Introduction

The principle that a claimant must mitigate the loss that flows from respondent’s breach is widely recognized in both civil and common law jurisdictions, as well as in international arbitration. Whether the duty is framed as a discrete doctrine – as it is in most common law jurisdictions – or as a type of contributory negligence – as it is usually accepted in civil law jurisdictions – the general principle remains the same: a claimant must take reasonable actions (or refrain from taking actions) in order to avoid increasing the loss that it is already suffering.

A common scenario is where a respondent has a contractual duty to purchase goods but fails to do so. Claimant then sells the goods to a third party at market value. In this scenario, the claimant can be said to have mitigated its loss and can pursue an action against the respondent for the shortfall between the price agreed in the contract and the price at which the goods were ultimately sold to the third party.

The principle of mitigation of damages is enshrined in the United States Convention on Contracts for the International Sale of Goods (CISG). Article 75 of the CISG provides a right of recovery for a price difference claim, as in the scenario above. Article 77 also imposes an obligation to take such measures which are reasonable in the circumstances to mitigate loss.

The general principle: a reasonable duty of care

The recent arbitral decisions discussed herein demonstrate that tribunals are willing to accept claimant’s mitigation provided the act or omission taken to mitigate the loss passes a commercial sense standard of reasonableness. The precise standard of reasonableness will depend on the applicable law, but the underlying rationale for this relatively low threshold is that tribunals are hesitant to hold the claimant to a high standard of conduct when the claimant has been placed in the position as a result of respondent’s breach. Accordingly, the duty to mitigate does not require the claimant to pursue the highest possible price in the context of a sale to a third party. Rather, the claimant’s duty is to obtain a fair price for the goods in light of the market conditions at the time.

The standard of reasonableness is important because it allows the claimant some flexibility in discharging its duty to mitigate. For example, if the claimant receives two third-party offers to purchase goods that were the subject of the avoided contract with the respondent, the claimant may be entitled to take the lower offer if the claimant can prove that it made commercial sense to do so. Risks of non-payment or reputational damages are examples of factors that can be considered when assessing the commercial sensibility of an offer. In ICC Case 18625/FA, for instance, the arbitral tribunal held that claimants’ decision to withhold a cargo until it found a suitable third-party purchase was reasonable under the particular factual matrix of this case.

However, there are instances where a claimant takes some action in purported mitigation but the act will nevertheless be held to be inadequate, as in the case in ICC Case 17475 where claimant took action to mitigate damages in a belated way. In this situation, the claimant will have failed to discharge its duty. For example, absent evidence of a compelling commercial justification, a claimant who accepts a ‘below market’ offer when an ‘at market’ offer was also made will likely be found to have failed to mitigate its loss and will not be able to recover the difference between the two offers.

The timing of claimant’s action as an exception to reasonableness

Another element that arbitral tribunals will take into account is timing. Delay also amounts to a failure to mitigate. If the claimant waits an inordinate amount of time, or only solicits offers from one customer when its usual business practice is to solicit more, then the respondent may be able to prove that the claimant has failed to mitigate the loss. In ICC Case 17475/FA, for instance, the claimant’s delay in taking action after the respondent’s initial breach but before the respondent’s repudiation was held to be unreasonable in the circumstances.

Recoverable costs and limited liability clauses

In addition to claiming the difference between the amount recoverable under the contract less the amount received as a result of mitigation (a price difference claim), the claimant is also entitled to recover for any costs incurred in the course of mitigating the loss. Advertising costs to find an alternative buyer is a simple example. However, if there is express limitation of liability under the contract, as it was the case in ICC Case 16710, the claimant should properly characterise the damages. If the contract limits recovery for consequential loss, the claimant cannot seek to claim an amount as a mitigation cost if it is truly a consequential loss.

Selection of ICC recent awards

In Case 16070, the claimant failed to mitigate its losses by rejecting an offer by the respondent following the respondent’s breach (what the arbitral tribunal called ‘an unreasonable inaction’). The respondent breached the original contract by failing to provide a vessel to take delivery of the product. The respondent then offered by way of mitigation to buy the product at a lower price than the original sale price. The claimant rejected that offer and instead sold the cargo to a third party at a price lower that the respondent’s new offer.

Given the claimant did not have any better offers at the time, the tribunal held it was unreasonable for the claimant to reject the respondent’s offer to mitigate. This was so in light of the fact that the claimant knew that the market price for the goods was falling rapidly with no end in sight. The claimant was therefore awarded damages under CISG Article 75 but this amount was reduced under CISG Article 77 to account for the claimant’s failure to mitigate. The arbitral tribunal interestingly referred to the analysis in the Singaporean Asia Star case which stated the following:

[T]he test for mitigation would apply less strongly in a case where the aggrieved party rejected a reasonable opportunity to reduce its own loss. In other words, while it may be a general principle of the law on mitigation that the court will not nicely weigh on sensitive scales the measures taken by an aggrieved party to mitigate its loss, this principle will ordinarily apply more strongly in cases where the question before the court is whether the aggrieved party engaged in unreasonable action as opposed to unreasonable inaction.

In an unpublished award, the parties established a joint venture company for which they were required to satisfy contribution requirements. In order to do so, the claimant obtained a cash bond in the relevant currency. The respondents failed to comply with their contribution requirements. The tribunal awarded damages to the claimant for expenses relating to the foreign exchange loss that was incurred by the claimant upon liquidating the cash bond and exchanging the funds back into the original currency.

