Section 73. Compensation for loss or damage caused by breach of contract.
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.
When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation. —In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
Mitigation
The rule that the party in breach of contract be placed as far as money can do it, in as good a situation as if the contract had been performed, is qualified by one more principle:
Which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part which is due to his neglect to take such steps.[1]
It was said by Just. James in Dunkirk Colliery Co v. Lever[2],
“The person who has broken the contract is not to be exposed to the additional burden by reason of the plaintiffs’ not having done what they ought to have done as a reasonable man, and the plaintiffs not being under any obligation to do anything otherwise than in the ordinary course of business.”
The injured party has to make reasonable efforts to avoid the losses resulting from the breach so that his loss is kept to the minimum. The most frequent application of the breach of this rule takes place in contracts for sale or purchase of goods. The well-known authority for this proposition is the decision of the Privy Council in Jamal, A.K.A.S. v. Moola Dawood Sons & Co.[3] In this case, the plaintiff sold certain shares of the defendant to be delivered on or before 30th December 1911. The shares were tendered on 30th Dec., but the defendant declined to take the delivery or pay for them. The difference between the contract price & the market price on 30th Dec, that is the date of breach amounted to Rs. 1,09,218. Between 28th Feb 1912 and Aug 1912, the plaintiff sold the shares in a rising market, thus, realizing more than if he had sold the shares on 30th Dec 1911, namely, a sum of 79,862, less than the contract price. In March 1912 the plaintiff sued the defendant on the contract and claimed 1,09,218. The defendant claimed that he was entitled to the benefit of the prices actually obtained in mitigation of damages. The Privy Council observed;
“It is an undoubted law that a plaintiff who sues for damages owes the duty of taking reasonable steps to mitigate the loss consequent upon the breach, and cannot claim as damages which is due to his own neglect. But, the loss to be ascertained is the loss at the date of breach.”
The above statement is also illustrated in Stainforth v Lyall [4].
The plaintiff must take all reasonable steps to mitigate the loss which he has sustained, consequent upon the defendant’s wrong. He must, therefore, take reasonable steps to minimize the loss, and secondly, refrain from taking unreasonable steps which would increase the loss. If he fails to do so, he cannot claim damages for any such loss which he ought reasonably to have avoided or which arises due to his own neglect.[5]
Where the plaintiff does mitigate his loss, he cannot recover damages in respect of that avoided loss, even if the steps he took to avoid the loss are characterized as being more than what was necessary.[6]
Three Rules of Mitigation
- The plaintiff cannot recover the loss consequent upon the default of the defendant if the plaintiff could have avoided the loss by taking reasonable steps.
- If the plaintiff avoids or mitigates the loss, he cannot recover for such avoided losses even if he takes steps which are more than what was reasonably required.
- Where the plaintiff suffers loss or incurs expenses by taking reasonable steps to avoid the loss resulting from the defendant’s default, he may recover the further loss or expense from the defendant.
The Principle of Mitigation as a Restriction on Right to Claim Damages
The obligation of mitigation is also stated not strictly as a ‘duty’ to mitigate, but rather a restriction on the damages recoverable, which will be calculated as if the plaintiff had acted reasonably to minimize the loss.[7]
In M Lachia Setty & Sons Ltd. v. Coffee Board of Bangalore[8], the Supreme Court held that the principle of mitigation does not give any rights to a party in a breach of contract, but it is a concept that has to be borne in mind in assessing damages. The correct position was stated:
“the plaintiff is only required to act reasonably in whether he has done so or not is not a question of law but a question of fact in each case. In case of breach of contract, a plaintiff is required to do no more than act in the ordinary course of business and where he is placed in embarrassment, the MEASURES he takes to extricate himself. The plaintiff is under no obligation to destroy his property or to injure himself or his commercial reputation to reduce the damages payable by the defendant.”
It is also submitted in the above mention case that the word ‘duty’ used in these cases may not give the party in default the right to sue, but it is submitted that does lay an obligation on the non-defaulting party, of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim, as damages, any sum which is due to his own neglect. The duty may not be such which gives the defaulting party a right to sue, but it is a positive defence in a matter of quantum of damages.
