Mitigating loss: Get the balance right

9th June 2015

A recent case clarifies the key principles of the duty to mitigate loss and highlights that claimants should weigh their options carefully when considering their reaction to another party’s breach of contract. Walker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, explains.

The “duty” to mitigate

Strictly speaking, when a party is faced with another’s breach of contract and suffers loss as a result, the law of England and Wales does not impose a proactive obligation on the former to minimise that loss per se. If that party does not take reasonable steps to minimise loss, however, any claim brought for damages may be reduced as a result. In common parlance, this principle of the law of damages is known as the duty to mitigate.

The Thai Airways case

The recent case of Thai Airways International plc v KI Holdings Co Ltd [1] serves as a useful reminder of the key principles of mitigation (which are summarised below) and clarifies an important point of law.

In breach of contract, the defendant failed to supply economy class seats to the claimant airline on time (and in some cases, at all). That meant that Thai Airways had to store some of its aircraft until alternative seats could be found. In order to mitigate its losses, Thai Airways purchased and leased some alternative seats when these became available on the market. The alternative seats were lighter and more expensive.

Thai Airways sought to recover its costs incurred in mitigating its losses as part of its overall claim. KI, the defendant, argued that account should be given in the damages calculation for any profit that Thai Airways had gained from operating aircraft with alternative seats and also for any fuel savings that would be occasioned over the life of the seats by virtue of their lesser weight. Thai Airways countered that it should not have to account for any benefits received because obtaining the more expensive seats was the only option to it to minimise its losses and any such benefits were incidental and had not been chosen by the claimant.

Legatt J, in the Commercial Court, held that Thai Airways was liable to account as KI had argued, but that the burden of proof was on KI to prove that Thai Airways had derived or would derive the alleged benefit(s).

Key principles

• The duty to mitigate: a party cannot recover damages for any loss which it could have avoided but failed to avoid through its own unreasonable action or inaction.
• Where the market affords an option or options for the claimant to minimise its losses, the claimant should take reasonable steps to avail itself of such option(s).
• The claimant is only required to act reasonably, however, and case law explains that the standard of reasonableness in this context is not high:
  • Less will be expected of a claimant who is acting in the heat of a crisis [2]
  • A claimant’s resources will be taken into account when deciding what is reasonable and a claimant need not take risks with its money [3]
  • A claimant need not risk its reputation, property or rights in order to mitigate [4]
• Where a defendant makes an offer, a claimant must consider carefully. A claimant could be in breach of its duty to mitigate if it unreasonably failed to accept a clear, well-supported and suitable offer, but it would not be required to tolerate or accept a sub-standard proposal for fear of forfeiting its damages claim.
• As Thai Airways confirms, a claimant should give credit for any monetary benefit received as a result of mitigating steps taken whether such benefit was anticipated or not, but the burden of proving any such benefit (which may be very difficult) falls to the defendant.

WM Comment

When let down by a supplier or faced with any breach of contract, a business should always weigh its options before taking any action either to mitigate loss or to initiate legal proceedings. This is particularly the case where alternative means of mitigating may exist. That is not to say that potential claimants have any time to delay, however, because if reasonable opportunities to mitigate are not taken, every minute can mean cost. As well as bearing in mind the above key principles, businesses may need to take expert industry, forensic accountancy and legal advice, to enable them to make informed mitigation decisions.

Walker Morris’ experienced Commercial Dispute Resolution team is available to help 24/7. Please contact Gwendoline Davies for further information or assistance.

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[1] [2015] EWHC 1250 (Comm)
[2] USA v Laird Line [1924] AC 286
[3] Wroth v Tyler [1974] Ch 30; Jewelowski v Propp [1944] KB 510
[4] James Finlay & Co Ltd v NV Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400; Elliott Steam Tug Co Ltd v Shipping Controller [1922] 1 KB 127
[5] https://www.walkermorris.co.uk/business-insights/mitigate-dont-tolerate