The duty to mitigate
In nearly all commercial disputes, the innocent party will have a duty to minimise the losses it is suffering. This legal duty of mitigation reflects the natural response to find the best possible solution in a bad situation. It stops a person from acting maliciously in allowing heavy losses to accrue in the hope of later passing them on to the party at fault.
Often the best solution can be found by working with the party that has caused the problem in the first place. Looked at from the other end of telescope, if you are the culpable party, offering a reasonable solution is sometimes the best way to prevent being faced with a sizeable financial claim.
At first it may appear counterintuitive to work alongside someone who has caused your relationship to fail. However, modern commercial contracts can be the product of months of negotiation, during which all parties will have put in place bespoke working arrangements and have gained important know-how about the other party's business. Building on this established groundwork is often more effective than beginning afresh with a new partner.
Striking the right balance
The question is: how far must you work together before you can say enough is enough? Can you walk away from a contract even though your counterparty is offering to solve the problems at their own cost?
The Court of Appeal has recently confirmed that a person is not obliged to accept a solution from a defaulting party unless it has sufficient information to assess the value of that solution. Even if the party at fault offers to fix any problems for free, it may be reasonable to look at other solutions. The theory being that even a "free" solution comes at a cost to the party offering it and it may be possible to find a better value solution elsewhere.
Sayce v TNT
In Carly Sayce v TNT (UK) Ltd [2011] EWCA Civ 1583, the claimant, Miss Sayce, was in a car accident. Her car was damaged beyond use and she hired a replacement car at her own cost. The defendant however had offered Miss Sayce a replacement car free of charge which Miss Sayce declined. Miss Sayce went on to try to recover her hire costs from the defendant. The defendant asserted that Miss Sayce had failed to mitigate her loss by failing to take up the free car on offer from the defendant.
The Court of Appeal ultimately found that Miss Sayce had failed to mitigate her loss. However, it did not come to this conclusion because the defendant's replacement car would have been free to Miss Sayce. The defendant had in fact told Miss Sayce that the cost of its replacement vehicle was £14 per day but that it would pay this charge. Miss Sayce was therefore able to assess that the defendant's car at £14 per day was cheaper and therefore offered better value than her own hire care. As such, Miss Sayce should have taken up the defendant's offer.
The consequence of this decision is that if Miss Sayce had not known how much the defendant's replacement car was going to cost the defendant, she would have been unable to assess the defendant's offer. In those circumstances, it would have been reasonable for her to hire any other suitable vehicle and to recover those hire costs from the defendant.
This decision has been criticised as contradicting previous authorities on this question. However, to date, all attempts to appeal the decision have been refused and it remains good law.
The solution must be reasonable in the round
It is important to bear in mind, when looking at possible solutions, that cost is not everything. The duty to mitigate seeks to ensure the best solution overall. When judging whether an innocent party took reasonable steps to mitigate its loss, the court looks at all the issues in the round.
Just because a solution is considered 'cheap' does not mean it offers good value. If a cost-free solution is provided by someone that experience shows is unreliable or incapable, then other alternatives may be more reasonable even if more expensive.
Tips
If you are the innocent party looking to solve a commercial dispute:
- Talk to the other party as soon as you notice things starting to go wrong. Do not wait for a significant breach before engaging with the other party.
- Always ask the other party for a solution.
- Consider your alternatives.
- Put those alternatives to the other party so they have a chance to make a better offer - this prevents them later saying that they could have offered a better solution.
- Record why you chose your preferred solution - it is easier to do this at the time than later in a witness box.
If you are the party in default:
- Always consider whether you can offer a solution.
- Explain the cost of your solution even if you are offering it to the other party for free.
- Press for the other party to disclose any alternatives that they are considering so that you have the chance to make a better (and hopefully more cost-effective) offer.