From Philadelphia To The Moon!

A decision which has always interested me is that of the House of Lords in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673. More than 100 years after it was decided, the case continues to generate academic articles and new decisions.

British Westinghouse also provides an excuse to tell the story of American rail tycoon Charles Tyson Yerkes, of which the case forms part - a story which began in Philadelphia in the 1860s and ended on the moon in the 1950s. While hardly essential to an understanding of the case, Yerkes' story is interesting in its own right, and so I have said something about him below.

The concept of mitigation

A claimant is entitled, so far as money can do it, to be placed in the position it would have been in if the contract had been performed. The difference between the position the claimant is in, and the position the claimant would have been in if the contract had been performed, is the claimant's loss.

But once a breach has occurred action (or inaction) on the part of the claimant may have the effect of preventing (or failing to prevent) losses which the claimant would otherwise have suffered.

The concept of mitigation is often said to comprise three 'rules', described in McGregor on Damages 19th Ed. (2014) as follows:

"(1) The first and most important rule is that the claimant must take all reasonable steps to mitigate the loss to him consequent upon the defendant's wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable action or inaction, to avoid. Put shortly, the claimant cannot recover for avoidable loss.

(2) The second rule is the corollary of the first and is that, where the claimant does take reasonable steps to mitigate the loss to him consequent upon the defendant's wrong, he can recover for loss incurred in so doing; this is so even though the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. Put shortly, the claimant can recover for loss incurred in reasonable attempts to avoid loss.

(3) The third rule is that, where the claimant does take steps to mitigate the loss to him consequent upon the defendant's wrong and these steps are successful, the defendant is entitled to the benefit accruing from the claimant's action and is liable only for the loss as lessened; this is so even though the claimant would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mitigating steps, by reason of these steps not being ones which were required of him under the first rule. ... Put shortly, the claimant cannot recover for avoided loss."

A recent article (A Dyson and A Kramer, "There is No 'Breach Date Rule'" (2014) 130 LQR 259, 263) suggests that the concept of mitigation can be expressed much more simply:

"Mitigation is often said to comprise three rules, but it is better expressed using just one: damages are assessed as if the claimant acted reasonably, if in fact it did not act reasonably."

The standard of reasonableness is not particularly exacting. In Banco de Portugal v Waterlow [1932] AC 452) Lord MacMillan said that the steps a claimant must take "ought not to be weighed in nice scales at the instance of the party who ... has occasioned the difficulty". The claimant "will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken". There is authority that a claimant need not prejudice his commercial reputation, need not act so as to injure innocent parties, need not sacrifice rights or property of his own, and need not take the risk of starting litigation against a third party.

It is convenient to speak of the claimant as having been under a 'duty' (or 'bound' or 'required') to do the reasonable thing and that terminology is used in this article and in many of the judgments to which it refers. But there is no duty in any strong sense of the word. The claimant has no liability to any other party if they fail to do that thing. We mean only that, if they fail to do that thing, their losses fall to be assessed as if they had done that thing.

The doctrine of mitigation might be appear to be an application of the doctrine of causation or remoteness:

(a) The claimant's unreasonable behaviour is like a new intervening act, which breaks the chain of causation between the breach and the loss. The law treats the loss as caused by the unreasonable behaviour, and not by the original breach.

(b) A defendant is only liable for loss which was foreseeable to any reasonable person in the defendant's position; or the likelihood of which was clear to the defendant in the particular circumstances of the case. A defendant might say it is likely that a claimant will act reasonably to avoid loss, and is entitled to assume that they will do so.

But mitigation, causation and remoteness are not quite the same. There are cases where reasonable actions by claimants have been held to sever the causal link. The Elena D'Amico [1980] 1 Lloyd's Rep 75 is an example - a chartered vessel became unavailable. The charterers decided not to charter a replacement, and this was held to have been commercially reasonable, even though it led to the loss of a lucrative market. Even if not a failure to mitigate, the loss was not caused by the breach.

McGregor's third rule (the authority for which is, supposedly, the British Westinghouse case) has been the subject of some criticism. Suppose a claimant does not do what is reasonably required. Suppose that, instead, they either do less, or go beyond what is reasonably required. According to McGregor's third rule:

(a) if an extra loss results, then the claimant must bear that loss; but

(b) if an extra benefit results, then the claimant must give credit for the benefit, and the defendant's liability is reduced commensurately.

This seems asymmetric - if the claimant goes beyond what is reasonably required, they take all the risk, and the defendant will enjoy any reward.

This article considers whether British Westinghouse really supports McGregor's third rule, and looks at how judges have dealt with British Westinghouse in some later cases.

Charles Tyson Yerkes

Yerkes (which rhymes with "turkeys") was born in Philadelphia in 1837. He made, and lost, one fortune in Philadelphia in the 1860s, where he rose from clerk in a grain brokerage to become the banker and stockbroker to the city's treasury, risking public money in huge stock speculations. In 1871 the Great Chicago Fire triggered plummeting stock prices, leaving Yerkes insolvent and owing colossal sums to the City of Philadelphia. Sentenced to 33 months in prison, he publically denounced two local politicians whom he said had collaborated in his unlawful speculations with public money. Concerned at the ramifications for his election campaign, President Ulysses S. Grant granted Yerkes a pardon in exchange for Yerkes withdrawing his allegations against Grant's supporters.

Yerkes then headed for Chicago. The city whose conflagration had lost Yerkes his first fortune soon made him a second as he mounted takeovers of the various companies which ran Chicago's rail and tram services, and bribed and blackmailed politicians in an attempt to try and secure a monopoly. Though a monopoly eluded him, he soon controlled nearly all the city's streetcar lines and buses. During this period he was approached by various astronomers from the University of Chicago. Despite Yerkes having no interest whatever in astronomy, they succeeded in persuading him to donate $300,000 to pay for a new observatory to be named in his honour, probably in the hope that this would improve his terrible public image.

By the late 1890s, however, Yerkes had grown sick of Chicago, and the people of Chicago had apparently grown sick of him too. A narrow majority of a reformed city council refused Yerkes' bribes, and voted against the extension of his companies' franchises. Yerkes sold almost all his stock in those businesses, and turned his eye to London.

In 1900, Yerkes established "The Underground Electric Railways Company of London" ("UERL"). As this was something of a mouthful, the company, and the railways it operated, quickly came to be known simply as "the Underground". At the time, there were various companies which were licensed to operate underground rail lines in London, and UERL set about acquiring these. In 1901 UERL succeeding in acquiring the Metropolitan District Railway Company. That company operated the lines which later became the modern London Underground network's District, Circle, Hammersmith and City and Metropolitan lines. At the time, those lines used steam locomotives.

Through the sale of what were (for the time) novel financial instruments, UERL obtained finance for a huge project to electrify the lines it had bought, buy new rolling stock and to build the biggest power station on earth in order to supply the electricity required.

Permission was given to build that power station at a site in Chelsea at Lots Road by the Thames River. In 1902 UERL contracted to buy eight steam turbines and turbo alternators for the Lots Road power station from British Westinghouse for £250,000. British Westinghouse was the Manchester-based subsidiary of Pittsburgh's Westinghouse Electric and Manufacturing Company. Work on construction of the power station began that same year.

The Lots Road power station opened in 1905, but Yerkes himself died soon afterwards. Having led a highly leveraged life, he died with debts in excess of $21 million. Once these were paid off, his remaining estate proved to be worth considerably less than $1 million.

The dispute between UERL and British Westinghouse

The turbines and alternators which British Westinghouse had installed at Lots...