Extent of Obligation
The rule of mitigation must be applied with discretion; a man who has already put himself in the wrong by breaking his contract has no right to impose new and extraordinary duties on the aggrieved party.[9] The plaintiff is required only to act reasonably in the matter[10] i.e. a manner in which a prudent man would have acted in the same way if the original wrongful act had arisen through his own default; or if the whole expense was to fall on him.[11] If goods are purchased for delivery in England and on delivery, prove to be unmerchantable, the buyer is not bound to go hunting the globe to find similar goods and have them shipped to arrive some months after the contract date; it might be different if such goods were available as near as France.[12]
So far as practicable, a person with whom a contract has been broken has a right to fulfil that contract for himself as nearly as may be, but he must not do this unreasonably or oppressively as regards the other party, or extravagantly. It is even his duty to take all reasonable steps to mitigate the loss consequent on the breach, and then the effect in an actual diminution of the loss he has suffered may be taken into account, and this apart from the question whether it was his duty to act.[13] The question must always be whether what was done was a reasonable thing to do, having regard to all the circumstances and one test is what a prudent person uninsured i.e not having a claim for compensation or indemnity on anyone, ‘would do under the same circumstances’.[14]
Expenses for Mitigation
The plaintiff can recover expenses or further loss incurred by him in taking reasonable steps to mitigate his loss resulting from the defendant’s breach, even when the mitigating steps were unsuccessful, or he had led to a greater loss.[15] The Plaintiff may recover the cost of his reasonable attempt to ‘extricate’ himself from the position in which he was placed by the breach.[16] If he has acted reasonably, he is not disentitled from claiming the cost of remedial measures taken by him, merely because the defendant can suggest other less burdensome measures.[17] Since only the plaintiff net gain from his mitigating efforts will be deducted, he may set off against his substitute profits or earnings reasonable expenses incurred in obtaining them.
In Martindale v Duncan,[18] a taxi driver whose taxi met with an accident found himself unable to pay for the repairs and so had to wait for the repairs and so had to wait till the repairs were carried out at the expense of the insurers. He brought an action for hire he paid for a car hired by him to be used as a taxi. However, he succeeded since he was seeking, in the first instance, damages from the defendant (insurers) rather than from his own, and until the repairs were authorized by the defendant (insurers) and until the repairs were okayed, he could not stand in a good position vis-à-vis insurer.
Anticipatory Breach and Duty to Mitigate
Where the plaintiff has accepted an anticipatory, repudiation, e.g. has begun an action for damages, it is his duty forthwith to mitigate the damage if a reasonable opportunity sets. If the opportunity is lost, the defendant is entitled to have the damages assessed at the time when the opportunity occurred. If, however, the plaintiff does not accept the anticipatory repudiation but holds the defendant to his contract, damages are to be assessed at the time fixed for performance and no duty to mitigate arises until that date.
The injured party is under an obligation to take all reasonable steps to is on the loss flowing from the breach; the emphasis is on the word ‘reasonable’.[19]Where the innocent party does not repudiate the transaction, a question arises whether he ought to be able to recover the agreed amount when he performs is promise without the cooperation and against the wishes of the other party.
There is an element of public policy requires limitation of the contra be an actual right of the innocent party. If it can be shown a person has no legitimate interest, financial or otherwise, in performing the contact rather than claiming damages he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If the party has no interest to enforce a stipulation, he cannot, in general, enforce it. So it might be said that if a party has no interest to insist on it. And just as a party is not entitled to enforce a penalty so he ought not to be allowed to penalize the other party by taking the course when another is equally advantageous to him.[20]
Burden of Proof
Although the duty to mitigate is that of the plaintiff, the burden of proof is on the defendant to show that the plaintiff has failed to take reasonable steps to mitigate his loss;[21] that the plaintiff had the means available and did not take a step to avail himself of the means. The burden of proving that the plaintiff loss has been diminished or avoided lies on the defendant.
