14.5 DUTY TO MITIGATE

14.5.1 In General

The party who is true to the contract cannot sit and wait for the other party to breach the contract, but must become active in order to minimize the loss or to prevent it at all.  ⁸³⁶  In other words, even where the aggrieved party has not contributed either to the non-performance or to its effects, it cannot recover for loss it would have avoided if it had taken reasonable steps to do so.

In this respect, the mitigation doctrine, which is a generally admitted obligation in Common Law, though "not so largely and clearly consecrated in Civil Law", deals with such an "obligation for a creditor to minimise the damage he suffers because of the non-fulfilment by the debtor of his own commitments."  ⁸³⁷  Now, a number of international awards have applied it as a general principle of international trade, not referring in particular to a Common Law system.  ⁸³⁸  Indeed, it is said to "constitute the lex mercatoria in its present form",  ⁸³⁹  and is regarded as "[o]ne of the most well-established general principles in arbitral case law".  ⁸⁴⁰  Further, the awards in support on mitigation "rarely call up the lex mercatoria in so many words; they merely treat the principle as obvious."  ⁸⁴¹ 

Mitigation has gained under the three instruments, it is regarded as one of the principles "capable of general application" as expressed in provisions of the CISG.  ⁸⁴²  Under the CISG, Art. 77 is of particular relevance (the mitigation rule is also reflected in Arts. 85 and 86 concerning preservation of the goods), which limits damages by placing an obligation to mitigate damages on the aggrieved party: "A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated." Art. 77 CISG adopts the same principle as Art. 88 ULIS, but clarifies certain matters.  ⁸⁴³ 

In the Secretariat Commentary on Art. 73 of the 1978 Draft [draft counterpart of CISG Art. 77],  ⁸⁴⁴  it is stated that Art. 77 (together with Arts. 85-88) is one of several articles which states a duty owed by the injured party to the party in breach.  ⁸⁴⁵  However, "even if it is possible to refer to mitigation using such terms as a 'duty' or an 'obligation', the nature of this 'duty' is substantially different from other obligations under the CISG."  ⁸⁴⁶  Because the first sentence of Art. 77 is worded in terms of a duty to mitigate, courts may require such mitigation, and allow a set-off in favor of the breaching party for failure of the non-breaching party to mitigate. The second sentence seems to take the approach that CISG Art. 77 was not intended to place liability on the injured party for failing to avoid damages but is meant to simply precluded an injured party from recovering damages which could have reasonably been avoided.  ⁸⁴⁷  A third interpretation of Art. 77 takes the position that mitigation of loss can become a sword as well as a damages shield -- by drawing on the "general principles" provision of the CISG, Art. 7(2) to create a duty of "loyalty to the other party to the contract". Failure to mitigate damages may be a breach of this duty and result in recoverable damages.  ⁸⁴⁸  It appears that the parameters of the duty to mitigate under Art. 77 are not clear. Presumbly it does not affect the aggrieved party's right to seek specific performance or his right to avoid the contract where a fundamental breach has occurred. Presumably too the greater particularity will have to be supplied in the light of the overall structure of the Convention, the general principles on which it is based (Art. 7), and the duty of good faith.  ⁸⁴⁹ 

Nonetheless, the significance of the deliberations in Art. 77 CISG is of no doubt. This mitigation duty has been adopted under the two Principles. In the UPICC, this principle is reflected in Art. 7.4.8 under the heading "Mitigation of Harm" and has been formulated as: "(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm." Indeed, it has been stated that the provision of the UPICC on contribution to harm (supra. 14.4) "must be read together in conjunction with the following article on mitigation of harm (Art. 7.4.8). While the present article [Art. 7.4.7] is concerned with the conduct of the aggrieved party in regard to the cause of the initial harm, Art. 7.4.8 relates to that party's conduct subsequent thereto."  ⁸⁵⁰  The purpose of this article is to avoid the aggrieved party passively sitting back and waiting to be compensated for harm which it could have avoided or reduced. Any harm which the aggrieved party could have avoided by taking reasonable steps will not be compensated. It would be unreasonable from the economic standpoint to permit an increase in harm which could have been reduced by the taking of reasonable steps.  ⁸⁵¹  And a rule concerning "Reduction of Loss" can also be found in Art. 9:505 of the PECL, which resembles Art. 7.4.8 UPICC: "(1) The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party could have reduced the loss by taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the loss."

