable steps to avoid it. 

A claimant is not entitled to take advantage of situation, expend sums to improve their position and recover the benefit of that spending from the party in breach.

There are not many cases where an innocent party cannot do anything to reduce the loss that it suffers as a result of a breach. It’s a matter of making an assessment of the situation as it stands and doing what is reasonably required – whether in the form of doing something or refraining from doing something - to avoid further loss being suffered.

There can be real value in process. In the best case for a defendant, it can mean that it is not liable for any loss. A positive defence made by a defendant to reduce the damages  can effectively reduce the damages payable.

Another process is finding, establishing or making things happen that bring about a break in the chain of causation: ie a novus actus intervenus.

 

Mitigation of Loss Solicitors

The what is required to mitigate loss in damages cases, the options available and selecting the rights options can be difficult to cut through.

Speak to a loss mitigation expert to help work out what steps should be taken by a party to identify the scope of the legal duty to mitigate loss.

Call us on +44 20 7036 9282 or email us on contact@hallellis.co.uk.