Under English law, when there is a breach of contract, the injured party will be entitled to damages as compensation for any loss suffered. Sometimes, these damages are quantified (so-called liquidated damages) allowing the parties to know, accurately, how much the injured party will receive for the breach. However, on most occasions, and unless the parties work out a settlement, it will be left to the court to assess the quantum of damages to be paid.
However, under the common law, the injured party has a duty to reduce his or her loss – i.e. an obligation to mitigate using any reasonable means at their disposal. The principle ensures that a party seeking damages will not be able to recover for a loss that could have been “reasonably avoided”. This term is not legally defined – it’s a measure of what a reasonable person would have done in the circumstances. In assessing reasonable steps to take in mitigation, the party seeking to claim damages does not need to take any extraordinary measures outside the normal course of business, or to incur unnecessary additional expenditure.
For example, if a buyer of apples breaches the contract with the seller, the seller has an obligation to take reasonable steps to try and sell the apples to someone else – i.e. the seller can’t wait for the fruit to rot and the sue the buyer for the whole of the sale price. If the seller has to to sell the apples for a much lower price, the duty to mitigate is discharged and the buyer will have to pay the difference in damages.
Although the common law generally operates to minimize damages for breach of contract by disallowing avoidable losses, a 2006 Court of Appeal case indicates that the duty to mitigate is not absolute. In Reichman v Beveridge, a commercial tenant vacated leased premises before the end of the fixed term of the lease (which also had no break clause). The landlord sought to recover the full rent for the remainder of the lease. However, the tenant argued that the landlord had a duty to mitigate by seeking to install a new tenant, limiting losses to the amount of time the premises remained vacant.
The Court of Appeal disagreed, stating that, in the circumstances of the case, it was not unreasonable for the landlord to insist on full payment of rent, as there were other options open to the tenant (such as finding a willing assignee) to reduce their exposure. This case should be read on its specific facts, but although it is yet to be tested by the courts, it is likely to apply to residential as well as commercial leases.
Although the common law generally operates to minimize damages for breach of contract by disallowing avoidable losses, the parties can also expressly enshrine the duty to mitigate in their contract. This has the added advantage of allowing the parties to define, between them, what steps each party can take to mitigate their respective losses.