Mitigation of damages – general principles
1. In a claim for damages for breach of contract, the starting point is that the non-defaulting party should be compensated for all of the pecuniary loss which is caused by the defaulting party’s breach.
2. It follows that:
a. any pecuniary loss which is not caused by the defaulting party’s breach is not recoverable; and
b. therefore, the defaulting party will not be liable for a pecuniary loss which could have been avoided by taking reasonable steps.1
3. What constitutes a ‘reasonable’ step will depend on what a hypothetical prudent person ought reasonably to have done in the same circumstances in order to avoid all or part of their loss, and is a matter of fact to be decided on a case-by-case basis.2 The burden will be on the defaulting party to demonstrate that the non-defaulting party failed to meet this standard.
Mitigation of damages – offers received from the defaulting party
4. This note focusses on the circumstances in which it will be considered ‘reasonable’ for the non-defaulting party to accept, or ‘unreasonable’ for the non-defaulting party to reject, an offer in mitigation made by the defaulting party. This is an important question for both parties because:
a. if the non-defaulting party fails to act reasonably, it may miss out on damages which would otherwise have been recoverable; and
b. the defaulting party may be able to deploy an offer in mitigation strategically in order to force the non-defaulting party into accepting a position which will reduce the defaulting party’s exposure (and, in turn, this may influence the defaulting party’s decision on whether to perform its obligations, or to take a calculated risk on falling into default).
5. In the leading case of Payzu v. Saunders3 it was held that in the context of a commercial contract, it will “generally” be reasonable for the non-defaulting party to accept an offer in mitigation received from the defaulting party. However, the court deliberately chose the word ‘generally’, since the statement cannot be construed as a rule, and indeed subsequent case law has confirmed that there are many situations when it will be reasonable for the non-defaulting party to reject such an offer.
6. Whilst what is reasonable turns on the specific facts of the case, the legal authorities nevertheless provide an insight into the types of factual circumstances which the courts of England and Wales may take into account.
7. From this, a number of factors can be identified which may be of use when making (in the case of the defaulting party) or assessing (in the case of the non-defaulting party) an offer in mitigation.
8. Please note that although the cases referred to in this note relate principally to the sale of goods and real property, some of the principles which emerge from the judgments can be applied by analogy to other categories of contract.
Consideration 1: the timing of the offer in mitigation
9. It is likely to be reasonable for the non-defaulting party to reject any offer in mitigation if it is made before the time fixed for performance.
10. For example, in ABD (Metals and Waste) Ltd v. Anglo Chemical & Ore Co Ltd4 the parties had agreed to the sale and purchase of high grade zinc, with payment to be made to the seller by way of a documentary letter of credit in pounds sterling.
11. After the contract had been concluded, the seller wrote to say that it was unable to export the goods against a letter of credit denominated in pounds sterling, and to request that the purchaser open a letter of credit denominated in the currency of Italy or Portugal. The buyer declined, and after the contractual time for shipment had passed, the buyer terminated the contract. The seller then reiterated materially the same offer, which was again rejected.
12. Subsequently, the buyer sought damages for breach of contract, which the seller argued ought to be reduced because the buyer had been unreasonable in rejecting the seller’s two offers to sell and deliver the same goods at the same price.
13. The court disagreed with the seller on both counts. In particular, the first offer was not to be taken into account because it was made before the time fixed for performance had expired, i.e., before there had been a breach of contract. In the absence of a breach, the buyer had suffered no loss and had no right to damages. It followed that if there was no right to damages, the buyer was under no obligation to take reasonable steps to avoid loss at that stage, whether by accepting the seller’s offer or otherwise.
Consideration 2: nature and certainty of the offer
14. When making (in the case of the defaulting party) or assessing (in the case of the non-defaulting party) an offer in mitigation, the question of whether or not it is reasonable to reject the offer may also turn on the nature and certainty of the terms being proposed.
15. As set out above, in ABD (Metals and Waste) Ltd v. Anglo Chemical & Ore Co Ltd, the defaulting seller made a second, post-breach offer to deliver the same goods for the same price. This offer was rejected, and the court again held that the non-defaulting purchaser had acted reasonably.
16. A key factor appears to have been that the defaulting seller was unable to propose a specific period for delivery of the goods. Therefore, accepting the offer would have exposed the non-defaulting buyer to a number of commercial and operational uncertainties and risks (including, potentially, the loss of its resale agreement). The buyer was not required to expose itself to such uncertainties and risks, in particular given there was an available market for the goods and a replacement for delivery within a specific timeframe could have been obtained elsewhere (see also paragraphs 20 to 24, below).
