Duty to Mitigate Losses

Duty to mitigate losses is a legal definition used to describe the obligation upon a person who sues another for damages to reduce his damages.

In the 1912 decision of British Westinghouse Electric & Manufacturing Co. Ltd. v. Underground Electric Rlys Co. of London Ltd. Justice (Lord) Haldane of the English House of Wales noted that: “(A)s far as possible, he who has proved a breach of bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good situation as if the contract has been preformed. The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach. But, this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.”

This means that a party to a contract can seek to be compensated for the party’s losses/damages if a contract between that party and another party has been breached by the other party. The first party can seek to be put in the same position as if the contract has been performed.

For example, if a contractor undertakes to complete a job for 10,000.00 dollars over a two weeks period (at $5,000.00 per week) and the other party decides to cancel the first party’s services, for no valid reason, after one week, the first party can ask to be paid for the second week too, so it is placed in the same position, as if the contract has been performed in full. However, the first party also has a duty to try to find another paid job during the second week period. Only if the first party cannot find another paid job during that time, the first party can claim the full amount for the second week, namely the sum of $5,000.00, as damages for the second party’s breach of contract. Thus, a party has to do all that is reasonable to avoid or reduce its losses.

Is the duty really a duty?

The short answer it is no. A plaintiff doesn’t have to mitigate his losses, unless of course the plaintiff wants to claim those losses against the other party, in which case the plaintiff has to do all that is reasonable to mitigate those losses. Thus, the duty only applies if damages are sought against the other party to the contract. This view has been expressed or confirmed in the Queensland Court of Appeal’s case Pialba Commercial Gardens Pty Ltd v Braxco Pty Ltd & Ors [2011] QCA 148.

How far does the plaintiff have to go to mitigate his losses?

In Victorian Supreme Court case, namely Orica Australia Pty Ltd v Limit (No 2) Ltd [2011] VSC 65, it was held that while an insured is obliged to mitigate its insured loss, it is only obliged to do what is reasonable in the circumstances and can consider its own commercial interest to the extent it is reasonable to do so. It does not have to go beyond what is reasonable and suffer further losses just to spare the insurer.

Whilst this case is considered an insurance claim, it would be expected that the same principle would apply in other cases.

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