Failure to mitigate loss may prevent the innocent party from recovering damages for avoidable loss. It is the defendant that has the burden of proving that the claimant has failed in its duty to mitigate loss.
For example, in contracts for the sale of goods, the claimant seller usually has to give credit for the market value of the goods at the time of termination. This requires the defendant to establish two things:
- that there is indeed a market for the goods; and
- the market value of the goods.
It is often an easy exercise to establish on factual or expert evidence that there was a market for the goods in issue, and their market-value. However, it is sometimes much more difficult in the case of bespoke or specialist goods.
Recent example
The Court of Appeal decision in Bulkhaul Ltd v Rhodia Organique Fine Ltd [2008] is an example of a defendant establishing that the claimant had failed in its duty to mitigate.
Facts in Bulkhaul
Bulkhaul, the claimant, leases tanks for the transport of corrosive chemicals. Rhodia, the defendant, is a manufacturer of such chemicals. In 1999 Bulkhaul leased to Rhodia 18 bespoke tanks for the transport of hydrofluoric acid. The agreement was to run for ten years at a fixed rent per day. There was a dispute between the parties as to whether the contract was a fixed-term or whether termination was permitted on reasonable notice.
In October 2004, about half-way through the intended term, Rhodia purported to terminate the contract, as it had decided to cease the manufacture of hydrofluoric acid. Bulkhaul brought proceedings seeking to recover the unpaid rental up to the end of the intended ten-year contractual term and obtained summary judgment on liability.
Outcome
On the assessment of damages, two issues arose. The first concerned the extent to which damages should be reduced to reflect the expenses that Bulkhaul would have incurred had the contract run its natural course, but which were not in fact incurred because of the premature termination. Such expenses are deducted to ensure that a claimant is not over-compensated, as the object of an award of damages for breach of contract is typically to put the aggrieved claimant in the same financial position that it would have been had the contract been performed. The expenses would have been incurred had the contract been completed and therefore must be taken into account.
The second issue was whether Bulkhaul had taken reasonable steps to mitigate its loss. This depended on whether Bulkhaul could have sold or leased the tanks to third parties to reduce the loss it had suffered. The question for the judge was whether or not there was an available market for tanks of this nature after they had been in use for five years.
Rather bravely, Bulkhaul did not itself adduce any factual or expert evidence on the issue. Instead, it simply asserted that the tanks could only be used for the transport of hydrofluoric acid and that sale of the tanks was therefore unlikely as manufacture of the chemical was being phased out. At trial, Bulkhaul sought to attack the quality of the evidence put forward by Rhodia by asserting that it was not sufficient to establish that there was a market for the tanks, nor what their value would be.
This strategy failed. The first-instance judge inferred the existence of a market and the value of the tanks from a number of facts established by Rhodia at trial, including the following:
- Rhodia's witnesses gave evidence that, while manufacture of hydrofluoric acid was declining in the Western hemisphere, it was still being produced and transported in other parts of the world.
- Prior to termination of the contract, Rhodia identified a third party that was interested in acquiring the tanks from Bulkhaul. Further, Rhodia sought to broker the sale of the tanks as a means of consensual termination of the contract, but a price per tank could not be agreed with Bulkhead. Similar discussions were held following termination. Eventually, the potential purchaser acquired alternative tanks from another source, apparently because it believed that the price demanded by Bulkhead was too high.
- During the course of the litigation, Rhodia appears to have made efforts to find other potential purchasers of the tanks and to introduce them to Bulkhaul. Those efforts came to nothing, seemingly because Bulkhaul was seeking too high a price for the tanks.
- 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.
As there was a market for the goods, Bulkhaul had a duty to mitigate its loss by selling the tanks for the best price that could be obtained in the market (or perhaps by leasing them to another customer). Bulkhaul accepted at trial that it had made no active attempts to sell the tanks. Indeed, it seemed to have made only lethargic attempts to follow up leads provided by Rhodia. Nor, apparently, had Bulkhaul sought to lease the tanks to any other customer. As a result, the judge decided that Bulkhaul had failed in its duty to mitigate its loss.
The judge also decided a market price for the tanks following termination, assessing it at the level of the offer made by the potential purchaser identified by Rhodia, minus the cost of sale.
The Court of Appeal upheld the first-instance decision, noting that Bulkhaul's position was unattractive. If Bulkhaul were right, it could recover the whole of the rental to the end of the term, while retaining assets of some value, without having made any positive effort to sell them.
In rejecting the appeal, the Court of Appeal stated that a judge was entitled to infer the existence of a market and of a market value from any sufficient evidence relevant to those issues. It was not necessary for a defendant to prove that there was an identified willing buyer at a specified price. Here, there had been direct evidence on which the Court could rely properly to make the decisions that were reached. Indeed, that evidence included an actual offer made by a third party for the tanks. Bulkhaul sought to argue that this offer was irrelevant because it was made before termination, apparently on the grounds that to put weight on it would effectively be to criticise Bulkhead for rejecting an offer made prior to the breach of contract. That, the Court held, was to confuse two separate issues. It is one thing to say that a party cannot be criticised for rejecting an offer before breach, and quite another to say that the fact of the offer is of no relevance to the existence of a market or to the value of the goods.
Conclusion
Defendants often assert that claimants have failed to mitigate their loss in an effort to reduce the level of damages. Generally, courts are sympathetic to the efforts made by a claimant seeking to deal with a breach of contract. The requirement to take 'reasonable steps' is not a high standard. In particular, the courts will typically reject criticism of a claimant seeking to do its best to mitigate its loss when faced with a breach of contract, particularly when decisions have to be made - often quickly - by a claimant with imperfect knowledge. It is, after all, the defendant that has put the claimant in the position of having to deal with a breach of contract
However, the courts will penalise a claimant in damages where it has demonstrably and unreasonably failed to take any steps to mitigate its loss, or where the steps that it has taken are clearly inadequate. In circumstances where a claimant could, for example, potentially mitigate its loss by selling goods in the market, the court will usually expect to see evidence of meaningful attempts to do so. That should not be difficult if such attempts are genuine. A claimant that gives the impression that it is more concerned with enhancing a claim than mitigating loss should expect deductions in the damages awarded to it.
By James Maton, partner, Edwards Angell Palmer & Dodge UK LLP. E-mail: jmaton@eapdlaw.com.
