Introduction:
If someone has damaged you, either by their own negligence or intentionally, they have committed what the law calls a “tortious” act and may be liable to you for damages. Further, if you have been damaged by someone violating a provision in an agreement, either written or oral, that may be a breach of contract and you would be entitled to reasonable, provable damages.
In the case of a tort (non-contractual injury to you by violation of a duty of care) you are allowed damages for the ill you have suffered, including pain and suffering. If fraud or conversion is perpetrated upon you, you are allowed to be placed back in the position you were in before the fraud and may be entitled to punitive damages against the wrongdoer(s).
Damages for breach of contract are normally the loss of profits you would have received if the breach had not occurred. Thus, if you fail to deliver five hundred tires to me which you were obligated to do and because of that I could not sell them for a fifty-dollar profit apiece, my damages, if proven, would normally be twenty-five thousand dollars.
The obligation of the plaintiff in such actions is to prove the existence of the duty that is violated (if a tort cause of action) or the existence of a contractual commitment that was violated (if breach of contract) and then to prove the actual damages that were incurred.
But there is a wrinkle. Even if you prove the duty/breach and damage it caused, you face the defense known as failure to mitigate damages which, if proven by the defendant, can reduce your damages, perhaps even down to zero.
This article shall discuss the defense of mitigation of damages and the limits of that defense imposed by the courts.
The Basic Law:
The mitigation of damages doctrine, also known as the doctrine of avoidable consequences, prevents an injured party from recovering damages that could have been avoided through reasonable efforts.
The duty to mitigate damages is most usually seen in the areas of tort and contract law. In a breach of contract case, upon receiving notice that one party to a contract does not intend to perform, the other party is required to mitigate damages, meaning that it must make reasonable efforts to avoid further losses from the breach. The duty to mitigate damages was illustrated in contract law in Luten Bridge Co. vs. Rockingham County where Rockingham County hired Luten Bridge Co. to construct a bridge. Thereafter, the County voted not to continue with the construction of the bridge and informed Luten to cease construction of the bridge. The County had obviously breached the agreement and would owe damages to Luten. However, after receiving the notice of breach, Luten continued construction, then filed suit seeking damages for the county’s breach of contract. The court held that Luten had a duty to stop construction and that a contractor cannot continue to work on a project and increase the damages stemming from the breach of contract. Luten would have been entitled for work completed to the date of breach and lost profits deriving from the contract but could not continue working to finish the project and demand payment for all the work completed.
Mitigation of damages is also seen in contracts related to property. For example, if a tenant abandons their lease, a landlord has a duty to mitigate damages caused by the breaching tenant. In this case, the mitigation of damages doctrine imposes a duty on the landlord to try to find a new tenant and re-rent their property. If the re-rental is lower and/or if the landlord had to incur expenses to prepare the premises for the new tenant, those would have been allowable damages. If the re-rental is higher and no improvements were necessary, it is likely the landlord has no damages at all.
For landlord/tenant situations, the duty to mitigate often does apply, but the specifics can depend on local laws. For example, if a tenant breaks their lease early, the landlord generally has a duty to mitigate damages by attempting to re-rent the unit. However, not all jurisdictions require landlords to mitigate their damages, and the interpretation of what counts as “reasonable efforts” can vary widely. Consult the specific landlord/tenant laws in your jurisdiction to fully understand how the duty to mitigate might apply.
Reasonableness Test:
Mitigating damages does not require the plaintiff to act in commercially unreasonable ways. For example, even if a proposed new tenant may pay more rent, if his or her creditworthiness is suspect, or if the intended use is not appropriate for the building, few courts would require such mitigation of damages.
As an example, assume that the tenant who breached sold high-end clothing and the proposed new tenant was a fast-food restaurant completely out of keeping with the other tenants in the building which are also high-end fashion. The plaintiff could argue that mitigation of damages means the landlord should seek an equivalent tenant in the high fashion world.
Further, assume that locating such a tenant would require paying a substantial fee to a broker since there are few high-fashion prospective tenants available. Again, the court could conclude that was a reasonable expense which would be part of damages.
In the world of torts, mitigation of damages often requires taking reasonable steps to lower the cost of the damages caused. Assume you negligently damage my truck, interfering with my business. My truck could carry fifteen tons of materials daily and I have already existing commitments to deliver over the next six months. Assuming I could purchase a replacement truck which could deliver the materials, the court would require me to mitigate damages by purchasing the replacement truck and keeping my business commitments. I could not just sit back and assume the court would award me the lost profits from the lost business. But if I could argue that I did not have sufficient money to purchase a replacement truck at an interest rate I could afford, then I could argue that such mitigation is unreasonable. For that reason, some defendants advance possible payment of damages to a plaintiff precisely to avoid the extra damages that could ensue. In that example, the potential defendant could advance sufficient money to purchase the replacement truck.
The key is that the plaintiff is only required to take reasonable steps to mitigate damages. While the question as to what is reasonable may be an object of dispute at trial, no court will impose unreasonable steps upon an injured party.