American View
In the US, the law has been stated to be this. The measure of damage to the non-defaulting party will be measured as if that party has made reasonable efforts to avoid the losses resulting from the default. Some courts have stated this doctrine as a duty by the innocent party, i.e. a duty to minimize damages. “However, on analysis, it is clear that in contract cases as well generally, there is no duty to minimize damages because no one has a right of action against the non-defaulting party if he does not make the non-defaulting party liable to suit. Such a failure of the party only shows that damages actually suffered are greater than the law will compensate. Therefore, in a contract action, the doctrine of avoidable consequences is only a statement as to how the damages will be measured.
Mitigation: Illustrative Cases
Where a tenant, who has promised to pay government revenue and cess, has failed to pay it, the landlord, on notice of intended sale of property by the government, should pay the arrears, and save the property from sale. He is not entitled to stand by and allow the property to be sold then after purchasing it, to file a suit to recover the purchase price as damages from the tenant.[22]
The plaintiff bid at an auction which would have entitled him to operate the trade quarry for the stipulated period of three years, but defaulted in executing the formal contract to providing surety. It was held that the state could not claim compensation for breach beyond forfeiting the earnest money, as it could not take advantage of its own negligence in not holding the re-auction for the unexpired term; and did not take steps for mitigating the damages.[23]
Upon a breach of contract committed by the tenderer who did not make payment and lift the stock of rice, the seller must exercise the right of resale within a reasonable time from the date of the breach so as to prevent variance in the market price between the date of resale and date of breach.[24]
The opportunity to mitigate the loss may also arise if the defaulter makes an offer. If the plaintiff unreasonably refuses such an offer, he would be in breach of duty to mitigate his loss.[25]
Similarly, where the plaintiff bought a ship from the defendant, who could not deliver her on the agreed date, it was held that it would have been reasonable for the plaintiff to mitigate his loss by accepting the late delivery at the original price.[26]
A plaintiff claiming damages for personal injuries is under a duty to mitigate his loss by obtaining proper medical treatment;[27] but it may be reasonable for him to refuse to undergo an operation involving serious risk or to undertake medical treatment in respect of which there is a conflict of medical opinion.[28]
In the case of damages to perishable goods due to delay if the damaged goods are saleable to the plaintiff must sell them at a reasonable price and recover the balance of the loss, due to the damage to the goods.[29]
Re Vic Mill Co Ltd.[30], P claimed damages from D for loss of profit on D’s order of spinning machines to be manufactured by P. D repudiated the order at a time when four machines had been made, and the rest were not begun. There was no available market for the machines already made, as they had been made to a particular specification. P retained these machines for some time, and with some alterations costing GBP 5/-, sold them to X, a new customer, at GBP 23/- below the D’s agreed price. D argued that P’s damages were limited to GBP 28/-, but the court held that P was entitled to the profit he would have made on D’s order for the four machines, as C was not a substitute for P, for, had D not repudiated, P would have had both orders and profits. As regards the machines not yet made, it was argued for D, that allowance should be given for profits made on other contracts on which P had been engaged. The court rejected this plea, holding that there was no evidence that P’s factory was working to capacity, or that if he had executed D’s order, he could not have performed the other contracts. The court awarded P damages for the loss of profit he would have made on the manufacture of the machines.[31]
Similarly, in WL Thompson Ltd v. R Robinson(Gum Markers) Ltd,[32]R agreed to buy a new Standard car from T, who was a retail motor dealer. Then R changed his mind, and returned T to his supplier S, the car he had obtained from R. There was no available market for such a car, as the supply was greater than the demand. T claimed GBP 61 damages for his loss of profit, but R pleaded that as S had accepted the car back without any claim, T had suffered no damage. The court held for T, as he had lost one sale. He had accepted reasonably in returning the car to S. he could not sell it in the market for what it would fetch because the manufactures did not permit the sale of new cars below the list price. If T had kept the car until another customer appeared, R would still have been liable to him, as the new customer would be an additional, not a substituted one.
Recent Judgements
Kanchan Udyog Ltd. v. United Spirits Ltd.(2017) 8 S.C.C. 237.
