Court of Appeal decision on mitigation of loss

The Court of Appeal has held that an innocent party did not fail to take reasonable steps to mitigate its loss by not permitting the party that was in breach of contract to modify the faulty product it had supplied: Manton Hire & Sales Ltd v Ash Manor Cheese Co Ltd [2013] EWCA Civ 548.

The decision is of interest in illustrating the court's approach to arguments that a party should have mitigated its loss by negotiating with the party in breach. While each case will turn on its facts, the key practical points arising from this decision are:

• Where a party is in breach of contract and wishes to make an offer that will allow the innocent party to mitigate the loss, it should take care to put forward a proper, detailed proposal that is capable of acceptance by the innocent party. If it fails to do so, arguments that the counterparty acted unreasonably in failing to negotiate may be met with little sympathy.
• Innocent parties should think carefully before closing the door to negotiation with the party in breach, where such negotiation might enable them to reduce or eliminate their loss. Depending on the circumstances, the court may consider their actions unreasonable.

Background

A defendant who is in breach of contract will not be liable for losses that the claimant could have avoided by taking reasonable steps to mitigate its loss. The onus is on the defendant to show that the claimant failed to act reasonably, and the standard of what is reasonable for these purposes is not a high one. 

In this case, the appellant (Manton) had supplied a reach forklift truck for use by the respondent (Ash) in its warehouses. A Manton representative had attended at Ash's site to take measurements of its racking arrangements and the model supplied was one of two that it had recommended as suitable.

After delivery, Ash discovered that the forklift did not fit within the racking, and took the view that it was not fit for purpose. Manton proposed to remove the truck and have it modified to correct the problem. Ash expressed various concerns including as to whether the proposed modifications would comply with relevant legislation and regulations. The tone of the correspondence became less conciliatory, discussions broke down, and the forklift was rejected by Ash.

The sole issue for determination at trial was whether Ash had failed reasonably to mitigate its loss.

Decision

The Court of Appeal rejected Manton's argument that Ash had failed to mitigate. Manton had not put forward an offer that Ash could reasonably have been expected to accept without more. Ash had not shut the door to negotiations; its "apparent intransigence" had to be considered in light of the "combative tone" of Manton's correspondence.

On the facts, there was nothing to prevent Manton putting forward a detailed proposal supported by a proper specification and drawings, as well as information as to how the relevant legislative and regulatory requirements would be met. As the court put it, "A detailed and documented proposal could have been put forward which Ash might then have rejected at its peril." In the circumstances, