Mitigation of Loss in Contractual and Intellectual Property Claims

Procedure

After determination of liability in a contract claim, legal proceedings move on to the quantum of damages that will be ordered to be paid to the successful claimant. Firstly, the sum of compensation to be paid to the claimant is limited to the loss suffered by the claimant, as far as money can do it. A claimant also has a duty to mitigate their loss. This is about reducing damage suffered that should have been avoided by the claimant. Losses that are not mitigated do not have to be paid by the defendant, thus reducing the sum to be paid by a defendant.

After determination of liability in a contract claim, legal proceedings move on to the quantum of damages that will be ordered to be paid to the successful claimant. Firstly, the sum of compensation to be paid to the claimant is limited to the loss suffered by the claimant, as far as money can do it. A claimant also has a duty to mitigate their loss. This is about reducing damage suffered that should have been avoided by the claimant. Losses that are not mitigated do not have to be paid by the defendant, thus reducing the sum to be paid by a defendant.

Mitigation of Damage

Mitigation of damage arises in a number of contexts. Claimants to legal proceedings have a positive duty to avoid suffering loss when a legal wrong has been suffered by them. The duty to mitigate encompasses a powerful set of legal principles that entitle a defendant to argue that they are obliged to pay lesser sums in a claim for damages.

What should or should not have been mitigated by reasonable action in a particular case is a question relying on the facts of the case. Whether the law imposes upon the claimant the obligation to mitigate on those facts in the first place, that is, has the duty arisen, is a question of law.

The measure of compensation that a claimant is entitled to recover is the loss naturally flowing from the legal wrong. This measure of damage is offset by a duty to mitigate – or minimise – losses suffered by them by taking reasonable steps to mitigate the loss consequent on the breach.

Simply because a defendant breaches a contract or (say) infringed copyright does not mean that a claimant is entitled to recover endless damages or compensation for the defendant's misconduct. Unsuccessful litigants are not required to compensate a successful claimant where the claimant has sat back and allowed damages to accumulate or to pay sums that are too remote in law to recover.

For instance, a supplier of goods or services fails to deliver, the buyer is not entitled to sit back on a rising market or wait until a contract for onward supply has fallen, and then claim the loss from the defendant. They must approach the market with reasonable speed and buy equivalent goods or services.

Reasonable Steps to Avoid Loss

Claimants are not entitled to recover those damages represented by sums that are avoidable by taking reasonable steps. If the claimant has failed to take reasonable steps to avoid particular losses, the claimant is not entitled in law to recover them, as they are not entitled to profit from their own neglect. This neglect may take of the form of either failing to take action reasonable steps or allowing an act to continue that would have increases loss.

A claimant is not entitled to recover sums or for actions taken that were unreasonably spent or steps that were unreasonably taken. The claimant will only be entitled to recover those expenses that were reasonably incurred.

Where a claimant takes measures to mitigate loss, the defendant is entitled to the benefit of those steps, such that the defendant is required to pay the reduced measures of damages resulting from the steps made in mitigation. In this way, the claimant must hand over the benefit of the steps made in mitigation to the defendant. This applies even if the claimant would have been entitled to recover the losses if the particular steps made in mitigation had not been made.

What is Reasonable?

The claimant is not required to nurse the interests of the defendant as if they were his own. A claimant does not need to act with perfect knowledge or an ideal wisdom, however the law will protect against wanton, needless or careless conduct.

The same test applies to the duty to mitigate regardless of whether it is an infringement of intellectual property rights, a contract claim, or the more serious claims such as fraudulent misrepresentation. The parties must act reasonably between themselves having regard for the turn of events between them. The claimant is not required to take unusual steps outside the outside the ordinary course of business; indeed if they do so, they will not be entitled to recover the sums expended.

The following guidance may be useful to determining when the claimant has a duty to mitigate:

1. The time that the claimant came into the knowledge that a breach had taken place may be relevant to determining when it would be reasonable for them to take action to mitigate loss;
2. where damage may be caused in the natural course of events to the claimant’s property, they may be required make their own repairs (or incur expense in doing so) rather than allowing their damage to exacerbate by not acting;
3. Allowing time to pass to acquire alternate goods or services in order to deliver on a contract, a claim that the claimant has failed to mitigate is more likely to be successful;
4. Where there are avenues available to safeguard an interest, such as registering a registered interest in property on a relevant public register and the claimant has not done so, is it likely that a claimant has failed to mitigate;
5. Where sale of property may be made to minimise loss in a buoyant market and is not made, there may have been a failure to mitigate;
6. Where a claimant exercises a right to terminate a contract on the basis of late delivery may be relevant to mitigation in a rising market and they refuse to accept an offer less than what a purchaser in the rising market may be prepared to pay; and
7. In some cases, it may be unreasonable for an injured party to consider an offer from the party in breach in mitigation; in commercial contracts (rather than those of personal service) this will ordinary not be the case.

On the other hand, the claimant may not be required to mitigate:

1. When the claimant does not need to undertake undue risk in expending resources to mitigate loss;
2. Commencing action against another defendant, where a cause of action lies against other parties who are liable to them, where a case with reasonable prospects of success cannot be shown;
3. in circumstances that would require the inured party to surrender, dispose of or destroy their own property rights to mitigate the loss of defendant;
4. a claimant will not be required to act against the interests of innocent parties to reduce recoverable loss;
5. the claimant is not required to sacrifice their commercial reputation in order to avoid losses suffered by a breach of contract;
6. to allocate resources, including personnel and finances that they do not have to take steps to mitigate their loss. Note that this would need to be proved with sworn evidence.

Recovering Sums spent in Mitigation

When a claimant does take steps to mitigate their loss, the loss that they suffer as a result of taking those steps is in broad principle recoverable from the defendant. This remains the case if the steps taken incur greater expense or loss than would have been incurred if these actions had not been taken.

Instances of where this has been the case are:

1. Where substitute goods or services are required to replace damaged, destroyed or undelivered goods;
2. Expenditure on advertisements where trade mark infringement has taken place;
3. Incurring expenses to conduct enquiries where unlawful conduct has taken place, in the appropriate circumstances, even though the enquiries may have exacerbated damage, provided that there was no ulterior motive.

Although such actions may increase or aggravate damage suffered, the increased damage is recoverable as well as the incurred expense, provided that the steps are taken to safeguard the claimants interests.

There is a caveat to recover of sums spent in mitigation over and above what the law considers reasonable. If the claimant goes further than what the law requires, the defendant will be entitled to the reduction of damage. The claimant must be aware of the limits of what may be reasonably done in the circumstances to reduce their loss, and then realise they are not required to go further. That limit is where the expense in mitigation is not one arising out of the consequences of the breach, and not in the ordinary course of business.

Conclusion

Although many claimants may have strong claims on liability for infringement of copyright, patents and other intellectual property rights, mitigation is a sword in the hands of the defendant to reduce loss suffered: if the claimant does not discharge it duty to mitigate, they are not entitled to recover that loss, thus reducing the sum to be paid by the defendant.