Summary
- The duty to mitigate loss requires businesses to take reasonable steps to limit their losses once they become aware of a breach of contract or tortious act by another party.
- Failure to mitigate may result in a court reducing the damages awarded, even where the other party was clearly at fault.
- Reasonable mitigation costs, such as sourcing alternative suppliers at a higher price, can be recovered from the breaching party.
- This article is a plain-English guide to the duty to mitigate loss in Australian contract and tort disputes, written for business owners.
- It has been produced by LegalVision, a commercial law firm that specialises in advising clients on commercial disputes and contract law.
Tips for Businesses
Act quickly once you identify a potential loss. Source alternative suppliers or contractors where possible, and keep records of all costs incurred. Document every step taken to reduce your loss, as this evidence will be critical if the dispute proceeds to court.
In the context of disputes, the duty to mitigate loss is an important principle to bear in mind. You may suffer some sort of economic loss because another person has breached a contract or otherwise acted unreasonably. However, the amount that you can recover in court for this loss is not absolute. If the court determines you could have taken steps to limit your loss, you may not be able to recover the full amount. The law calls this obligation the duty to mitigate loss.
This article will explain some of the key points regarding the duty to mitigate loss that you may find helpful. It will also consider some practical implications for your business.
Understanding Loss
When the law refers to loss, it usually refers to the consequence of someone else’s actions. In other words, consequential loss. In business, there are two main ways someone can cause you loss:
|
Contract |
You have a contract with another party that they breach. As a result, you lose money or suffer some other loss, such as damage to your property. |
|
Tort |
A person or business acts in such a way that causes you loss, even though you do not have a contract in place. |
You must be able to prove loss in either case.
Some Examples
|
Contract |
You have a contract with your supplier to deliver certain goods you use to produce custom computers for your business clients. The supplier does not show up. As a result, unless something changes, you will not be able to fulfil 10 orders, which otherwise would bring in £50,000. You could phone an alternative supplier. But because you need the goods delivered immediately, it will cost you twice as much. If you do this, factoring in the cost of sales, you will only make £25,000 for fulfilling the 10 orders. |
|
Tort | Your business premises are in a shared office facility. Your neighbour has a leaky pipe. By the time you discover it, it has caused £10,000 worth of damages to your premises. If you do not take corrective action in the next week, the damage will increase and cost £50,000 to fix. |
In both cases, someone else’s actions can cause your business harm. If you do not take any corrective action in either circumstance, the amount of loss will increase. However, in both cases, you can take steps to ensure the loss is lower than it would be otherwise. If you do not, a court may not be prepared to allow you to recover the full amount of loss.
This is called the duty to mitigate loss.
In the contract example, by contracting with another supplier, you will effectively lose £25,000. However, you can claim this difference from the initial supplier because their breach resulted in you paying more. Likewise, in the tort example, you may have to pay £10,000 to fix the consequences of their action. However, you can recover this by claiming against them.
This guide outlines how to resolve commercial disputes.
Practical Implications of the Duty to Mitigate Loss
Most disputes in a business context arise because one party has breached a term of a contract. You should look at the agreement in place and see what obligations you and the other party owe one another. Likewise, you should consider the implications of the other party not fulfilling their obligations. Specifically, will it impede your ability to fulfil obligations you might owe to other parties? If so, the breach of contract will result in your suffering ongoing loss unless you take corrective action.
At this point, you should look at whether there are any reasonable steps that you can take to stop the loss from happening. For instance, you may need to enter into a new contract with a third party or terminate your obligations with other parties. In every instance, you should do everything you can to minimise your loss. If you find yourself in this type of situation, it is best practice to seek professional legal advice. Your solicitor can assess your options and advise you on how to mitigate your loss
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Key Takeaways
At the point you become aware that your business will suffer loss as a result of someone else’s actions, you must act to minimise the effect. If you do not, and the dispute goes to court, a judge may not award you the full value of your loss. This is because you failed to mitigate losses. If you find yourself in this situation, it is a good idea to assess your options early and to seek professional legal advice to see any legal obligations that you may have.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced disputes lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If you have a contract that the other party has breached, you may be entitled to damages. However, you have to take all reasonable steps to limit your losses once you learn that the other party has breached their duties. This is called the duty to mitigate.
Damages are where a court orders the losing party to the dispute to pay a sum of money to the winner. The amount should reflect the cost and expenses the winner incurred before proceedings as well as during litigation.
Reasonable steps include sourcing alternative suppliers or contractors to minimise ongoing loss.
Yes, you can claim reasonable mitigation costs, such as higher supplier fees, directly from the breaching party.
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