Mitigation, Avoided Loss, and Time of Assessment

• Author: Jamie Cassels/Elizabeth Adjin-Tettey
• Profession: Professor of Law, Vice President Academic, and Provost, University of Victoria/Professor of Law, University of Victoria
• Pages: 375-415

375

CHAPTER 12

MITIGATION,

AVOIDED LOSS, AND

TIME OF ASSESSMENT

A. MITIGATION OF DAMAGES

1) Introduction

Mitigation of damages is the principle that a plaintiff may not recover

losses that could have been avoided by taking reasonable steps after the

wrong. The principle applies in both tort and contract. The Supreme

Court of Canada has quoted with approval the following statement

from the House of Lords:

The fundamental basis is thus compensation for pecuniary loss nat-

urally f‌lowing from the breach; but th is f‌irst principle is qualif‌ied by

a second, which imposes on a pla intiff the duty of taking all reason-

able steps to m itigate the loss consequent on the bre ach, and debars

him from claiming any part of the damage which is due to his neglect

to take such steps.1

Another way of expressing the rule is that a plaintiff cannot recover

“avoidable losses.”2

1 British Westinghouse Electr ic & Manufacturing Co. Ltd. v. Underground Electri c

Rlys Co. of London Ltd., [1912] A.C. 673 at 689 (H.L.) [British Westinghouse],

quoted with approva l in Asamera Oil Corp. v. Sea Oil & General Corp. (1978),

[1979] 1 S.C.R. 633 at 661 [Asamera].

2 Red Deer College v. Michaels, [1976] 2 S.C.R. 324 [Red Deer College].

REMEDIES: THE LAW OF DAMAGES376

There are sound reasons underlying the obligation to mitigate.

Most generally, mitigation is about fairness. Damages are not gener-

ally intended to be punitive. Following a tort or breach of contract, the

plaintiff may not hold the defendant hostage to every loss that might

occur. Where the plaintiff is reasonably able to avoid a loss, or to take

steps to minimize it, it would be antisocial and punitive for the plaintiff

to sit back and do nothing, thus incurring an “unconscionable accumu-

lation”3 of damages. The rule of mitigation has the effect of minimizing

the total costs of the tort or breach of contract, thereby avoiding unduly

burdening or surprising the defendant with an unexpected extent of

liability. It should be borne in mind that not all breaches of contract are

mala f‌ides or even intentional. There is no general policy that contract

breach should be punished. Similarly, most torts involve the unintend-

ed consequences of legitimate activities. The rule of mitigation ref‌lects

a recognition that “accidents happen” and that no useful purpose is

served by allowing the damages to increase in their aftermath.

The basic insight that it is socially desirable to minimize the total

costs of a civil wrong has been formalized by legal economists. The

rule of mitigation is said to be eff‌icient in that it provides an incentive

to minimize the joint costs of an activity. More specif‌ically, in breach

of contract cases, mitigation permits “eff‌icient breach.” According to

this notion, where the cost to the promisor of performing a contract is

substantially more expensive than the loss to the other party from non-

performance, the contract should not be performed. It is uneconomic,

and oppressive, to force completion of such contracts when any losses

to the innocent party can be compensated by damages. The theory also

applies when the promisor is able, by breaching, to earn additional

prof‌its on an alternate transaction. Where the innocent party’s loss can

be fully compensated by an award of damages paid out of the additional

prof‌its, and there is still a net gain to be earned on the alternate trans-

action, it is eff‌icient (joint value is maximized) to permit the breaching

party to pursue the alternative transaction.4 The rule of mitigation, re-

quiring the innocent party to take steps to keep the costs of breach low,

further promotes this result.

The rule of mitigation also ensures a fair allocation of risks between

the parties. Often the plaintiff is in the best (or only) position to deal

with the consequences of a breach of contract or tort. In such circum-

3 Ibid.

4 R.A. Posner, Economic Analysis of L aw, 6th ed. (New York: Aspen, 2 003) at 120.

The Supreme Court of Can ada has approved the idea of eff‌icient br each: Bank of

America Cana da v. Mutual Trust Co., [2002] 2 S.C.R. 601 at para. 31.

Mitigation, Avoided Loss, a nd Time of Assessment377

stances, it would be wrong to saddle defendants with post-breach risks

over which they have no control. For example, where a buyer of goods

breaches a contract of sale, the vendor has an obligation to resell the

goods. If the vendor does not do so and the goods spoil, or the market

price falls, that additional loss is caused as much by the vendor’s in-

action as by the buyer’s breach. Additionally, while the vendor in such

a case may choose to hold onto the goods rather than to resell them (in

the hope that the market price will increase), the risk of such specula-

tion should generally fall on the plaintiff’s shoulders rather than the

defendant’s (if the price does in fact increase, the plaintiff will be per-

mitted to retain the prof‌it).

2) General Principles: Reasonableness

The objective of the rule of mitigation is to give the plaintiff an incen-

tive to take steps to minimize the total costs of the tort or breach of

contract, and to avoid unduly burdening the defendant with avoidable

losses. The plaintiff is debarred from recovering losses that could rea-

sonably be avoided. What is reasonable is a question of fact, not law,

and the burden of proof is upon the defendant to demonstrate that the

plaintiff could reasonably have avoided a loss or was unreasonable in

her conduct.5 In assessing reasonableness, the context is important. In

the commercial context, plaintiffs must do what an ordinary business

person would do in the circumstances. They must take actions that are

consistent with their usual practices and may not let their feelings of

hostility or anger get in the way. However, the plaintiff is not obliged to

make extraordinary efforts or to take serious business risks or gambles

to reduce a loss. The plaintiff need only do what is prudent under the

circumstances. Given that the plaintiff is often facing diff‌icult circum-

stances following an unexpected breach, the actions taken will not be

judged against too high a standard. Nor will courts permit the actions

taken by the plaintiff to be easily second-guessed by the defendant with

the benef‌it of perfect hindsight. One court explained:

Where the sufferer from a breach of contract f‌inds himself i n con-

sequence of that breach placed in a position of embarrassment, the

measures wh ich he may be driven to adopt in order to extricate him-

5 Red Deer College, above note 2; Coutts v. Brian Jessel Aut osport Inc. (2005), 40

C.C.E.L. (3d) 236 (B.C.C.A.); Proctor Crushing Inc. v. Precision Surfacing Ltd.,

2004 ABQB 713 at pa ras. 72–73 [Proctor Crushing]; 2438667 Manitoba Ltd. v.

Husky Oil Ltd.,[2007] M.J. No. 233 (C.A.); Kern v. Steele (2003), 220 N.S.R. (2d)

51 (C.A.).