Facts
The appellant enters into an agreement with the respondent for the establishment of non-alcoholic beverages bottling plant and sale under the respondent trademark, “Thrill”, “Rush”, “Sprint” & “McDowell’s Sparkling Soda”. The respondent provided technical consultancy for the establishment of the plant. A bottler’s agreement on 26th Dec 1985 was separately executed, valid for ten years with a renewal option containing various rights and obligations. The concentrate for preparation of non-alcoholic beverages was to be supplied by the respondent.
The appellant applied for a loan to West Bengal Industrial Development Corp. at an estimated cost of Rs. 226.80 Lakhs. The bottler’s agreement was terminated by the respondent on 16th March 1988. Commercial production at the plant ceased in May 1989 and the suit was instituted by the appellant in 1990. The learned Single Judge decreed the suit, awarding damages for Rs 2,73,38,000 towards loss of anticipated profits, and a sum of Rs 1,60,00,000 towards costs for installation of the plant, after deducting Rs 9.05 lakhs payable by the appellant to the respondent as consultancy charges. The respondent was held liable to pay to the appellant a sum of Rs 4,24,33,000 with interest @ 10% from the date of suit till payment. The Division Bench in appeal reversed the decree and dismissed the suit. Shri Paras Kuhad, learned Senior Counsel appearing for the appellant, submitted that the bottler’s agreement valid for ten years, was terminated unilaterally and prematurely by the respondent on 16-3-1988, contrary to Clause 26 of the agreement. The appellant had never denied the performance of its obligations under the agreement.
The appellant had not signed and returned the termination letter, in acceptance, as reiterated by the respondent on 25-7-1988. The appellant did not sign any fresh agreement with M/s Venkateswara Essence & Chemicals (P) Ltd. (hereinafter referred to as “VEC”) for the supply of concentrates by it, in lieu of the respondent. The acceptance of concentrates by the appellant directly from M/s VEC for a short time span, under Clause 5 of the agreement, cannot be construed either as a novation of the original contract under Section 62 of the Contract Act, 1872.
The loss of anticipated profits was due to the failure of the respondent to provide adequate aggressive marketing and advertisement support under the bottler’s agreement, in an extremely competitive market. A party committing a breach of contract was liable for such damages as are estimated as not unlikely to result from the breach at the time of the making of the contract.
The appellant had taken all reasonable steps for mitigation of damages as available to it, by exploring the alternate use of its bottling plant by other bottlers, including the sale of the plant, relying on the Explanation to Section 73 of the Act.
The respondents were required to affirmatively demonstrate that the appellant had acted unreasonably, despite the availability of opportunity, in its duty to mitigate the loss.
Shri Jaideep Gupta, learned Senior Counsel appearing for the respondent, referring to Clause 7 of the bottler’s agreement submitted that it was not a business partnership agreement. The appellant was unable to run its business for more than one reason, attributable to it alone. The change in excise regime dated 22-9-1987 made it an economic compulsion to route concentrates through M/s VEC to avoid higher excise duty, which in turn would affect the price and saleability of the product, ultimately to the detriment of the appellant itself. There had been no breach by the respondent.
The termination of the contract was not the causation or dominant cause for loss of anticipated profits. the appellant also failed to take steps to mitigate its losses under Section 73 of the Act for “remedying the inconvenience caused” by the breach either by utilization of the plant for bottling by others, availing concentrates from M/s VEC or selling the plant immediately after closure in May 1989 to fetch a higher rate, but did so belatedly in 1996.
Judgement
The apex considered the submissions. The learned Single Judge referring to Section 73 of the Act, on basis of the averments made in the plaint, allowed the claim for loss of anticipated profits, the appellant was also entitled to cost of the plant, as it was useless for any other purpose. The appellant was unable to mitigate its damages as the product did not find acceptability, and the efforts of the parties to persuade Pepsi and Coca-Cola to utilize the bottling plant also came to nought. The appellant was awarded Rs 2,73,38,000 towards loss of anticipated profits for ten years and a sum of Rs 1.60 lakhs towards the cost of the plant, is the price it fetched in the auction-sale to Cadbury-fry by West Bengal Financial Corporation. A negative finding was returned in one line on the issue if the suit was barred by waiver and acquiescence without any discussion.
