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RULES OF MITIGATION

As had been discussed earlier, in cases of breach of contract, the aggrieved party has
the right to seek for damages from the party who had breached the contract made.
Under the rules of mitigation, there are three rules of mitigation in which the
aggrieved party must follow in order to limit the award given in the case of a breach
of contract. If the award is not limited, then a defendant or person who had breached
the contract will have to bear the liability for all losses suffered by the plaintiff.

The requirement to mitigate losses and to limit the award given can also be
understood by looking at the case of Khoo Than Shui v Chan Chiau Hee where Seah J
was quoted as saying that:

“…damages are compensatory only and that one who
has suffered loss from a breach of contract must take
any reasonable steps that are available to him to
mitigate the extent of the damage caused by the
breach”.

Avoidable Losses

Under the rules of mitigation, the first principle is that a plaintiff cannot recover
damages for losses where they should have avoided. This means that the plaintiff
cannot recover damages for any losses which can be avoided had he take any
reasonable steps to avoid the losses. This principle was found in the case of British
Westinghouse where in that case, the court held that the plaintiff has a duty to take
reasonable step to mitigate the losses it suffered. In addition, the plaintiff can never
claim for damages which he could have avoided.

A reasonable step is very subjective and it is hard to determine what exactly amounted
to a reasonable step. An example of what amounted to a reasonable step is the making
a substitute contract. A substitute contract is when the defendant makes an offer to the
plaintiff where if the plaintiff accepted the offer, the amount of losses can be reduced.
Nevertheless, as had been laid down in Tansa Enterprise Sdn Bhd v Temenang
Engineering Sdn Bhd, a substitute contract should be obtained especially so if there
was an available market.

In the case of Tansa Enterprise Sdn Bhd v Temenang Engineering Sdn Bhd, the
defendant was alleged to have breached the contract to supply common bricks to the
plaintiff. As such, the plaintiff claimed for the losses incurred due to the breach.
However, the court held that the common brick is available in the open market at the
material time and that they could have bought it there. As such, the plaintiff could
have mitigated his loss.

Nevertheless, in mitigating losses, the aggrieved party must ensure that they did not
put their commercial reputation or good public relations at risk. They must also ensure
that in doing so, it must not cause them unreasonable expenses or involved them in
complicated litigation. This was held in the case of Khoo Than Shui v Chan Chiau
Hee.

In that case, the plaintiff and the defendant had entered into a verbal contract whereby
the defendant agreed to tow the plaintiff's logs from Sungei Sugut to his log pond at
Sandakan. The defendant towed a total of 82 logs but only 11 logs were delivered.
The plaintiff claimed damages for the loss. The court rules that it is a question of fact
in each case whether the plaintiff has acted as a reasonable man might have been
expected to act. Nevertheless, he is not required to risk his commercial reputation or
to embark upon complicated litigation in order to mitigate his loss.

So, according to the first principle in mitigating losses, a plaintiff will not recover
damages for losses it should have avoided.

Avoided Losses

The second principle on rule of mitigation is that if a plaintiff had avoided a loss,
damages for that loss are not recoverable. This rule on avoided loss can also be seen
by looking at the case of British Westinghouse v Undergound Electric Railway Co of
London. In this case, British Westinghouse supplied 8 steam turbines to the defendant
railway company. They transpired to be defective in design and used excessive
quantities of steam. The railway company did not reject them but reserved its claim to
damages for breach of contract.

Then, the railway company replaced them with more efficient turbines made by
company called Parsons. The railway company claimed damages for the excessive
fuel used while they were operating the British Westinghouse turbines and the whole
cost of replacing them with the Parsons turbines. The arbitrators found that the
railway company had acted reasonably and prudently in acquiring the Parsons
turbines to mitigate their continuing loss in using excessive fuel and that by the course
of action they took, the railway company had actually made a profit.

So, there is an issue of whether the railway company could claim against British
Westinghouse for the cost of replacing the turbines. The House of Lords, however,
held that additional benefits gained by the railway company from acquiring the
Parsons turbines, over and above what would have been their contractual entitlement
as against British Westinghouse, had to be brought into account in calculating the
damages. So, the matter was brought back to the arbitrators with a declaration to this
effect.

