III. Facts

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K. Sale to [third party]

  1. … [X] contracted with [Claimant] for the purchase of [amount] of [product], at a price of ... (the "Original [third party] Contract"). [A director of Claimant] indicated in her witness statement that [X] is the exclusive broker for [third party].
  2. [A director of Claimant] explained in his testimony that the unit price … under the Original [third party] Contract included the cost of packing the product in cellophane bags with a [third party] label … and the product loss resulting from the bagging process ... These costs would not be incurred in shipping the product to [Respondent 2], as the product was simply shipped in bulk boxes.
  3. … [Claimant] and [X] amended the Original [third party] Contract by increasing the volume of committed product … (the Original [third party] Contract, as modified … is the "Amended [third party] Contract").

  1. [Claimant] and [X] further amended the Amended [third party] Contract by increasing the volume of committed product … while the price and contract term remained unchanged (the Amended [third party] Contract … is the "Final [third party] Contract").

  1. [A director of Claimant] stated in her witness statement:

Faced with [Respondent 2]’s refusal to honor its obligations under the [Disputed Contract] and in an effort to mitigate [Claimant]’ss losses and/or damages following our … meeting with [Respondent 2’s manager], the decision was made to allocate the entire batch of [prior year’s production] previously sold to and reserved for [Respondent 2] pursuant to the [Disputed Contract] to [third party] pursuant to the Final [third party] Contract, but at a significant loss due to the fact that [the product]’s prices had decreased substantially since [Claimant] and [Respondent 2] initially entered into their [Disputed Contract] ...

  1. In her testimony, [a director of Claimant] confirmed that the entire volume that [Claimant] was "holding" for [Respondent 2] was shipped to [a third party], and that the balance of the volume required under the Final [third party] Contract came from the [production of year Y]. [A director of Claimant] further explained that if [Respondent 2] had subsequently decided to commence shipments under the Disputed Contract, [Claimant] could have covered [Respondent 2]'s needs with the [production of year Y].

L. Alternatives to the Final [third party] Contract

  1. With respect to the existence of other opportunities to sell the volume contemplated in the Disputed Contract, [a director of Claimant] stated:

The spot market, it doesn't exist at that time of year for the prior year's [production]. So, actually we were very fortunate to have that opportunity with [third party] because there are [sic] not that type of buyers looking for that type of volume at that time of year."

  1. Similarly, [Claimant]'s expert witness … opined in his Expert Report:

... [Claimant] was justified in seeking a new buyer for the [prior year’s production] contracted for by [Respondent 2] pursuant to the [Disputed Contract], reselling the [prior year’s production] to [third party] in [year Y], and allocating the [prior year’s production] contracted for by [Respondent 2] against the [prior year’s production] volume contemplated by the Final [third party] Contract. By waiting even a few additional weeks, let alone months, [Claimant] would have been hard-pressed and fortunate to sell the [prior year’s production] for anything close to … assuming, of course, that the [prior year’s production] could be sold at all without the benefit of the Final [third party] Contract. This is particularly true in light of the oversupply of [production of year Y].... Indeed, absent the Final [third party] Contract, the most likely scenario is that the [prior year’s production] would have been sold on a spot basis at a significantly lower price.

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IV. Issues

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G. Did Respondent(s) Breach the Disputed Contract?

  1. Having found that the Disputed Contract is binding on [Respondent 2], I now consider whether [Respondent 2] breached it.

1. Parties' Positions

  1. Claimant submits that [Respondent 2] repudiated the Disputed Contract ... when [Respondent 2’s manager] informed [Claimant’s directors] that [Respondent 2] had purchased [the product] from other suppliers. Respondents acknowledge [Respondent 2]'s failure to book any shipments under the Disputed Contract, but submit that this was simply the result of the parties' failure to create a binding agreement in the first place.

