It’s a long standing principle of English law that when there’s a breach of contract the injured party can claim damages.

The basic premise is simple: damages put the injured party in the position it would have enjoyed had the contract been properly performed. (You can read my previous post about damages here.)

 

Sometimes the amount a party can claim is pre-agreed in the contract (what are called ‘liquidated damages’). But more often this is one of the things the Court will decide, once it’s adjudicated on liability – and in this situation the injured party’s entitlement is qualified by a ‘duty to mitigate loss’. What this means is that it can’t simply stand by as losses accumulate, expecting to recover them all in full. The law requires an injured party to take reasonable steps to limit the consequences of the defendant’s misbehaviour.

 

An important question therefore arises: just how far does this ‘duty to mitigate’ go? Two important points govern the answer.

 

The first is that a claimant can’t recover for losses that were avoidable. So, for example, if a buyer wrongly terminates a contract for the sale of goods, the seller will be expected to try to sell them to someone else. The claimant won’t be able to recover the full price under the broken agreement if the buyer can show there is a demonstrable ‘market’ for the goods in question, and a market value at which the claimant could have made good its loss. (This might be easier to show for widgets than for specialist or bespoke items, of course, but you get the picture.)

 

The second point is that claimants will usually claim for every last nickel and dime. Superficially this is obvious (why would they not?), but it’s also the consequence of an important matter of law: namely, that the burden of proving that losses are not claimable lies with the defendant. In other words, it is for the defendant to prove that the claimant could (and should) have avoided them.

Generally, the Court will be sympathetic to an injured party’s efforts to deal with a breach, particularly when decisions have to be made – often very quickly – by a claimant with imperfect knowledge. But the Court will still penalize a claimant where it has demonstrably failed to take reasonable steps, or where its actions were inadequate.

Two recent cases illustrate these points nicely. A Court of Appeal case from 2008, and a Technology and Construction Court case from earlier this year.

 

The 2008 Court of Appeal decision, Bulkhaul Ltd v Rhodia Organique Fine Ltd, is a good example of a claimant failing to take reasonable steps to mitigate losses.

 

Bulkhaul leased tanks for the transport of corrosive chemicals. Rhodia was a chemical manufacturer. Under a ten year agreement Bulkhaul leased tanks to Rhodia for the transport of hydrofluoric acid. Half way through the contract Rhodia purported to terminate it, having decided to stop manufacturing the chemical. There was a dispute over whether the contract was for a fixed-term or whether Rhodia could terminate early. Bulkhaul got summary judgment on liability but then had to quantify its loss (which it claimed in the form of unpaid rent for the remainder of the 10 year term).

Looking at whether Bulkhaul had taken reasonable steps to mitigate its loss, the Court considered whether it could have sold or leased the tanks to someone else (i.e. whether there was a market for tanks of this sort after they’d been in use for five years).

 

Bulkhaul said the tanks could only be used for the transport of hydrofluoric acid and that re-sale was unlikely because manufacture of the chemical was being phased out. Rhodia disagreed.

1. •It put forward evidence that while manufacture of hydrofluoric acid was indeed declining in some parts of the world, it was still being produced and transported in others;
   

2. •Before terminating, Rhodia had identified a third party interested in acquiring the tanks and had sought to broker a sale as a means of consensual termination – but the deal had foundered on Bulkaul’s demands over price.
   

3. •Discussions on a sale had continued post-termination, but when Bulkaul refused to lower its terms the potential purchaser had eventually acquired tanks from another source.
   

4. •During the course of the litigation Rhodia appeared to have made efforts to find other potential purchasers, but Bulkhaul’s conduct had effectively priced the tanks out of the market.
   

5. •The tanks had been manufactured with a life expectancy of ten years and had had five or six years of use remaining at the point when the contract was terminated.
   

On the evidence the Court decided there was indeed a market for the tanks and that Bulkhaul should have mitigated its loss by taking steps to sell or re-lease them. It assessed a market price at the level of the offer made by the purchaser Rhodia had identified, minus the cost of sale. Baulkhaul was not entitled to claim this sum back.

...

In the second case, Linklaters Business Services v Sir Robert McAlpine Limited,  McAlpine were engaged as main contractor for the redevelopment of Linklaters’ London offices. Part of the work involved installing chilled water pipes. Ten years after Linklaters moved into the building one of the pipes sprang a leak. An investigation revealed severe corrosion throughout the building. On the advice of an engineer, Linklaters decided to replace the pipes wholesale rather than merely repair them. It sued for the cost of the work (which the Court agreed had become necessary because of corrosion resulting from poor workmanship by a subcontractor).

When it discovered the problem Linklaters had had two options: either to repair the pipes (the cheaper alternative) or replace them. The question was whether the decision to replace was reasonable. The Court decided that it had been reasonable and therefore that the cost of the work was recoverable.

In reaching its decision, the Court considered the following points:

1. 1.Repair works were required come what may because the pipes could not be left untreated. Linklaters were under a full repairing and insuring lease and had contractual obligations to maintain their premises to a high standard – so any rectification work needed to satisfy their landlord. They had acted on the advice of an experienced mechanical and electrical engineer who had said there was no practical, technical or commercial alternative to replacement – and there was no good reason to ignore him. The alternative (repairing rather than replacing) would have been only a partial solution, which was risky. The option of replacing the pipework had the advantage of certainty in that all defects would be remedied.
   

2. 2.The duty to mitigate is not a heavy one. In most cases it simply requires the claimant not to act unreasonably in the context of incurring loss. The burden of proving that the claimant has not done so is on the defendant.
   

3. 3.Each case depends on its own facts - but, in considering 'reasonableness', the court will look at all the facts and, in particular, the circumstances in which the innocent claimant finds itself at the time when it commits to a particular course of remedial action.