Mitigation, Avoided Loss, and Time of Assessment

• Author: Jamie Cassels
• Pages: 428-479

428

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 ta king 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 f rom the breach; but this f‌irst principle is qualif‌ied by

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

able steps to mitigate the loss consequent on the breach, and debars

him from claim ing any part of the damage which i s 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 Electr ic Rlys

Co of London Ltd, [1912] AC 673 at 689 (H L) [British Westinghouse], quoted wit h

approval in Asame ra Oil Corp v Sea Oil & General Corp (1978), [1979] 1 SCR 633

at 661 [Asamera].

2 Red Deer College v Michaels, [1976] 2 SCR 324 [Red De er College].

Mitigation, Avoided Loss, a nd Time of Assessment 429

There are sound reasons underlying the obligation to mitigate.

Most generally, mitigation is about fairness. It will be recalled that the

fundamental premise of this book is that civil remedies are intended

to do justice between the parties, and that damages should be set at a

level that properly protects the plaintiff’s interests without being un-

duly oppressive to the defendant. Damages are not generally 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 mini-

mize it, it would be antisocial and punitive for the plaintiff to sit back

and do nothing, thus incurring an “unconscionable accumulation”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 a re

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 ex pensive 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 c an be compensated by damages. The theory also

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

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

be fully compensated by an awa rd 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 in nocent party to take steps to keep the costs of breach low,

further promotes this result.

3 Ibid.

4 RA Posner, Economic Analysis of L aw, 6th e d (New York: As pen, 2003) at 120.

The Supreme Court of Cana da has approved the idea of eff‌icient br each: Bank of

America Cana da v Mutual Trust Co, [2002] 2 SCR 601 at pa ra 31.

REMEDIES: THE LAW OF DAMAGES430

The rule of mitigation also ensure s 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-

stances, it would be wrong to saddle defendants w ith 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 t han 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 avoid-

able losses. The plaintiff is debarred from recovering losses that could

reasonably 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 import-

ant. In the commercial context, plaintiffs must do what an ordinary

business person would do in the circumstances. They must take ac-

tions that are consistent w ith 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, to take serious business

risks or gambles, or risk its reputation or business relationships to

reduce a loss.6 The plaintiff need only do what is prudent under the

5 Red Deer Coll ege, above note 2; Coutts v Brian Jessel Autosport Inc (2005), 40

CCEL (3d) 236 (BCCA); Proctor Crushing Inc v Precision Surfac ing Ltd, 2004

ABQB 713 at paras 72 –73 [Proctor Cru shing]; 2438667 Manitoba Ltd v Husky Oil

Ltd,[2007] MJ No 233 (CA); Ke rn v Steele (2003), 220 NSR (2d) 51 (CA); BP

Global Special Product s (America) Inc v Conros Corp,2010 ONSC 1094 at p ara 68,

aff’d 2011 ONCA 384.

6 For example, see 3Com Corp v Zorin Inter national Corp,[2006] OJ No 2184 (CA),

where the court held t hat the plaintiff, a v ictim of fraud, did not need to be

overly aggres sive with its other (innocent) custome rs in revoking sales rebate s

that it would not have given b ut for the fraud.