The respondents alleged contributory negligence on the part of the claimant for (i) failing to hedge against the foreign exchange loss, (ii) failing to invest the cash bond, or (iii) converting the bond back to the original currency instead of waiting for foreign exchange rates to improve. The tribunal held that the claimant’s decision to convert the funds from the relevant currency back into the original currency was reasonable because the original currency was predicted to strengthen against the relevant currency. This so called ‘stop-loss decision’ was taken to address the claimant’s reasonable concern to not incur further losses due to the continuing depreciation of the relevant currency, and as such was deemed by the tribunal to be a commercially reasonable decision.

Case 16710 deals with a sales contract governed by ‘the Laws of USA applicable to the issues not governed by the CISG and Uniform Customs and Practice for Documentary Credits (UCP)’. In this case, the claimant was obliged to manufacture, deliver and set up a specifically designed production line for respondent. The sales contract contained a limitation of liability clause which read the following:

‘Notwithstanding any other provision of the Contract’, [claimant] shall not be liable for such losses as ‘increased expense of operation … loss of use of capital or revenue ... or for any special, incidental or consequential loss or damage.

The respondent stopped paying the monthly invoices and the claimant sought, inter alia, recovery for the unpaid balance. The respondent submitted a counterclaim alleging non-conformity and a fundamental breach by the claimant. The respondent’s damage claim included mitigation costs such as the additional production costs incurred to make products on another production line. The sole arbitrator found that the respondent was not entitled to recover the mitigation costs due to the limitation of liability as the mitigation costs were either increased expenses of operation, loss of revenue, incidental losses, or consequential losses.

The conclusion to be drawn in light of the above decisions is that claimants should first and foremost be made aware of their duty to mitigate, and that this duty will often entail some form of positive action. While meeting the duty’s commercial sense standard of reasonableness is achievable, the act in mitigation must be taken in a timely manner if it is to be considered reasonable.

Case 17475 demonstrates a nuanced application of the duty to mitigate loss. The claimant entered into a turnkey contract of sale and delivery of certain infrastructure with a state entity. Following a series of breaches amounting to repudiation of the contract by the respondent, the claimant cancelled the contract. The tribunal held that it was not reasonable for the claimant to continue to incur costs for the entire period between the initial breach and the date of repudiation and that instead it should have taken measures to reduce those costs at an earlier stage. The tribunal held that the claimant, upon realising that the project was not suffering a minor delay and was instead ‘on hold’, should have started taking measures to minimise its losses. The tribunal stated as follows:

Claimant is therefore wrong in asserting that it would have been in ‘unlawful breach of the contract and rendered itself liable to cancellation by the respondent’ if it had ceased its activities prior to cancellation of the Contract. It appears, rather, that it could have ceased its activities as long as it believed the project to be on hold, and resumed them if Respondent had in the end decided to perform its contractual obligations. In that scenario, Respondent would clearly have had to bear the consequences of any delays caused by its own late performance.

The tribunal considered that a suspension of activities during a period of two months after that realisation was reasonable in the circumstances. Accordingly, to the extent that the claimant continued to accumulate costs after the suspension period, the claimant failed to mitigate its loss. The tribunal’s finding of a failure to mitigate affected several heads of damage. For example, the claimant’s claim for employee costs was reduced to those employee costs incurred up to the end of the winding-down period (with an additional one month allowance to comply with the applicable minimum severance period).

On its part, Case 17730 discusses the interplay between a respondent’s anticipatory breach and a claimant’s duty to mitigate. The sales contract was governed by the laws of the State of California, and the sole arbitrator also applied the Uniform Commercial Code. The sole arbitrator found that respondent’s repudiation crystallised at a meeting where it informed claimant that it intended to purchase the product from other sources (at a lower price) notwithstanding the sales contract. The claimant elected to treat this repudiation as an anticipatory breach and mitigated its damages by selling the product to a third party. The sole arbitrator held that it did not matter that the sale to the third party occurred before the expiration of the original contract’s term; once the respondent repudiated the original contract and the claimant elected to treat this repudiation as an anticipatory breach, the claimant was entitled to seek damages immediately. The claimant’s duty to mitigate accompanied this right to seek damages immediately.

Lastly, Case 18625 shows the standard of reasonableness applied when assessing the timing of a claimant’s actions in mitigation. The sole arbitrator decided this case based on Singaporean Law and established the existence of the duty to mitigate in the Singapore Court of Appeals decision Asia Star. In the case at hand, the respondent failed to collect a portion of cargo, and the claimant resold this portion to a third-party purchaser one month later. The respondent challenged the timing of the resale and argued that the claimant should have resold the cargo either earlier or later than it did in order to achieve a higher price. Indeed, a few months after the sale, the international prices of the cargo increased considerably.

The sole arbitrator emphasised that the reasonableness inquiry depends greatly on the particular factual matrix of the case, and for this reason past cases are of limited guidance. The sole arbitrator found that the claimant’s act of reselling the cargo the month following the expiry of the final deadline by which the respondent ought to have purchased the goods was reasonable.

Importantly, the sole arbitrator held that the respondent had failed to establish that the claimant should have predicted that the price would increase at a point in the future. The claimant had therefore adequately discharged its duty to mitigate loss.