Mitigation following a breach of contract – how far does the duty extend?
The rout in commodity prices continues to impact nations and stocks across the globe. Already this year the price of oil has dipped below US$30 a barrel, with a seemingly unrelenting oversupply of crude and markets preparing for the return of Iran post-sanctions. Sadly, falling prices often result in contract re-negotiations or default, leading to claims and innocent parties with goods on their hands and a difficult search for a willing buyer prepared to pay a reasonable price.
Following a breach of contract, the innocent party has a duty to mitigate the loss it has suffered. However, failure to mitigate loss may prevent that party from recovering damages for avoidable loss. A standard defence which the defaulting party often invokes to reduce the damages payable is that the innocent party has failed to act reasonably to mitigate its loss. The burden of proving a failure to mitigate falls, however, on the defaulting party.
As one might imagine, the courts are generally sympathetic to efforts made by an innocent party seeking to deal with a breach of contract. The requirement to take 'reasonable steps' to mitigate loss is not a particularly high standard. This so-called ‘duty’ requires reasonable steps to be taken to limit the losses that are incurred (and also to avoid incurring unnecessary expenditure in seeking to remedy the breach). An innocent party need not, however, take unusual steps that would be outside the normal course of its business, or even incur undue costs. Reasonable costs of mitigation incurred by the innocent party will generally be recoverable from the defaulting party.
We are pleased to introduce our first blog post in banking and finance: a video interview with our blog editor for banking and finance, Edmund Parker, global co-head of Mayer Brown's derivatives and structured products practice.
The author and consulting editor of a number of Globe Law and Business titles on derivatives, Edmund offers an expert view on the evolution of credit derivatives.