17. The court arrived at a similar decision in the later case of Strutt v. Whitnell.5 In that case:
a. a house purchaser sued the vendor after the conveyance because he was unable to obtain vacant possession of the property (a sitting tenant refused to leave the premises);
b. by being unable to give the purchaser vacant possession of the house, the vendor was in breach of the express terms of the sale and purchase contract;
c. the non-defaulting purchaser sued for the difference between the value of the house with, and that without, vacant possession; and
d. the defaulting vendor argued that it had twice offered to repurchase the house, and that the non-defaulting purchaser’s damages should therefore be reduced to reflect the part of the loss which could have been avoided by accepting that offer.
18. For a number of reasons, the court held that the non-defaulting purchaser was entitled to the damages claimed without any deduction. However, as in ABD (Metals and Waste) Ltd v. Anglo Chemical & Ore Co Ltd, one factor was that, although there had been an offer to repurchase, the vendor had never said at what price. In those circumstances, what was being proposed was so uncertain it was unreasonable for the purchaser to accept the offer.
19. It is worth noting that another important factor in Strutt v. Whitnell was that even if the offer had been to repurchase the house at the price paid by the non-defaulting party, that would not have compensated the buyer for the damage caused by the vendor’s breach. The damage suffered was not the payment of the price: it was the difference between the value of the house with, and that without, vacant possession. Had the vendors offered to pay the £1,900 difference claimed (or part of it) the outcome may have been different as such an offer would have allowed the purchaser to avoid all or part of the loss arising from the breach (without depriving the buyer of the benefit of the contract, i.e., the ownership of the house and the opportunity to, for example, make a profit should its value increase in due course).
Consideration 3: absence of an available market
20. A further factor which may be relevant in the context of the sale of goods is whether or not there is an available market for the goods in question at the time the offer in mitigation is made.
21. The leading case,Payzu v. Saunders, is an example of the circumstances in which the non-defaulting buyer’s damages may be adjusted if, following a breach and lawful termination, it rejects the seller’s offer to resell the goods when no alternative supplier is available.
22. In that case:
a. the defaulting seller sold the non-defaulting buyer 400 pieces of cloth, to be delivered in nine monthly instalments, and paid for within one month of each delivery, less a 2.5 per cent discount;
b. the buyer failed to make punctual payment on the first instalment and the seller (in a bona fide but erroneous belief that the non-payment was due to the buyer’s impecuniosity) wrongfully refused to deliver any further instalments unless the buyer agreed to pay for the cloth in cash without the benefit of any credit period;
c. this refusal was a repudiatory breach of the contract, which the buyer accepted; and
d. at the time the contract came to an end, the offer to sell the goods for cash remained open.
23. The court determined that the buyer had acted unreasonably, because as a result of the war-time conditions, it could not obtain similar goods from any other source. As the seller’s offer was bona fide and all other terms, including as to quality, quantity and delivery, remained the same, the proximate cause of the loss of the principal amount claimed was therefore not the breach of contract, but the buyer’s unreasonable decision to reject the offer in mitigation. As such, the principal amount claimed was not awarded, and damages were restricted to the part of the loss which could not have been avoided by accepting the seller’s offer (the loss of the useful period of credit).
24. This is in contrast to ABD (Metals and Waste) Ltd v. Anglo Chemical & Ore Co Ltd in which one of the determining factors was that substitute goods were available from other sources.
Consideration 4: impact on other legal remedies
25. A final consideration which arises from the case law is that the court may be reluctant to reduce the non-defaulting party’s damages if it rejects an offer which, whilst on its face reasonable, would effectively deprive the non-defaulting party of another legal remedy, nullify the effects of the non-defaulting party having exercised that remedy, or even penalise the non-defaulting party for having had recourse to its rights.
26. This is evidenced by two examples concerning contracts for the sale of goods.
27. In Heaven & Kesterton v. Etablissements François Albiac & CIE6:
a. the defendant CIF seller tendered goods which, amongst other things, had been shipped outside of the contractual shipment period and were not of the agreed length;
b. in the circumstances, the claimant buyer was entitled to reject the goods and claim damages for the seller’s breach of contract;
c. as a matter of law, the starting point for calculating the buyer’s damages was the difference between (i) the market price of the goods at the date of the seller’s breach, and (ii) the contract price; and
d. it was argued that whilst the buyer was entitled to reject the goods, the usual measure of damages ought to be reduced, because a part of the buyer’s loss had been caused by the buyer’s unreasonable refusal to agree to receive the goods by way of mitigation.