The appellate court with reference to evidence has adequately discussed that the appellant failed to take steps to mitigate its losses under the Explanation to Section 73 of the Act. We find no reason to come to any different conclusion from the materials on record. If concentrates were available from M/s VEC, the appellant had to offer an explanation why it stopped lifting the same after having done so for nearly a year and could have continued with the business otherwise. t could also have taken steps to sell the unit after its closure in May 1989 rather than to do so belatedly in 1996. No reasonable steps had been displayed as taken by the appellant for utilization of its bottling plant by negotiations with others in the business. Nothing had been demonstrated of the injury that would have been caused to it thereby.
The aforesaid discussion leads to the inevitable conclusion that the appellant had failed to establish its claim that the breach by the respondent was the cause for loss of anticipated profits, that the profitability projection in its loan application was a reasonable basis for an award of damages towards loss of anticipated profits. The appellant had failed to abide by its own obligations under Ext. C and lacked adequate infrastructure, finances and manpower to run its business. It also failed to take reasonable steps to mitigate its losses. The appeal lacks merit and is dismissed.[33]
Conclusion
The duty to “mitigate damages” means that, in certain circumstances, a person who is harmed by someone else’s bad act has a duty to “mitigate” the harm. In plain language, it means that an innocent person who has been harmed must take action to stem the harm and minimize the amount of damages the bad actor has to pay. What can be concluded by the research is that the only difference between English Law and Indian Law so far as the rule relating to mitigation of damages is concerned. The only thin line difference, which has been noticed during this research, is that the rule in the explanation to Section 73 of the Indian Contract Act is applied with great care and caution one can say in more strict and rigid manner than that is in England. Thus, from the above discussion on the topic of quantum and mitigation of damages, it is clear that a plaintiff cannot claim as damages any sum, which is due to his own negligent act. In other words, one can say that a party is not entitled to damages if, by the use of reasonable precautions, he might not have avoided the loss.
While researching on this topic what is observed is that there is intricacy in this also that is, first of all, is that it is difficult to determine the reasonableness. This is qualified by the principle, which imposes a duty upon the defaulting party to take reasonable steps to mitigate the consequences which arise as a result of the breach. The plaintiff is required to act reasonably, but the standard of reasonableness is not high in view of the fact that the defendant has committed a wrong. Moreover, reasonableness is a question of fact and it depends on the facts and circumstances of each case.
Another principle on which this principle depends to sometimes creates ambiguity i.e., there is a general principle with respect to claiming the consequential damages by non-defaulting party is that the non-defaulting party is only entitled to recover claim such part of the damages or losses resulting from the breach by the defaulting party, as was at the time of execution of the contract reasonably foreseeable as liable to result from the breach. Further, the damage or loss “reasonably foreseeable” would inter-alia depend on the knowledge possessed or shared between the parties. It is expected out of a reasonable person to understand and foresee the damage which may be suffered by the non-defaulting party and resulting from the breach by the defaulting party in the “ordinary course”. However, in case of existence of “special circumstances”, which are outside the purview of the “ordinary course” what is of utmost importance, so as to be able to claim the consequential damages, is that the defaulting party should be aware of the said “special circumstances” which would result in consequential losses for the non-defaulting party, at the time of executing the contract.
Taken into consideration all the aspects, except the few minor intricacies mentioned above, which to occur in special circumstances only, the importance of mitigation of damages cannot be denied. The importance of mitigation is clearly evident from the judicial pronouncements discussed above.
Frequently Asked Questions
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What is the purpose of the rule of mitigation of damages?
The rule is aimed at preventing the waste of limited resources in society, which forces the innocent party, the plaintiff, to find a substitute after the defendant’s breach. However, the rule also enables the defendant to commit “effective breach” of contract, where the defendant deliberately would break his contractual relationships for better opportunity, and make a higher profit on the new contract, and profit even after paying damages to the original promise; this, in economic theory, is considered socially desirable.
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What is the duty of the plaintiff and when it can be excluded?