2. Discussion

  1. Section 1440 of the Civil Code states:

If a party to an obligation gives notice to another, before the latter is in default, that he will not perform the same upon his part, and does not retract such notice before the time at which performance upon his part is due, such other party is entitled to enforce the obligation without previously performing or offering to perform any conditions upon his part in favor of the former party.

  1. The following excerpts from two California court decisions further clarify this doctrine:

An anticipatory breach of contract occurs on the part of one of the parties to the instrument when he positively repudiates the contract by acts or statements indicating that he will not or cannot substantially perform essential terms thereof

In the event the promisor repudiates the contract before the time for his or her performance has arrived, the plaintiff has an election of remedies-he or she may 'treat the repudiation as an anticipatory breach and immediately seek damages for breach of contract, thereby terminating the contractual relation between the parties, or he [or she] can treat the repudiation as an empty threat, wait until the time for performance arrives and exercise his [or her] remedies for actual breach if a breach does in fact occur at such time.'

  1. In light of these principles, I agree with Claimant that [Respondent 2] repudiated the Disputed Contact. Through repeated acts and statements, [Respondent 2] made clear its intention not to perform its obligations under the Disputed Contract. Although the precise point of repudiation is debatable, I find that [Respondent 2]'s repudiation crystallized, at the latest by [date of the meeting between Claimant’s directors and Respondent 2’s manager].
  2. The uncontradicted evidence of [a director of Claimant] is that at [this meeting], [Respondent 2’s manager] informed [Claimant’s directors] that “[Respondent 2] had elected to purchase products from other sources despite the fact that there was then a substantial volume balance remaining on the [Disputed Contract]”. This statement is corroborated by [a director of Claimant]'s letter... I note that in his response … to this letter, [Respondent 2’s manager] took no issue with [a director of Claimant]'s description of the meeting… [A director of Claimant] further explained that [Respondent 2’s manager] had cited the desire to save money as [Respondent 2]'s motivation in purchasing from other suppliers the volume that was outstanding under the Disputed Contract.
  3. Even prior to [the meeting], [Respondent 2]'s conduct strongly suggested an intention not to perform under the Disputed Contract. [A director of Claimant] gave evidence that at [a previous meeting], [Respondent 2’s manager] represented to her that “[Respondent 2] planned to take advantage of the incentive rebate program offered by [Claimant] and receive shipment of the full remaining balance of the [Disputed Contract] …” [A director of Claimant] memorialized this representation in her email … to [Respondent 2’s manager] and followed up with [Respondent 2’s manager] on this point repeatedly thereafter. However, [Respondent 2] never honoured this representation… [Respondent 2’s manager] cited an unfavourable exchange rate as the reason for this failure.
  4. In light of this conduct, I conclude that [Respondent 2] repudiated the Disputed Contract by [date of the meeting] at the latest. Furthermore, I find that [Claimant] elected to treat this repudiation as an anticipatory breach. This is evidenced by [a director of Claimant]'s witness statement, in which she explained that following [Respondent 2]'s repudiation at [the meeting], [Claimant’s directors] “informed [Respondent 2’s manager] that under the circumstances, [Claimant] had no choice but to attempt to mitigate its damages by finding another buyer for those [prior year’s products] contemplated by the [Disputed Contract]”.This election is further evidenced by [Claimant]'s subsequent conduct with respect to mitigation of damages, which I now consider.

H. Did Claimant Mitigate its Damages?

  1. In order to determine the quantum of Claimant's damages caused by [Respondent 2]'s breach, I must consider whether Claimant reasonably mitigated its damages.

1. Parties' Positions

  1. Claimant submits that [Claimant] shipped the [product] that it had set aside for [Respondent 2] under the Disputed Contract to [third party] in order to mitigate the damages suffered in connection with [Respondent 2]’s breach. Claimant submits that [Claimant] was justified and acted in a reasonable commercial manner in doing so.
  2. Respondents submit that the sale to [third party] was at less than fair market price, although they point to no evidence in support of this submission. Respondents further submit that there is no evidence "on how the individual units of [product] were segregated from the fungible heap of [product] held by [Claimant] for the purposes of sale to [Respondent 2] before they were sold to [third party]." Finally, Respondents highlight the fact that the sale to [third party] occurred approximately two months prior to the end of the term of the Disputed Contract.

