Benefits derived from mitigation are relevant in assessing damages
In assessing damages for breach of contract, the court will take into account any benefit that a claimant derives from taking steps to mitigate its loss.
KI Holdings agreed to supply aircraft seats to Thai Airways. KI was unable to deliver the seats on time because they failed to meet regulatory standards. To mitigate the effects of the delay, Thai leased extra aircraft and ordered lighter, more expensive, seats from an another supplier.
Thai sued for breach of contract and claimed damages for the full cost of mitigating its losses.
KI argued that any damages should be reduced to reflect (i) the extra profit made by Thai as a result of operating the additional leased aircraft; and (ii) the fuel costs that Thai would save over the lifetime of the lighter seats.
Thai argued that it took the only possible mitigating steps, so any benefit would be purely incidental and shouldn’t be deducted from its damages.
The High Court said a pecuniary benefit derived from mitigating steps would reduce any damages for breach - even if the benefit resulted from the only mitigating steps available. The defendant must prove that the claimant has received a benefit as a result of its mitigating steps. Here, KI proved that, as a result of the extra aircraft and lighter seats, Thai’s profit exceeded what it would have been if KI had performed its obligations under the contract. The additional amount was deducted from the damages award.
If you're deciding what to do about a supplier's breach of contract, remember:
- you must take steps to mitigate your losses; and
- if those steps result in a windfall (whether intentional or otherwise), this amount will be deducted from any damages you are awarded.
No implied good faith duty when exercising a contractual right
The court won't imply a good faith duty on a party choosing whether to exercise a contractual right, as distinct from exercising a discretion to choose between various options. The court is less likely to imply a term into extensive and detailed documentation.
This case related to loan notes issued as part of the consideration for the sale of a business. The loan notes allowed the issuer to make unilateral changes to their terms in certain circumstances.
The issuer exercised its right to vary the terms; as a result, the loan notes became subordinate to other debt and their redemption date was postponed. The sellers complained that this made the loan notes worthless. They asked the court to imply a term into the loan notes that the issuer's right to change the terms must be exercised in good faith.
The High Court considered some of the recent cases on good faith and refused to imply a duty here. The overall documentation was extensive and detailed, and the court was being asked to find that the parties had omitted an important term. Although the court might impose a good faith duty where a party exercises a contractual discretion to choose from a range of options, it won't impose a duty where a party makes a 'binary choice' whether or not to exercise a contractual right.
The decision is in line with previous cases suggesting that the court is unlikely to imply a good faith term into contracts between sophisticated commercial parties negotiating at arms' length.
If you intend to impose a duty of good faith on a party to a contract, include it as an express term and specify its scope, for example by stating whether the party:
- must consult the other party;
- may act to the other party's detriment; or
- must subordinate its own commercial interests to the other's.
Notice of SPA warranty claim: time period starts when party is aware of proper basis for claim; must give clear notice of claim
If a clause requires a party to notify a claim for breach within a set time after becoming 'aware of the matter', the notice period starts when the party becomes aware that there is a proper basis for bringing the claim. To qualify as a valid notice, a communication must state that it is a claim for breach and give sufficient details of the claim.
Two recent cases show the problems that can arise when a party to a sale and purchase agreement notifies the other of a claim for breach of warranty.
The first case concerned breach of a seller warranty relating to management accounts. The SPA required the buyer to:
'serve notice of the Claim as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter'.
The sellers argued that 'matter' had a different meaning from 'claim': 'matter' meant the facts forming the basis of the claim. So the time period started as soon as the buyer became aware of the factual grounds for the claim. The buyer argued that the clause required awareness of the proper legal basis for claiming for breach of warranty. Here, the buyer had had to get advice from accountants before it knew whether it had a legal claim. The buyer said that this was when the notice period began.
The High Court found that the notice period began when the buyer became aware that there was a proper basis for a claim. This made commercial sense: without knowing that a claim had a proper basis, a party would not expect or want to have to notify the other party of it. The word 'matter' generally had a different meaning from 'claim', but here the use of 'matter' was a reference back to 'claim' earlier in the clause.
In the second case, the SPA required the buyer to notify any warranty claims within two years and to specify the claim in reasonable detail. The buyer argued that two letters it sent within the two-year period were sufficient notice, even though they didn't specify that they were claim notices. The High Court said:
- every notification clause turns on its own wording;
- the commercial purpose of these clauses is to give the seller enough certainty to make financial provision against a potential claim;
- in construing a notice, the test is how it would be understood by a reasonable recipient with knowledge of the context; and
- a notice must specify that a claim is being made.
The letters here didn't comply with the requirements of the SPA. They didn't refer to the relevant clause in the SPA; they didn't say they were giving notice of a claim for breach of warranty; and there was no real attempt to identify the form and substance of the claim (although it wasn't necessary to go into the same detail as in a pleading). The fact that the second letter was sent a few days before the deadline wasn't enough to imply that it was a claim notice
If you're drafting a notice clause, specify the mechanics for making a claim and use clear language. If you're claiming for breach of warranty, check any notice clauses and follow the procedures closely.
Use standard forms and precedents with caution
Two recent cases show the dangers of relying solely on a standard form or precedent without reviewing the facts of the current transaction.
In the first case, a solicitor used a precedent to draft a will that referred to the testator's 'issue' (ie his descendants). The question was whether the word 'issue' was limited to the testator's natural children or included his step-children and their children; the testator had apparently intended the latter. The court said it would not rectify the will to reflect the testator's wishes. The solicitor's failure to use the correct term wasn't a mere clerical error, so this wasn't a case for rectification.
The second case involved a lender who sold on part of a loan. The parties used a standard form agreement issued by the Loan Markets Association. The LMA is a prominent trade body for participants in the London lending market. It issues standard documents for its members, drafted by specialised lawyers. However, it was unclear how the agreement would apply to a premium on early repayment here, and the parties went to the Supreme Court for clarification. The LMA has updated its wording, but it's worth remembering that, just because a standard form is widely used, it might not be perfect for your deal.
For more tips drawn from this case, here's a note by a former Freshfields partner and now writing and drafting consultant.