A duty is imposed upon the plaintiff to take reasonable steps to mitigate the loss. His position is similar to that of a plaintiff guilty of contributory negligence. The duty to minimize damages may be removed by an express clause in the contract. In Ralli Bros. Ltd. v. Firm Bhagwan Das Parmeshari Das, P ought to have resold goods refused by D, in May, soon afterwards as the market was falling but unreasonably waited until November. He was held to be protected by a clause in the contract authorizing them in the event of a breach of contract to resell at such times, as in his control discretion seemed desirable, and precluding an objection on behalf of the buyer that such resale was carried out after an unreasonable of time.
[References]
[1] British Westinghouse Electric & Mfg. Co. Ltd. v. Underground Electric Rlys. Co. of London Ltd., [1912] A.C. 673.
[2] Dunkirk Colliery Co. v. Lever, (1878) 9 Ch. D. 20.
[3] Jamal, A.K.A.S. v. Moola Dawood Sons & Co., (1916) 43 I.A. 6.
[4] Stainforth v. Lyall, (1830) 7 Bing. 169.
[5] Murlidhar Chiranjilal v. Harischandra Dwarkadas, (1962) 1 S.C.R. 653.
[6] Chitty on Contracts, 28th ed, pg. 1316, para 27- 085.
[7] Dardisshire v. Warran, (1963) 3 All E.R. 310.
[8] M Lachia Setty & Sons Ltd. v. Coffee Board of Bangalore, A.I.R. 1981 S.C. 162.
[9] Dhulpudi Namayya v. Union of India, A.I.R. 1958 A.P. 533.
[10] R.J. Mahommad Jacub Sahib v. Indian Bank Ltd., A.I.R. 1975 Mad. 220.
[11] Dhulpudi Namayya v. Union of India, A.I.R. 1958 A.P. 533.
[12] Lesters Leather & Skin Co. Ltd. v. Home & Overseas Brokers Ltd. (1948) 64 T.L.R. 569.
[13] British Westinghouse Electric & Mfg. Co. Ltd. v. Underground Electric Rlys. Co. of London Ltd., (1912) A.C. 673.
[14] Le Blanche v. London & North Western Rly. Co., (1876) 1 C.P.D. 286.
[15] Banvo de Portugal v. Waterlow & Sons Ltd., (1932) A.C. 452.
[16] Wilson v. United Countries Bank Ltd., (1920) A.C. 102.
[17] R.J. Mahommad Jacub Sahib v. Indian Bank Ltd. A.I.R. 1975 Mad. 220.
[18] Martindale v. Duncan, (1973) 2 All E.R. 355.
[19]Avtar Singh, Contract & Specific Relief.
[20] White & Carter Ltd v. Mc Gregor (1962) A.C. 413.
[21] Nadreph Ltd. v. Willmett & Co. (1978) 1 All E.R. 746.
[22] Dhanu Lal v. Kuldip Narayan Singh, A.I.R. 1940 Pat. 88.
[23] Pran Nath Suri v. State of Madhya Pradesh, A.I.R. 1991 M.P. 121.
[24] Bismi Abdullah & Sons v. Regional Manager of F.C.I., A.I.R. 1987 Ker. 56.
[25] Payzu Ltd. v. Saunders, [1919] 2 K.B. 581.
[26] The Scholtz [1983] 1 Lloyd’s Rep. 605.
[27] Mancroft v. Scruttons Ltd., [1954] 1 Lloyd’s Rep. 395 (C.A.).
[28] Savage T Wallis Ltd. [1966] 1 Llyod’s Rep 357 (C.A.).
[29] Union of India v. B. Prahlad & Co., A.I.R. 1976 Del. 236.
[30] Re Vic Mill Co. Ltd., [1913] 1 Ch. 465.
[31] Samuel Fitz & Co. Ltd. v. Standard Cotton & Silk Wug Co., (1946) I.L.R. Mad. 192.
[32] W.L. Thompson Ltd. v. R. Robinson (Gum Markers) Ltd., [1955] 1 All E.R. 154.
[33]Kanchan Udyog Ltd. v. United Spirits Ltd., (2017) 8 S.C.C. 237.
