It is often said that where a breach of contract occurs, the innocent party has a duty to mitigate its loss. In fact, no such duty exists in law. Instead, it is a general principle that recoverable damages following a breach of contract will be assessed on the assumption that the innocent party has taken reasonable steps to mitigate its losses.
The case of the missing seats
The mitigation principle was reiterated in a case decided in the English High Court in May 2015: Thai Airways International Public Company Limited v KI Holdings Co Limited. This case concerned a breach of contract involving a failure by the defendant to supply new seats for the plaintiff/claimant’s aircraft as contracted for. This failure posed difficult business and operational decisions for the claimant, meaning that the scope of the mitigation principle became central to the claimant’s recovery of damages.
The scope of the mitigation principle
The court outlined the scope of the general principle:
a. The question of mitigation of loss involves whether or not the claimant has acted reasonably in response to the defendant’s wrong. If it has, then the costs and benefits accrued by the claimant in doing so, form part of the damages calculation. But if the claimant has not acted reasonably, then its damages are assessed as if it had.
b. There is no legal duty to mitigate loss; a claimant is free to act as it wishes in response to a breach of contract. The point is that its damages will be limited by an assumption that it has taken reasonable steps in mitigation of loss whether or not it has taken these steps.
c. The law gives a fair degree of latitude to the innocent party in responding to a breach of contract. Mitigation of loss does not require actions involving unreasonable expense, risk or inconvenience. Also, where the innocent party’s response was reasonable, the fact that there were other reasonable or arguably ‘more reasonable’ options will not be a reason to reduce the claimant’s damages claim. Rather, the defendant has the burden of proof to demonstrate that the claimant’s actions were not reasonable and that there was an alternative course of action which was reasonable, and which the claimant did not adopt.
d. The requirement of reasonable conduct has two particular connotations: (i) promptness – the claimant should act reasonably promptly in the face of a breach of contract; if losses are increased through inaction or delay, then these increases are likely to be irrecoverable; and (ii) reasonable cost – the claimant is expected to adopt a remedial option at proportionate cost, preferably by reference to the open market, unless there is a particular justification for not doing so. This can mean that whilst the innocent party’s actions may be reasonable for its own interests, the same actions may be deemed unreasonable from a legal point of view. The example given was a previous case where a claimant had his car repaired rather than replacing it with a similar second hand vehicle, where the cost of repair was more than twice the market value of the car before the accident. The court had held that whilst the decision to repair the car may have been reasonable from the claimant’s own point of view, legally he had failed to mitigate his loss given that replacement was a much more cost effective option.
e. Finally, in general terms, benefits that are gained by a claimant through adopting a course of action in response to breach of contract, are also to be taken into account in assessing damages. This principle does not stop at genuine betterment, where the claimant’s position has been improved; it also includes collateral or incidental benefits.
Applying the principle to the facts
The application of the above points was significant in examining the level of Thai Airways’ recoverable damages:
- Thai leased a number of aircraft to replace its planes that were grounded as a result of the missing seats. Thai leased the replacement aircraft for three years. The court held that the three year lease period was driven by commercial considerations and did not involve proper mitigation of loss. This was because new seats to replace those that weren’t supplied, could be ordered, manufactured, supplied and installed within two years. Therefore, replacement aircraft were only required for that two year period, so the damages claim was limited to two years.
- In leasing and operating the replacement aircraft, Thai was alleged to have accrued greater revenue than it would have accrued through operating its own aircraft. The court agreed that this additional revenue should in principle be taken into account as an offset against Thai’s damages claim. However, it was for the defendant to prove this excess revenue not the claimant. The defendant was held to have failed to do so.
- Thai Airways also purchased replacement seats from another supplier, to fit to its existing aircraft. The court agreed that the additional cost of these replacement seats was a valid head of claim. However, the court also agreed that because these replacement seats were lighter than the seats that were originally to be supplied by the defendant, thus producing a fuel saving to Thai Airways, that fuel saving was to be offset against this head of loss. It was for the defendant to prove that offset.
- Thai Airways had to put its aircraft with the missing seats into storage, whilst awaiting delivery of replacement seats. The court agreed that the storage charges were a recoverable head of loss. The court rejected the defendant’s argument that the aircraft could have been stored elsewhere at lower cost, because the defendant could not prove this.
- Thai Airways negotiated a delay to the supply of its new aircraft previously ordered from Airbus, because Thai would have no seats to install within them upon receipt. This delay enabled Thai Airways to negotiate a reduction in the new aircraft purchase price. The court agreed with the defendant that this saving should be offset as a credit against Thai’s damages claim.
- Thai Airways also opted to reinstall old seats into an existing aircraft. This resulted in the aircraft being grounded for a period of time and then flying with reduced seat capacity. The court agreed that the loss arising from this reduced capacity was a valid loss for the claimant.
The Thai Airways case is an example of how a principle that is easy to state, can yet be difficult to apply, especially to the facts of a modern commercial contract dispute. It also demonstrates the real and practical effect of the mitigation of loss principle, because whilst Thai Airways recovered significant damages, these were significantly reduced through the application of the mitigation principle, which in certain aspects produced somewhat harsh results. The case also illustrates that however hopeless the situation first appears for a defendant, there are usually avenues and arguments that are worth exploring in order to reduce the ultimate level of liability.