Affirmative Defense Burden of Proof:
In an action for damages, it is up to the plaintiff to prove both liability and damages by a preponderance of the evidence to the satisfaction of the trier of fact. If an affirmative defense is presented by a defendant, such as failure to mitigate damages, then the burden of proof shifts to the defendant to prove failure to mitigate damages. That is not always an easy matter to prove.
To prove that a party failed to mitigate damages, the defendant (the party accused of causing the breach) must show that:
The plaintiff (the party who suffered the breach) acted unreasonably in response to the breach and failed to make a reasonable effort to limit their damages;
There were reasonable steps that the plaintiff could have taken to avoid or reduce their damages; and
If the plaintiff had taken those steps, they would have suffered less harm.
This might involve, for instance, presenting evidence that the plaintiff had opportunities to reduce their losses but refused to take them or that the plaintiff took actions that unnecessarily increased their damages.
Common Examples of Mitigation of Damages
Employment Contracts: If an employer terminates an employee without cause, the employee is usually expected to mitigate damages by seeking similar employment. If the employee finds a new job at a lower salary, the original employer might be liable for the difference.
Lease Agreements: If a tenant breaks a lease early, the landlord is typically expected to mitigate damages by attempting to re-rent the property. If the landlord is unable to find a new tenant despite reasonable efforts, the original tenant may be responsible for the unpaid rent.
Construction Contracts: If a contractor fails to complete a project as agreed, the property owner may be required to mitigate damages by hiring a new contractor to complete the work. The original contractor may be liable for any additional costs incurred.
Supply Contracts: If a supplier fails to deliver goods as promised, the purchaser might be expected to mitigate damages by finding an alternate supplier. The original supplier could be liable for any price differential and lower-quality materials need not be considered reasonable mitigation.
Practical Application of Mitigation of Damages:
Both the plaintiff and the defendant have a joint interest in minimizing the damages. Neither side can be sure of who is going to win the case, and both should seek to limit the cost of the alleged breach of contract or duty. An experienced manufacturer used a simple test to determine if he was mitigating damages appropriately if he was the victim of a breach. He wrote, “I just assume I am going to lose the case and have to cover all the damages myself with no recovery. What should I do to limit those damages?”
On the part of the defendant, a formal demand to limit damages should be sent to the plaintiff as a matter of course and that can be done without admitting liability. A letter stating, “While we deny responsibility for the loss, we hereby demand that you do all that is reasonable to limit possible damages, “can be written. If the damaged party fails to take reasonable steps, another demand letter clearly outlining the intended defense of failure to mitigate can be created to have a good record for the judge.
But there are limits to the duty. In one case, our client, to cover his contractual commitment, would have been required to purchase replacement parts from a competitor who not only was going to charge far too much but would have received massive financial benefit to the extent it could have hurt our client’s ability to compete in the future. Once those facts were discovered, it is vital to create a record that it was commercially unreasonable to expect our client to help a competitor in that manner. In that case, the defendant actually found another source of supply and made that available to our client so that the damages we were fighting over were tens of thousands and not hundreds of thousands of dollars.
The courts use equity to determine the appropriate mitigation of damages. If there is economic waste being created, the court is unlikely to allow it. The challenge for the parties is to develop sufficient clear economic evidence that such is the case and to confront that need right at the beginning of the case when mitigation of damages is still possible.
Limiting the Doctrine of Mitigation of Damages:
Both the contractual documents and the statutes passed by the legislature can abridge or even eliminate the duty to mitigate. It is not uncommon for commercial leases to provide that the landlord may elect to leave the premises vacant for the remainder of the lease and these clauses can often be fully enforced, unlike similar clauses in residential leases. Liquidated damages clauses in a contract can also set specified damages regardless of actual damages incurred, though the liquidated damages must be related to foreseeable damages and must be reasonable.
And in various specified areas, the local governmental entities can enact laws which reduce the duty to mitigate or even put additional obligations on the party breaching a contract or committing a wrongful act. It is vital when facing such a situation to obtain local legal advice so one is aware of what statutes or clauses may alter the duty to mitigate.
Conclusion:
One judge put it to an opposing party very well in his written opinion: “Despite contentions of the plaintiff, breach of contract is not a meal ticket to easy profit. Our goal is to minimize costs incurred by a breach, not allow a party to maximize its return from a breach.”
As with so much in law, common sense is required for both sides. A breach of contract or tort creates damages and those must be paid, but the damages must be reasonably limited by reasonable efforts of the damaged party. Damages have to be proven by the plaintiff and failure to mitigate must be proven by the defendant, and that simple fact must be kept in mind by all parties.
One client, who was the victim of a breach of a real estate purchase agreement ended up selling the property to another buyer for a significantly higher amount. He commented that the breaching party got away with the breach without penalty. I pointed out that the right type of real estate agreement could have had him keep a nonrefundable deposit and the problem was his own contract, not the breach. And when all was said and done, I pointed out, he had not suffered any harm, but had benefited. Breach of contract is not a crime. One simply has to pay the damages incurred by the other side. No damages, no harm. And one cannot artificially create damages by failing to mitigate reasonably.