Contracts and loss mitigation
Every business will enter into numerous contracts every year and in most cases, both parties will perform their part of the bargain at least satisfactorily. However, breach of contract is not an uncommon occurrence.
In many business to consumer contracts, whilst incredibly annoying, as a consumer, if the seller doesn’t deliver on the contract, the position is generally quite clear. There are statutory rights to reject goods and the value of most contracts makes it in the seller’s interests to resolve the issue without argument.
When it comes to business to business contracts, the position is far less straightforward. It is very tempting, as the innocent party following a breach, to adopt a response to that breach based on irritation, anger or the belief that, as innocent party, you can sit back and do nothing and simply claim against the culpable party. This can backfire spectacularly as the law on mitigation of losses shows.
The duty to mitigate loss
In a contractual situation, English law provides that the innocent party does have a duty to take reasonable steps to minimise loss. What is reasonable is generally a question of fact, but it is not safe to assume that doing nothing will be considered reasonable or to take action to remedy a breach without due regard to all available options, their suitability and cost involved.
It is worth noting that under English law the burden of proof is on the Defendant to prove that the innocent Claimant has failed to mitigate loss.
4 types of mitigation of loss examples
Unfair dismissal – this is a classic example demonstrating that the duty to mitigate will still apply notwithstanding how reprehensible the conduct of the Defendant is. In many unfair dismissal situations an employer may have ridden roughshod over the employee and dismissed without adequate reason or process. This often results in psychological distress. Notwithstanding this, subject only to the employee being medically fit to work, he or she is expected to actively seek suitable alternative employment after being unfairly dismissed. What constitutes suitable employment is a question of fact. An employee may not be expected to initially seek any kind of work regardless of his or her skillset, experience but generally, to show some flexibility especially if unable to secure like work within a reasonable time after being dismissed.
Sale of goods – In this common scenario, a buyer defaults in paying for goods ordered. The seller cannot simply sue for the value of the contract. He, she or it will generally be expected to attempt to sell the goods to an alternative buyer for a reasonable price. There are many variables in this circumstance, such as the overall market for the goods in question – are they specialised, are they perishable ? In some cases, it may be reasonable for the seller to accept a much lower price to sell the goods elsewhere and legitimately sue for the balance from the defaulting party. In other cases, the innocent Claimant might be expected to sell the same goods for a price similar to that agreed with the defaulting buyer and may only be able to claim administrative or other costs associated with the default.
Repairing or replace situations – Take a situation where you are the tenant of commercial premises. Some water pipes burst and there is flood damage and you are without water and heating. These are Landlord’s responsibilities under your lease and the leak was avoidable. Your landlord is in breach of contract. You can’t contact the Landlord or he, she or it fail to take action. You decide to remedy the breach by having the pipes in question replaced. The Landlord subsequently argues that you haven’t mitigated the loss because instead of replacing the pipes it would have been cheaper to have them repaired. This type of scenario again demonstrates the potential complications of mitigation. A scenario such as this occurred in a reported case where the tenants were in fact a very prominent law firm – case details here. In the event, the court decided that the law firm had the right to replace the pipes and not just have them repaired, based on the facts of that case.
Failing to consider all options – As explained above, it is understandable to a degree, for Claimants who feel angry about breach of contract, to feel that they should have the law fully on their side. In other cases, Claimants simply don’t realise that they have a duty to look at ways to minimise loss and the available options. Whatever the motive, such a failure can prove costly as evidenced by this case where the Claimants had a solid claim for professional negligence but, having rejected an opportunity to negotiate a partial solution to their problem (gaining access to a garden area which they believed was an established legal right when they bought a property) they were found not to have adequately mitigated the loss.
In summary, with any breach of contract of significant value or importance or where the facts are complicated, it is vital to think clearly and act as reasonably as possible. You may consider that in such situations you would benefit from legal advice to enable you to take the correct decisions and protect your interests. If so, we would be happy to assist.
For more advice on breach of contract, visit this part of our site.
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