28. The decision of the court was that whilst a non-defaulting buyer could legitimately be criticised for not accepting the rejected goods by way of mitigation in some cases, in this instance the buyer had not acted unreasonably, in particular because the goods did not in fact meet the contractual requirements.
29. Similarly, in the more recent case of Truk (UK) Ltd v. Tokmakidis GmbH7:
a. the defendant purchaser lawfully rejected an ‘underlift’ delivered and sold by the claimant seller and which was fitted to the chassis of a car;
b. accordingly, the defendant purchaser had no obligation to pay the price of the underlift and was entitled to damages for breach of contract;
c. the defendant purchaser rejected an offer from the claimant seller to redeliver the repaired vehicle; and
d. the claimant seller argued that (i) the defendant purchaser’s decision was unreasonable, (ii) a part of the damages claimed could have been avoided had the offer been accepted, and (iii) that part of the damages which could have been avoided were not recoverable as they were caused by the defendant purchaser’s unreasonable rejection and not by the claimant seller’s original breach.
30. The court held that the defendant purchaser’s conduct was not unreasonable, and that damages ought not to be reduced on this ground.
31. Crucially, in each case the non-defaulting party had a legal right to reject the defective goods (in both cases, under the iteration of the Sale of Goods Act then in force). A part of the thinking behind each judgment (in particular in Heaven & Kesterton v. Etablissements François Albiac & CIE) appears to have been that this right of rejection would effectively be nullified if the non-defaulting party was required to accept the goods in order to reduce its loss. Whilst other factors were also relevant (such as the non-conformity of the goods in Heaven & Kesterton v. Etablissements François Albiac & CIE, and the passage of time in Truk (UK) Ltd v. Tokmakidis GmbH), it would be prudent for a non-defaulting party presented with a defaulting party’s offer in mitigation, to ask itself whether accepting the offer would deprive it of (or have the effect of reversing its exercise of) a legal right or remedy. If so, this is likely to be a relevant factor.
32. It is important to note, however, that the prejudicing or unwinding of a legal right which has already been exercised will not necessarily be determinative. In Sotiros Shipping Inc v. Sameiet Solholt (The Solholt)8 the defaulting seller made a vessel available for delivery a day late. The non-defaulting buyer had an express contractual right to cancel the sale and purchase contract in these circumstances, and that right was exercised. It was held that, in circumstances where the market had risen and the value of the vessel had appreciated by US$500,000, the non-defaulting buyer was not entitled to recover the difference between the contract price and the market price, and that its damages should be reduced to take account of its refusal to negotiate a fresh contract to purchase the vessel at the previously agreed price.
33. What is surprising about this decision is that (i) had the non-defaulting buyer accepted such an offer, it would have been put in precisely the same position it would have been in had it elected not to cancel, i.e., the court’s decision effectively nullified the exercise of the cancellation right (or punished the buyer for having exercised that right), (ii) there was no evidence that the defaulting seller had made an offer to resell the vessel on these terms, and (iii) as a consequence of the decision, the defaulting seller benefited from its breach due to the rise in the market.
34. Leaving aside the second point, the decision on the face of it is inconsistent with earlier cases such as Heaven & Kesterton v. Etablissements François Albiac & CIE where the courts have taken care not to allow the calculation of damages to interfere with (or act as a penalty for) the exercise of legal rights.
35. However, this is simply illustrative of the fact that each case turns on its own facts, and the judgment is less surprising when one considers that:
a. unlike in Heaven & Kesterton v. Etablissements François Albiac & CIE the goods (hypothetically) offered for resale were contractual and, as a result, it is arguable that accepting the ship would not have caused the same prejudice or inconvenience to the non-defaulting party as would have been caused by reversing the rejection in the older case; and
b. unlike in Truk (UK) Ltd v. Tokmakidis GmbH there need not have been a material delay between the time fixed for performance under the contract, and the time of delivery of the ‘substitute’ goods (the Solholt was in dry dock at the agreed place of delivery and could, presumably, have been taken over very promptly).