By analyzing British Westinghouse, it can be seen that as the railway company had
avoided loss by changing their turbines and plus, they had acquired profit from such
move, the damages which are the losses they suffered from using the turbines
supplied by British Westinghouse earlier are not recoverable. This is in line with what
Viscount Haldane L.C held in that case where he was quoted as saying that:

“But when in the course of his business [the plaintiff]
has taken action arising out of the transaction, which
action has diminished his loss, the effect in actual
diminution of the loss he has suffered may be taken into
account even though there was no duty on him to act”.

He added:
“But where - the person whose contract was broken
took a reasonable and prudent course quite naturally
arising out of the circumstances in which he was
placed by the breach, it was necessary to look at any
additional benefits which he thereby acquired and to
balance loss and gain”.
Thus, under the second principle, if a plaintiff avoids a loss, damages are not
recoverable for that loss.

Money Spent In Mitigation

The third principle of mitigation under the rules of mitigation is that when a plaintiff
spent their money in mitigating the losses or attempting to mitigate the losses, he may
recover the amount of money spent. However, in order to recover the amount of
money spent in mitigating, the plaintiff must ensure that the action he takes in
mitigating the losses or attempting to mitigate the losses is reasonable.

A reasonable step is unique to each and every case. What amounts to a reasonable
step in one case, might not be reasonable to another. Reasonable step simply means
reasonable in the ordinary course of business. In other words, the plaintiff is not
required to take unusual steps outside the ordinary course of business.

Two cases can be referred to in order to illustrate the subjectivity of this issue that is
what amounts to a reasonable step and what amounts to an unreasonable step. In
Hoffberger v Ascot International Bloodstock Bureau Ltd, the defendants had breached
their contract to buy a horse for £ 6000. For one whole year, the plaintiff had kept the
horse in the hope of selling it at a higher price. Nonetheless, the horse was sold at a
much lower price after one year that is at £ 1025. The Court of Appeal allowed the
plaintiff’s claims for both loss of profit of £ 4975 and also for the expenses incurred
in keeping the horse for a year as according to the court, the plaintiff had acted
reasonably in mitigating his loss.

On the other hand, the court decided differently in Compania Financiera Soleada SA
v Harmoor Tanker Corp Inc, The Borag. In this case, the plaintiffs had taken out loan
carrying a very high interest rate to gain the release of the ship detained in breach of
contract. However, the court held that by doing so, the plaintiffs had acted
unreasonably and thus, the high interest charges were irrevocable.

In short, for the third principle, when the plaintiff is mitigating the losses or
attempting to mitigate the losses, the money they spent for doing so can be
recoverable. Nevertheless, the recovery of the money is applicable only if the act that
they done to mitigate the losses were reasonable. What constitutes reasonable act is
very subjective and it may differ from one case to another. As discussed above,
reasonable action in mitigating the losses depends on the fact of the case itself and if
and only if the action taken is reasonable, the plaintiff may recover the money spent
in mitigating the losses suffered due to the breach done by the defendant.

MITIGATION AND ANTICIPATORY BREACH

Anticipatory breach is a situation where the defendant breached the contract but he
made known to the plaintiff of his intention to do so. It is also known as repudiation.
When such situation occurs, the plaintiff has a right to elect that is whether to ignore
the anticipatory breach or to accept the repudiation.

If the plaintiff chooses to ignore the anticipatory breach, the contract will remain
intact and there is no breach of contract. In addition, remedy is not available to the
plaintiff until the time for performances arrives. This principle was founded in the
case of Shindler v Northern Raincoat Co Ltd where the judge was quoted as saying
that:
“It cannot be said that there is any duty on the part of
the plaintiff to mitigate his damages before there has
been any breach which he has accepted as a breach”.

Conversely, if the plaintiff chooses to accept the repudiation, he can sue the defendant
at once for breach and seek immediate damages. Additionally, the plaintiff is not
bound to mitigate the losses incurred.

However, the judgments in several cases tend to raise doubt over the real situation in
practice with regards to this issue. This is due to the fact that in some cases, the
judgment seems to be anomalous. One such case is the case of White and Carter
(Councils) Ltd v McGregor. In this case, after the parties had entered into an
advertisement agreement, the defendant wrote to the plaintiff to cancel the three-year
contract. Nonetheless, the plaintiff refused to cancel the agreement and as they had
performed their part of the contract, they claimed for the full contract price.
The defendant argued that the plaintiff should have reduced its loss, accept the
repudiation and sue for damages. The House of Lords in this case held that the
plaintiff were entitled to carry out the contract and claim the full contract price and
further added that they were not under an obligation to accept the repudiation and sue
for damages.

