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--------------- Print Magazine --------------
 
  May 2016
 
  April 2016
 
 
 
 
LEGAL ARTICLE
MITIGATION OF LOSS
P.K. Basu Manumdar

When deciding on a claim of damages for breach of contract for sale of goods, a question that is often posed to the claimant is whether he has done enough to mitigate the loss consequent on the breach. The two factors on the basis of which damages to the aggrieved party are calculated in case of breach by a party to the contract are well-settled 1 :

(i) As far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed in as good a situation as if the contract had been performed.

(ii) The injured party has the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and therefore cannot claim any part of the damage which is attributable to his negligence in taking such steps.

Mitigation of loss is therefore a duty cast on the aggrieved party. In the Indian Law of Contract, this principle of mitigation of loss is embodied in the following ' explanation ' to Section 74 of the Contract Act:

Explanation . - In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

In terms of the above explanation to Section 74, 'the principle of mitigation of loss does not give any right to the party who is in breach of the contract but it is a concept that has to be borne in mind by the court while awarding damages' 2 . But the aggrieved party is under no obligation to injure himself or his commercial reputation in trying to reduce the damages payable by the party in breach, nor need he take steps which would injure other innocent persons.

International conventions also clearly lay down the duty of the aggrieved party to take positive steps to reduce the damage caused by the breach of contract. The UN Convention on Contracts for the International Sale of Goods (CISG) has incorporated this doctrine of mitigation specifically in Article 77.

Article 77 : A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.

The idea behind the above Article 77 is that the injured party cannot recover damages or losses which he should have avoided. It may be noticed that 'losses' include 'loss of profit'.

This principle is also accepted in the Principles of European Contract Law (PECL) in Article 9:505.

Article 9:505: Reduction of Loss: (1) The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party could have reduced the loss by taking reasonable steps.

(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the loss.

The above article of PECL allows recovery of expenses incurred in mitigating loss, but does not mention anything about loss of profit. However, Article 9: 502 mentions loss of profit as a measure of damage.

Article 9:502: General Measure of Damages: The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived.

The concept of 'damages' in PECL is similar to that in the Indian Law of Contract. It is to be noticed that while in Article 9: 505, the word 'loss' is mentioned, in Article 9: 502, what is mentioned is 'damages'. Looking at the above provisions in CISG and PECL, it is possible to take a view that the term 'damages' is to be understood to expand on 'losses', and includes 'loss of profit'.

The CISG text provides that a party who relies on a breach of contract must take measures to mitigate the 'loss'. This language is imperative, and it imposes a duty on the aggrieved party to mitigate the 'loss'. But PECL only suggests that the non-performing party is not liable for damages which the injured party could have reduced. The wording is not as strong as the one in the CISG.

The Indian law would seem to leave it to the court or tribunal to decide whether means 'existed of remedying the inconvenience caused by the non-performance of the contract'. It states that means of mitigating the breach 'must be taken into account' when deciding on a claim of damage. The inactivity or failure to take reasonable steps would be held against the claimant when the adjudicator assesses the claim of damages.

The UNIDROIT Principles (2004) attempt to state the law in clear terms.

Article 7.4.8 : Mitigation of harm: (1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps.

(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

The language is very lucid. But it adds a new dimension - reasonableness of expenses incurred in attempting to 'reduce the harm'. It would be open to determination by the court or tribunal as to what expense would be considered reasonable when steps are taken to mitigate the loss.

From the above discussions therefore, the following principles emerge in regard to mitigation of losses, when the adjudicator decides on claim of damages:

(i) The aggrieved party / claimant is not entitled to recover damages for any part of the loss resulting from breach of contract that he could have avoided by taking reasonable steps.

(ii) The aggrieved party may recover 'reasonable' expenses incurred in taking 'reasonable steps' to mitigate the loss occasioned by breach of contract by the defendant.

(iii) Even if the injured party takes more than 'reasonable steps' to mitigate loss, the party cannot recover for the losses avoided by such extraordinary effort, nor recover anything more than 'reasonable expenses'.

In order to claim relief, the party in breach will have to prove that mitigation was possible, and also the extent to which the loss could have been reduced. On the other hand, the aggrieved party could set up a defence that mitigation would not have been possible without putting himself out of the way.

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* The Author is an Executive Director of SAIL.

  1. Murlidhar Chiranjilal v. Harishchandra Dwarkadas , (1962) 1 SCR 653.
  2. M. Lachia Setty and Sons Ltd. v. Coffee Board, (1980) 4 SCC 636.
 
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