36. In fact, there was no discernible disadvantage to the non-defaulting buyer in accepting the hypothetical offer. It would have obtained a vessel sooner, and for a lower price than was possible in the then current market. This does not, however, explain the court’s decision to reduce damages in circumstances where the defaulting seller had not made an offer to resell, and leaves open the question of whether a non-defaulting party may, in some cases, be required to pro-actively seek an offer in mitigation.
Summary and practical considerations
37. In conclusion, whilst each case will turn on its facts, the authorities provide a party which is considering whether (and on what terms) to make or to accept an offer in mitigation with a number of issues to consider. In particular:
Timing: An offer which is made before there has been a breach (or in the case of a repudiatory breach, before the non-defaulting party has elected whether or not to bring the contract to an end) is more likely to be construed as an offer to negotiate commercial terms than a bona fide offer in mitigation. Therefore:
a. a non-defaulting party which receives a purported offer in mitigation before the time fixed for performance need not feel under pressure to accept that offer in order to avoid a reduction in any later damages claim; and
b. a party which is considering making an offer in mitigation in order to exit a contract with minimum liability must be careful to ensure the timing of the offer is right.
Terms of the offer: It is less likely that a court will find that it was unreasonable to reject an offer which is made in broad-brush or uncertain terms. Therefore, a defaulting party should take care to ensure that any offer in mitigation is clear, in particular as to key terms such as price. As to the non-defaulting party, it is conceivable (in particular considering the decision in The Solholt) that, where appropriate, the non-defaulting party ought reasonably to ask for more information and seek to clarify the position before saying ‘no’. Factors such as the absence of an available market may be relevant, and the question of whether or not to accept an offer should be considered in the round.
Available market: In cases of non-delivery and non-acceptance of goods, the availability of a market to sell or purchase the goods may be relevant. Where there is no such market, it may be less reasonable to reject an offer to supply/receive the goods from the defaulting party, although factors such as conformity of the goods with the contract and the other commercial terms being proposed (for example, as to timing of delivery and price) may also play a part.
Other remedies: If accepting an offer in mitigation would have the effect of depriving the non-defaulting party of a legal right, reversing the exercise of a legal right, or even penalising the non-defaulting party for relying on its rights, it is arguable that rejecting that offer is less likely to result in a reduction in damages. However, as The Solholt demonstrates, the position is not clear cut and there may be cases (for example, where there is no real prejudice as a result of the interference) where rejecting such an offer may be considered unreasonable.
Defaulting party ‘windfall’: Both Payzu v. Saunders and The Solholt demonstrate that the principle of causation will be upheld even if this results in a perverse outcome whereby the defaulting party benefits from its breach (in the former case, due to having the silk in hand and not being required to pay the ordinary measure of damages, and in the latter case, by benefitting from the rise in the market upon resale to a third party). Accordingly, a non-defaulting party should not assume that it can reject an offer simply because any reduction in its damages would allow the defaulting party to benefit from its breach.
38. In particular, therefore, a party in breach of contract that is considering making an offer in mitigation should be mindful that:
a. the mere fact of the offer does not of itself guarantee that the damages available to the non-defaulting party will be reduced; and
b. in order to be taken into account at the time of assessment of damages, any such offer will need to be made on an ‘open’ (rather than a ‘without prejudice’) basis.
39. A deliberate or strategic default in anticipation of then making an offer in mitigation should certainly not be undertaken lightly. In cases where there is a genuine dispute as to liability, all communications should be carefully managed in order to avoid, insofar as reasonably possible, any admissions or statements which prejudice the defaulting party’s position as to breach, and the factors set out in this note relating to any offer in mitigation need carefully to be assessed.
- This second principle is often described as the non-defaulting party’s ‘duty’ to mitigate. This is somewhat misleading, as the non-defaulting party owes no duty to the defaulting party, and is free to act as they wish and live with the consequences. This distinction was most recently reiterated by the UK Supreme Court in Bunge SA v. Nidera SA  UKSC 43.
- Due to the emphasis on fact over law, it is accordingly relatively rare that a court of first instance’s decision will be subject to appeal.
-  2 K.B. 581 CA.
-  2 Lloyd’s Rep. 456.
-  1 W.L.R. 870 CA.
-  2 Lloyd’s Rep. 316.
-  1 Lloyd’s Rep. 543.
-  1 Lloyd's Rep. 605.
Client Alert 2020-310