Commercial Court sets out impact of successful mitigation on damages for breach of contract

Commercial Court sets out impact of successful mitigation on damages for breach of contract

Published:

Author: Fleur Turrington

Applies to: England and Wales

In Thai Airways International Public Company Ltd v KI Holdings Co Ltd [2015] EWHC 1250 (Comm) the Commercial Court has provided guidance on how a claimant's mitigation efforts affect the damages it can recover for breach of contract.

The court held that the claimant had to account for the benefits received from its mitigation, but that the defendant had to prove that the claimant had derived the benefits, and the extent of such benefits.

The facts

The claimant, Thailand's national airline Thai Airways, had entered into a contract with Japanese aircraft seat manufacturer Koito for the supply of aircraft seats. Due to regulatory intervention, Koito breached the contract and delivered some of the seats late and some not at all. As a consequence, Thai Airways had to store several aircraft in its fleet for 18 months and had to purchase more expensive seats from an alternative supplier. In addition, Thai Airways decided to lease aircraft from a third party for three years.

Koito admitted liability for the losses Thai Airways incurred as a result of Koito's failure to deliver the seats, but the parties disagreed on the extent of the damages that were payable.

Thai Airways sought to recover all its expenses in mitigating Koito's breach of contract, including the cost of leasing the third party aircraft and the cost of the alternative seats. The lease was by far the most significant cost and amounted to about $162m.

Koito argued that Thai Airways' costs in mitigating Koito's breach should be offset against the financial benefits it had derived in the process. The financial benefits included profits made from operating the additional leased aircraft as well as fuel savings Thai Airways made because the alternative seats it had procured were lighter than the seats Koito was supposed to deliver. Koito claimed that these benefits not only exceeded the losses Thai Airways would otherwise have suffered due to reduction of aircraft capacity, but also covered the cost of the lease.

The law of mitigation

In the Thai Airways case, the court took the opportunity to outline the law of mitigation. A claimant in a breach of contract case is required to take all reasonable steps to mitigate the loss it incurs from the defendant's breach. If the claimant unreasonably fails to do so, it may not be allowed to recover losses which it could easily have avoided through mitigation.

The claimant can recover the costs of reasonable mitigation from the defendant. To assess the extent of the damages payable by the defendant, it is necessary to distinguish between actions the defendant took to mitigate its loss from the defendant's breach, and actions which the defendant took for other reasons.

The decision in Thai Airways

The court held that the mitigation costs to be recovered from Koito must be offset against any gains Thai Airways had made as a result of its mitigation. This principle was established in the longstanding case of British Westinghouse v Underground Electric Railways of London [1912] AC 673, in which the gains London Underground made by replacing the engines British Westinghouse failed to deliver with more efficient ones, had to be offset against the losses claimed from British Westinghouse.

Applying the principle to the Thai Airways case, the court held that the increased profit Thai Airways obtained from the leased additional aircraft had to be deducted from the losses it had incurred. This was in spite of the fact that the additional profit was incidental to Thai Airways' mitigation and had not been chosen by Thai Airways. The court also found that it would have been sufficient for Thai Airways to lease the alternative aircraft for two years in order to mitigate its losses. The decision to lease aircraft for three years was commercially motivated.

Consequently, Thai Airways was only able to recover the cost of leasing the additional aircraft for two years. Furthermore, the court agreed that some of the alternative seats bought by Thai Airways had led to fuel savings and these had to be deducted from the damages Thai Airways recovered.

However, the court placed the burden of proof on Koito to show that Thai Airways had derived any benefits and the amount of these. The court found that Koito had failed to show that the increased profits covered the cost of the lease, and accordingly awarded Thai Airways the full cost of two years of the lease, amounting to about 107m (USD).

The court also held that Koito had failed to adequately demonstrate fuel savings in relation to the remainder of the alternative seats, and these savings could therefore not be credited.

Impact on businesses dealing with supplier problems

Late delivery or non-delivery of essential products is a common problem for many businesses.

In dealing with delays in the supply chain, companies must remember the duty to mitigate.

The following practical tips are useful to bear in mind:

  • where there is an available market for a product, courts expect victims of supply problems to go into the market as soon as possible and obtain a replacement. It may not be possible to recover loss resulting from non-delivery of a product if the loss was easily avoidable
  • even if a business does successfully mitigate, the Thai Airways case underlines the impact sourcing alternative products can have on the damages recoverable from the offending supplier
  • businesses will not be able to keep any benefits they gain from successful mitigation as a windfall. This applies even if the business did not seek the benefits, but was merely taking the only option available to it to avoid a loss of profits following supply problems

If you are in any doubt about how the law of mitigation applies to you, please contact a member of our Dispute Resolution and Compliance team.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the Author

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Fleur Turrington

Senior Associate

03700 86 8976

Fleur is a Senior Associate within our Dispute Resolution and Compliance team and leads the team's Retail sector. Fleur specialises in commercial disputes and is based in our Thames Valley office in Reading. She advises clients on all contractual commercial disputes, construction disputes, corporate disputes, tortious claims (primarily negligence), contractual interpretation, breach of contract and supplier disputes. She also advises and assists clients in relation to the Sale of Goods and Supply of Services and provides training to clients on consumer legislation issues. In addition she advises on Product and Public Liability cases relating to claims primarily regarding large scale complex construction disputes.

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