14.5.2 Reasonable Measures Taken

The idea underlying mitigation is that the aggrieved party cannot recover damages with respect to loss which he could have reasonably avoided. However, no exceptional efforts are required from that party; he only has to take such measures to mitigate loss as are reasonable in the circumstances concerned. According to Art. 77 CISG, the aggrieved party must take measures "as are reasonable in the circumstances". The type of measures that need to be undertaken depends on the criterion of reasonableness. The latter, in turn, depends on and will be construed in the light of the circumstances in question.  ⁸⁵²  It is said that the duty to mitigate applies to an anticipatory breach of contract as well as to a breach in respect of an obligation the performance of which is currently due.  ⁸⁵³  It follows that this provision refers the duty to mitigate to all kinds of loss. However, different types of loss can practicably give rise to a great variety of situations.

Although not specifically defined, on the one hand, reasonableness is specifically mentioned in thirty-seven provisions of the CISG and clearly alluded to elsewhere in the Uniform Sales Law. Reasonableness is a general principle of the CISG. As a general principle of the CISG, reasonableness has a strong bearing on the proper interpretation of all provisions of the CISG.  ⁸⁵⁴  On the other hand, the principle of "reasonableness" plays a dominant and recurrent role in almost all of the provisions of the UPICC.  ⁸⁵⁵  Although no blanket clause which defines the notion of reasonableness is found either in the CISG or the UNIDROIT Principles, reasonableness is generally defined in the PECL, which "also fits the manner in which this concept is used in the CISG [as well as the UPICC]. This definition can help researchers apply reasonableness to the CISG [as well as the UPICC] provisions in which it is specifically mentioned and as a general principle of the CISG [as well as the UPICC]."  ⁸⁵⁶ 

In this respect, Art. 1:302 PECL specializes "Reasonableness" as: "Under these Principles reasonableness is to be judged by what persons acting in good faith and in the same situation as the parties would consider to be reasonable. In particular, in assessing what is reasonable the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trades or professions involved should be taken into account." Generally speaking, reasonableness is to be judged by what parties acting in good faith and the same situation as the parties would consider to be reasonable. In deciding what is reasonable all relevant factors should be taken into consideration. Account should be taken of the nature and purpose of the contract. The circumstances of the case will have to be considered. Furthermore, the usages and practices of the trade or profession should be taken into account. These generally reflect the behaviour of reasonable parties.  ⁸⁵⁷  "In general, it has been said that a measure is reasonable 'if under the particular circumstances, it could be expected to be taken by a person acting in good faith, or if it is 'adequate' and preventive with respect to the loss. In the evaluation of the situation, regard should be also had to the party's skills and position as a businessman, such as, for example, 'ingenuity, experience, and financial resources', etc. At that, relevant trade usage, if any, should be taken into account as well. The aggrieved party is not, in any way, obliged to take measures, which, in the circumstances concerned, are 'excessive' and entail unreasonably high expenses and risks. If the party refrains from such measures, he will not be considered as not having complied with Article 77."  ⁸⁵⁸ 

Although it does not seem possible to list every single measure which can be possibly implied in Art. 77 CISG, some examples of such measures will be given in order to illustrate how wide a range of possible mitigating measures can be. It is commented that such measures may frequently include a cover purchase or sale. It can also include the possibility that the buyer himself remedies defective goods delivered to the buyer. Although there is no obligation to avoid the contract even if the other party has committed or is expected to commit a fundamental breach of contract (Arts. 49 and 64 CISG), avoidance of the contract may be one of the reasonable measures which help to mitigate the losses of the injured party. If reasonable measures can be taken before an impending breach of contract, they have to be taken by the party threatened by loss. Such measures could include for instance suspension of performance under Art. 71.  ⁸⁵⁹ 

