A brief summary of the principles, recent developments and practical tips relating to the need to mitigate losses in any claim for breach of contract.
- When one party breaches a contract, the innocent party must mitigate its loss by taking any reasonable steps open to it. A party cannot rely upon its own unreasonable behaviour to claim an increased sum from the party in breach.
- In so-called “available market” situations, where one party has failed to deliver, the innocent party must go into the market and acquire the goods or services at the best price it can: its loss will be any additional money it had to spend.
- If the innocent party takes a reasonable step to mitigate its loss but in fact increases its loss by doing so, it may be able to claim for the increased loss as still flowing from the breach.
- If the innocent party makes a gain as a result of the breach, it must account for that in any claim against the party in breach and this may extinguish the claim. Whether the benefit is caused by the breach will depend upon the nature of the benefit and loss and the manner in which they occurred.
- In Globalia Business Travel v Fulton Shipping the Supreme Court had to consider whether a party should account for a benefit it had gained from selling a ship after the charterparty repudiated the charter. Had the ship owner waited until the end of the charter to sell it, the value would have fallen by more than $16m, following the financial crisis.
- The charterparty argued that the owner had suffered no loss from its breach, as a result of its sale of the vessel before the market plummeted. With hindsight, the charterparty said it was clear that the owner had completely mitigated its loss.
- The Supreme Court analysed whether the benefit in this situation truly arose from the breach and decided it did not. Sale of the vessel was independent of income derived from it. The owner could have sold the ship while it was chartered out and need not have sold it at the end of the charter, had that been performed.
- The breach was not the legal cause of the owner’s decision to sell and was not an act in mitigation of the owner’s loss. It therefore did not have to account for the benefit it received from selling at that point.
What this means
- This case shows that the nature of any benefit derived by an innocent party following a breach of contract must be carefully examined to determine whether it must be accounted for in any claim against the party in breach.
- The sale of an asset may be triggered by the lack of an income stream from it, but it is not caused by the breach: the breach here was the “occasion for selling the vessel”, not the legal cause of it.
- Parties should examine the consequences of any breach carefully when framing their claim, in the case of the claimant, or arguing that the loss was reduced or should have been mitigated, in the case of the defendant.