Mitigating your loss: What’s the harm?

Written on 20 Jul 2015

A claimant has a duty to mitigate its losses, requiring it to take reasonable steps to avoid or reduce the damage that it suffers. Businesses cannot just wait for the damages to add up. But what if the actions taken by the claimant (or others) result in a financial benefit for the claimant? When will this reduce the amount awarded to the claimant?

In two recent decisions the Court of Appeal and Commercial Court have clarified that: 

  • If some of the loss claimed has been avoided, but not by the actions of the claimant or circumstances flowing from the defendant’s breach, the claimant can still claim the full losses that would have otherwise ensued (Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629).
  • Any profit derived from taking action to mitigate damage can be deducted from the damages being claimed (Thai Airways International Public Company Ltd v KI Holdings Co Ltd [2015] EWHC 1250).

Swynson v Lowick Rose: Should avoided loss be taken into account in assessing damages?

Swynson brought a professional negligence claim against a firm of accountants (known at the time as HMT), who in 2006 produced a due diligence report for Swynson in connection with a loan to a borrower (EMSL). The purpose of the loan was to finance a management buyout of a business (Evo).

In its due diligence report, HMT negligently failed to report a $3-$4m adverse difference between Evo’s actual and forecast working capital, which had a material impact on its cash flow post-completion. Evo did not perform well and in order to keep it afloat, Swynson advanced further loans, via EMSL, in 2007 and 2008. EMSL subsequently underwent a partial refinance in 2008, through a further loan, from an individual (Mr Hunt) who indirectly owned Swynson. This allowed EMSL to repay the 2006 and 2007 loans (which carried tax advantages and allowed it to avoid having impaired debt on its books). However, ultimately, Evo was wound up and the 2008 loans were not repaid to Swynson or Mr Hunt respectively. HMT argued that it should only be liable towards Swynson for the 2008 loan to EMSL, since the 2006 and 2007 loans were repaid.

At first instance, the judge held that the 2008 partial refinance of EMSL was collateral to the loss caused by HMT’s breach of duty and therefore Swynson was still entitled to recover the loss in respect of the 2006 and 2007 loans. The judge relied on the principle that if an action that causes a loss to be avoided arises out of consequences of breach and in ordinary course of business, the claimant cannot recover those losses. However, if the action causing the loss to be avoided arises by virtue of circumstances which are collateral to the breach of contract, the claimant can still recover the losses that have been avoided (British Westinghouse Co Ltd v Underground Electric Railways co Ltd [1912] AC 673). A typical example of where an avoided loss can still be claimed is where a claimant receives an insurance payment. This will reduce its direct financial loss, but will not prevent it (or the insurer) recovering the full loss from the other side. 

The Court of Appeal agreed with the first instance judge and dismissed HMT’s appeal. It held that even if the 2008 partial refinance may be said to have arisen as a result of the defendant’s breach, it was not something that Swynson brought about in the ordinary course of business. 

Thai Airways v KI Holdings: Any credit given for profit made as a result of steps taken to mitigate loss? 

Thai Airways entered into a contract with Koito for the supply of economy class seats for some of its aircraft. Koito was unable to fulfil the contract as a result of regulatory intervention concerning the safety of the seats. This prevented Thai Airways from using 5 new aircrafts for around 18 months, while it sourced seats from an alternative supplier. It also had to lease aircrafts from a third party to allow it to fully carry out its operations, in order to mitigate its losses.

Thai Airways claimed various losses, including the cost of the replacement seats and the cost of leasing the alternative planes. Koito argued that Thai Airways’ costs of leasing the alternative aircraft (including the duration of the lease and type of aircraft leased) went beyond reasonable mitigation and should not be recoverable. It also argued that Thai Airways’ damages should be reduced to take account of:

  • The profit that it made from the operation of the replacement aircraft; and 
  • The fact that the alternative seats that it purchased were lighter than Koito’s, which would save fuel over the duration of their use.

The Commercial Court found that the steps that Thai Airways took to mitigate its losses were reasonable. But it had to give credit for any profit or other monetary benefit which it had received (or would receive) as a result of those steps. This included both the profit made from the replacement aircraft and also the fuel saved by installing lighter seats. 

However, the burden of proof was on Koito to prove that Thai Airways had derived any benefit. Koito failed to establish that the benefits received were sufficient to offset the exceeded costs of the leasing arrangement. 

Practice points from these decisions

  • The benefits of action taken to mitigate losses must be taken into account as long as they resulted from a defendant’s breach and in the ordinary course of business.
  • Although businesses are not expected to take risks or damage their reputation by mitigating their losses, they will be expected to take steps quickly to reduce the damage already caused. Such steps could involve, as was the case in Thai Airways, replacing goods as soon as possible.
  • In some cases, it may be reasonable to source replacement goods or services that are superior to those originally intended. But if the superior performance of those goods service results in a monetary benefit to the claimant, that benefit will be taken into account in assessing the claimant’s damages.