2. Discussion

  1. The Second District Court of Appeal, Division 4, of California summarizes the key elements of the doctrine of mitigation as follows:

A plaintiff cannot be compensated for damages which he could have avoided by reasonable effort or expenditure... [However,] [t]he doctrine does not require the injured party to take measures which are unreasonable or impractical or which would involve expenditures disproportionate to the loss sought to be avoided or which may be beyond his financial means... The standard by which the reasonableness of the injured party's efforts is to be measured is not as high as the standard required in other areas of law. It is sufficient if he acts reasonably and with due diligence, in good faith.

  1. I further note, that under California law, the defendant (and in this arbitration the Respondents) bears the burden of pleading and proving a defence based on the avoidable consequences doctrine.
  2. [A director of Claimant] testified that the entire volume of [product] that [Claimant] was holding for [Respondent 2] was shipped to [third party] under the Final [third party] Contract, which [Claimant] executed [two days prior to the meeting]. I have no reason not to accept [a director of Claimant]'s testimony. This addresses Respondents' submission that there is no evidence that the specific [product] intended for [Respondent 2] were eventually sold to [third party].
  3. Furthermore, [a director of Claimant] testified that no viable alternative to the Final [third party] Contract existed at the time, given that the [production of year Y] was to become available very shortly. This statement was corroborated by [Claimant]' s expert witness, who opined that, had [Claimant] not entered into the Final [third party] Contract, the [product] that [Claimant] was holding for [Respondent 2] would likely have been sold at a significantly lower price. Once again, I have seen nothing to contradict [a director of Claimant] 's and [Claimant's expert]'s evidence on this point, and Respondents have not produced any evidence to support their assertion that the price under the Final [third party] Contract was lower than fair market value.
  4. Finally, I address the timing of [Claimant]'s alleged mitigation. Given my conclusion regarding [Respondent 2]'s repudiation of the Disputed Contract, I find Respondents' concern with the timing of the sale to [third party] relative to the expiration date of the Disputed Contract to be unfounded. As outlined above, once [Respondent 2] repudiated the Disputed Contract, and [Claimant] elected to treat this repudiation as anticipatory breach, [Claimant] was entitled immediately to seek damages for this breach. [Claimant] was under no obligation to wait to do so until after the term of the Disputed Contract expired... [Claimant]'s duty to mitigate its losses accompanied this right to seek damages for breach, and therefore arose well before [this date].
  5. Similarly, I am not concerned by the fact that [Claimant] executed the Final [third party] Contract two days prior to the meeting where the repudiation of the Disputed Contract most clearly crystallized. [A director of Claimant] indicated in her witness statement that the decision to allocate to [third party] the [prior year’s production] originally reserved for [Respondent 2] was made “following" [the meeting], when [Claimant] was "[f]aced with [Respondent 2]'s refusal to honor its obligations under the [Disputed Contract]”. She further explained in her testimony that [Claimant] would have been able to supply the full volumes under both the Disputed Contract and the Final [third party] Contract by drawing on the [production of year Y] together with the remainder of the [prior year’s production]. In light of this, I find that [Claimant]' s mitigation occurred not at the time of execution of the Final [third party] Contract, but rather at the time of shipping under that contract, when [Claimant] made the decision to ship [prior year’s production] volumes, rather than [production of year Y] volumes.
  6. On this basis, I find that [Claimant] effectively mitigated its losses subsequent to [Respondent 2]'s anticipatory breach of the Disputed Contract In conclusion then, I find that Respondents have failed to establish that Claimant was not reasonable in mitigating its damages.