In sum, "[t]he steps to be taken by the aggrieved party may be directed either to limiting the extent of the harm, above all when there is a risk of it lasting for a long time if such steps are not taken (often they will consist in a replacement transaction: see Art. 7.4.5), or to avoiding any increase in the initial harm."  ⁸⁶⁰  Indeed, the creditor should attempt to undertake everything possible in order to diminish the loss or at least to prevent its increase, and thus this rule may be regarded as just and fair.  ⁸⁶¹  On the other hand, the failure to mitigate loss may arise either because the aggrieved party incurs unnecessary or unreasonable expenditure or because it fails to take reasonable steps which would result in reduction of loss or in offsetting gains. However, the aggrieved party will not necessarily be expected to take steps to mitigate its loss immediately it learns of the breach; it will depend on whether its actions are reasonable in the circumstances. The aggrieved party is only expected to take action which is reasonable, or to refrain from action which is unreasonable, in the circumstances. Thus it need not act in any way that will damage its commercial reputation just to reduce the non-performing party's liability.  ⁸⁶²  Evidently, a party who has already suffered the consequences of non-performance of the contract cannot be required in addition to take time-consuming and costly measures.  ⁸⁶³  However, the decision on how and in what way an injured party should have mitigated his loss can be made only on the basis of careful examination of all circumstances of a concrete situation, criterion of reasonableness, and the type of loss in question.  ⁸⁶⁴ 

14.5.3 Effects of Failure to Mitigate

With regard to the legal effects of such failure, it follows from the wording of Art. 77 CISG "the party in breach may claim a reduction in the damages" that, non-fulfillment of this obligation by one party does not entail a claim for damages but rather leads to a situation where the party who is true to the contract cannot claim full compensation for damages. Reference is made here only to a party claiming damages. The rule of Art. 77 does not apply to other remedies."  ⁸⁶⁵  Therefore, the failure to mitigate will not affect the injured party's claim for other remedies. The only exception is said to be the case where it was reasonable to expect the injured party to carry out certain actions, for example, in the form of avoidance of the contract or of the conclusion of a cover transaction, in order to mitigate the loss.  ⁸⁶⁶  As regards the amount, it follows from Art. 77 CISG that if the aggrieved party fails to mitigate, the party in breach will have the right to claim reduction in damages "in the amount by which the loss should have been mitigated". In this respect, similar approaches can also be found in UPICC Art. 7.4.8(1) and PECL Art. 9:505(1).

On the other hand, frequently the aggrieved party will have to incur some further expenditure in order to mitigate its loss. The problem is that mitigation itself can bring about certain forms of loss. In other words, mitigation can often be the source of loss. In taking certain mitigating measures, an injured party may have to incur a number of different expenses such as, for example, the costs of storage, repair costs or brokerage costs. Both Art. 7.4.8(2) UPICC and Art. 9:505(2) PECL allow the aggrieved party to recover expenses reasonably incurred in attempts to avoid or mitigate the loss. Expenses are to be reimbursed even if they increased the total loss, provided they were reasonable. Costs which the party threatened by loss incurs for the measures he takes to mitigate his losses can also be claimed compensation for even when the, otherwise reasonable, measures were taken in vain.  ⁸⁶⁷  It is also argued that, the wording of Art. 77 CISG is broad enough to require that losses out of a measure aimed at mitigation should be mitigated.  ⁸⁶⁸ 

One should note, however, despite any harm which the aggrieved party could have avoided by taking reasonable steps will not be compensated, the reduction in damages to the extent that the aggrieved party has failed to take the necessary steps to mitigate the harm must not however cause loss to that party. The aggrieved party may therefore recover from the non-performing party the expenses incurred by it in mitigating the harm, provided that those expenses were reasonable in the circumstances.  ⁸⁶⁹