What is mitigation of damages?
The doctrine of mitigation of damages, also known as the doctrine of avoidable consequences, prevents an injured party from recovering damages that could have been avoided through reasonable efforts. This duty to mitigate damages is most commonly applied in tort and contract law. In a breach of contract case, upon receiving notice that one party does not intend to perform, the other party must take reasonable actions to avoid further losses from the breach.
Mitigation of damages requires a party in a contract dispute to minimize damages caused by the other party’s breach. The principle discourages parties from allowing damage to increase without making any efforts to alleviate it. In contract law, this often involves making reasonable efforts to reduce losses resulting from the breach. For instance, if a contract is canceled, the injured party is expected to seek similar employment elsewhere to mitigate damages.
The rationale behind the duty to mitigate damages is to promote fairness and efficiency in contractual relationships. It prevents parties from passively suffering increased losses and then seeking full compensation from the breaching party. By requiring the injured party to take reasonable steps to reduce their damages, it encourages proactive behavior and minimizes unnecessary economic waste. This principle ensures that compensation is based on actual, unavoidable losses rather than avoidable ones, thereby promoting justice and discouraging opportunistic behavior in legal disputes.
Example: Employee was fired from job
If an employee is terminated from their job, they have a duty to mitigate damages by actively seeking new employment. For example, if an employee is let go, they should promptly start looking for a similar job in their field. If they find a comparable position and refuse it without a valid reason, they may not be able to recover the full amount of lost wages from their former employer. This demonstrates their obligation to take reasonable steps to minimize their financial losses after termination. Failure to mitigate damages in this context could lead to a significant reduction in the compensation they are entitled to receive.
Example: Breach of Service Contract by service provider
In a service contract for two years that is breached or terminated after one year, the service provider has a duty to mitigate damages. For instance, if a consultant is contracted to provide services for two years but the client terminates the contract after one year, the consultant must take reasonable steps to find similar consulting work for the remaining year. If the consultant can secure a similar contract or employment and chooses not to, they may not be able to claim the full amount of lost earnings from the breach. This illustrates their responsibility to minimize financial losses by seeking alternative opportunities. The failure to mitigate damages in such scenarios highlights the importance of proactive measures to limit financial harm.
Example: Breach of Service Contract by service buyer
Consider a contract where a graphic design firm agrees to provide a company with design services for one year, delivering monthly marketing materials. After six months, the design firm breaches the contract by ceasing to deliver the agreed-upon services. The company has a duty to mitigate damages by seeking another graphic design firm to continue providing the necessary services for the remaining six months. If the company finds another design firm capable of fulfilling the requirements at a similar cost but chooses not to hire them, the company may not be able to recover the full amount of damages from the original design firm. This example illustrates the company’s obligation to take reasonable steps to minimize their financial losses following the breach. Failure to mitigate damages in this instance underscores the need for diligent efforts to reduce losses. See definition of mitigation of damages.
Example: Buyers Breach of contract for sales of goods
In a contract for the sale of goods, consider a scenario where a supplier agrees to deliver 1,000 units of a product to a retailer over the course of one year. After six months, the supplier breaches the contract by failing to deliver the remaining 500 units. The retailer, to mitigate damages, should make reasonable efforts to find another supplier to obtain the remaining 500 units. If the retailer can secure the goods from another source at a similar price but chooses not to, they may not be able to recover the full amount of the loss from the original supplier. This example illustrates the retailer’s duty to mitigate damages by seeking alternative solutions to minimize financial loss. The failure to mitigate damages here demonstrates the critical role of timely and reasonable actions to prevent additional losses. See definition of duty to mitigate.
Example: Seller breach of contract for sales of goods
In a contract for the sale of goods, imagine a scenario where a manufacturer agrees to supply a retailer with 2,000 units of a product over a six-month period. After delivering 1,000 units, the manufacturer breaches the contract by failing to deliver the remaining 1,000 units. The retailer, in this case, has a duty to mitigate damages by seeking an alternative supplier to fulfill the remaining 1,000 units. If the retailer finds another supplier who can provide the goods at a reasonable price but decides not to purchase from them, the retailer may not be able to recover the full extent of the losses from the original manufacturer. This example demonstrates the retailer’s obligation to take reasonable steps to minimize their financial losses after the breach. Failure to mitigate damages in such cases highlights the necessity of proactive measures to reduce the impact of contractual breaches.
