The benefits of mitigation

In Thai Airways International Public Company v KI Holdings Limited [2015] EWHC 1250 (Comm) the High Court has addressed how benefits received in mitigating loss affect calculation of damages for breach of contract.

The claimant airline contracted with the defendant, a manufacturer of airplane seats, for the supply of economy class seats. Certain shipments of seats were to be delivered in accordance with a timetable agreed between the claimant and a third party for delivery of new aircraft.

In breach of contract, some shipments of seats were delivered late by the defendant and others were not delivered at all. As a result, new aircraft were delivered to the claimant without any economy class seats installed. The claimant put these aircraft into storage until seats could be procured from alternative suppliers. In order to meet its capacity needs, the claimant leased three aircraft from another airline.

The claimant sought damages for the cost of leasing the three aircraft, which were claimed as costs incurred in mitigation of losses which the claimant would otherwise have sustained as a result of the defendant’s breach of contract. The defendant admitted liability shortly before trial. However, the parties remained in dispute over the correct measure of damages.

The defendant argued that the claimant gained certain benefits from its mitigating actions, which should be taken into account when calculating damages. The alleged benefits were principally profits generated by operating the leased aircraft and fuel savings occasioned by the fact that the claimant installed alternative seats in its own aircraft which were lighter than the defendant’s seats.

The claimant argued that any profits generated as a result of its mitigating actions need not be taken into account as a matter of law and alternatively, that the defendant had failed to establish that the alleged benefits it received exceeded the costs of the leases.

The High Court held that, in assessing damages for breach of contract, credit must be given for any monetary benefit which the claimant has received or will receive as a result of an action reasonably taken to mitigate its loss. Credit must be given even if the benefit is an unavoidable consequence of the claimant’s act. The court considered a monetary benefit to be ‘a benefit which either takes the form of money or the claimant could reasonably be expected to realise in terms of money’.

However, the court also held that the defendant had the burden of proving that the claimant derived a benefit from its mitigating actions. On the issue of the operating profits of the leased aircraft, the defendant was required to prove that the claimant’s profits generated by operating the leased aircraft exceeded the profits which would have been generated had the entry into service of the new aircraft not been delayed by the defendant’s breaches of contract (and the aircraft leases had not been entered into). The defendant failed to establish this and the claimant was awarded the costs of the leases. However, on the fuel saving issue, in respect of one set of seats, the defendant successfully established that the claimant had made a saving (on the basis of a reasonable estimate) by its actions. The court awarded credit for the saving to the defendant.

The facts related to aviation, but the principles are of general application, and provide an important clarification of the principles of mitigation.

The decision confirms that when a claimant acts to mitigate its loss, as it is required to do, monetary benefits which result from its mitigating actions may be credited to the defendant, even when the accrual of the benefit is simply a consequence of the claimant’s actions, not a choice. However, while the decision accords with the general principles that damages should compensate a claimant for its actual loss and that a claimant cannot recover for avoided loss, it is notable that the court adopted a wide definition of monetary benefit, which included future benefits which could reasonably be expected to be realised in money.