The Mitigation Conundrum

The English court has recently clarified the principles of the duty to mitigate loss. The decision in Thai Airways International plc v KI Holdings Co Ltd [2015] EWHC 1250 (Comm) highlights why an innocent party should carefully consider their options when faced with another party's breach of contract.

What is the duty to mitigate?

In fact, it is not a duty at all as it is not enforceable by anyone. Rather, it is a restriction on the damages recoverable for breach of contract, which will be calculated as if the claimant had acted reasonably to minimise his loss. As a result, upon a breach of a contract, the innocent party suffering the breach must take all reasonable steps available to it to reduce or avoid any loss. A failure to do so may reduce the damages the innocent party is entitled to recover.

The facts

Thai contracted with Koito, a Japanese manufacturer, for the supply of aircraft seats. In breach of contract, some of the seats were delivered late and others were not delivered at all. Among other consequences of the breach, Thai was prevented from using five new aircraft for around 18 months until replacement seats were obtained. In order to mitigate its losses, Thai ordered new seats from two other suppliers; they cost more than Thai had agreed to pay for the Koito seats, but were lighter. Thai also leased several aircraft for a term of three years to replace those that could not be flown until the replacement seats were delivered and fitted. As it happened, the replacement seats were installed in the new aircraft during the first two years of the leases.

Thai sought to recover all the costs incurred in purchasing the alternative, more expensive, seats and leasing replacement aircraft. Koito argued that even though costs were incurred by Thai as a result of Koito's breaches of contract, Thai had also derived certain financial benefits from the mitigating actions taken which had to be accounted for when calculating damages. Thus, Koito claimed that Thai had to give credit for:

Any amount by which the profits achieved by Thai from operating the leased aircraft exceeded the estimated profit Thai would have achieved had the contract been performed and its new aircraft had entered service on time. Any gains from the fuel savings made over the lifetime of the replacement seats due to the fact that they were lighter than the seats Koito contracted to supply. Thai's position was that:

If and insofar as it earned any profits by leasing the...