The principle in this case was applied in Malaysia in the case of Teh Wan Seng &
Sons Sdn Bhd v See Teow Chuan. The plaintiff in this case had entered into a tenancy
agreement with the defendant. The period of the agreement was for three years
commencing from 12 October 1974 to 11 October 1977, at the monthly rate of
$5928.75. On 11 February 1976, the defendant wrote to the plaintiff telling their
intention to repudiate the contract and vacated the premises. However, the plaintiff
refused to accept the letter and continued to claim rental for the premises.

During this time, there was an offer made to the plaintiff to rent the premises at $4000
per month but the plaintiff rejected this offer. In April 1977, the plaintiff succeeded in
finding another tenant to rent the premises at the same rate as that paid by the
defendant. The plaintiff then claimed for damages for the loss of rental from February
1976 until April 1977.

The defendant claimed that the plaintiff should only be entitled for the difference
between the original rental and the offered rental as the plaintiff had failed to mitigate
his losses by rejecting the $4000 per month offer made earlier. On the other hand, the
plaintiff claimed that by virtue of White and Carter (Councils) Ltd, he was not
obliged to mitigate unless there was a breach of contract and further argued that a
breach had not yet occurred until he accepted the defendant’s breach when he
accepted a new tenant in April 1977.

The court held that by virtue of White and Carter (Councils) Ltd, the breach occurred
when the plaintiff finally accepted the anticipatory repudiation that was when the
plaintiff finally took in a new tenant. As duty to mitigate losses can only arise if there
is a breach of contract, the plaintiff was under no obligation to mitigate it when the
defendant wrote him a letter of repudiation as there was no breach then. So, the court
allowed the claim for damages for the loss of rental from February 1976 to April 1977
and ruled that the plaintiff was not obliged to mitigate as there was no actionable
breach and that the plaintiff had elected to ignore the anticipatory breach.

The court nevertheless applied different approach in Ban Chuan Trading Co Sdn Bhd
v Ng Bak Guan. In this case, after the parties had signed a tenancy agreement, the
defendant informed the plaintiff that they were unable to deliver vacant possession of
the premises as the previous tenant refused to deliver it and continued to occupy the
premises. The plaintiff insisted on vacant possession and attempted to pay the
monthly rent but the defendant refused to accept.

A year later, the plaintiff gave notice to terminate the agreement and claimed for loss
of profits for three years, which was the lifespan of the agreement, as general damages
and for money spent in preparing to carry on business on the said premises as special
damages. The court at first instance allowed the claim. However, on appeal, the Court
of Appeal set aside the award of damages for loss of profits for lack of ecidence to
support the claim.

Mokhtar Sidin JCA was quoted as saying that:

“…the respondent [plaintiff] knew soon after signing
the agreement that the said premises were not
available… instead of terminating the agreement
immediately, he waited for a year and then claimed for
loss of profits for three years… In our view, the
respondent could have minimised his losses if he had
taken steps to terminate the agreement as soon as it was
made known to him that the premise was not available
He waited in order to justify his claims of loss of profits
for three years. We are of the view that he is not
entitled to do that”.

By analyzing these cases, it can be seen that the court in White and Carter and Teh
Wan Seng rules that the plaintiff may ignore the anticipatory breach and claimed for
loss of profits for the period of the agreement. These two cases also showed that the
court is of the view that the plaintiff need not mitigate his losses as there is no
actionable breach since they chose to ignore the repudiation until the time for
performance arrives.
However, in Ban Chuan Trading, the court took a different view and held that the
plaintiff should mitigate his losses even in cases of anticipatory breach. This is
because, by looking at the judgment by Mokhtar Sidin JCA, he required the plaintiff
to accept the repudiation as soon as possible and by doing so, it could minimise his
losses. Nevertheless, there was no authority cited by Mokhtar Sidin JCA in coming to
that conclusion and therefore, as to the issues of mitigation when there is repudiation,
it is still debatable and arguable.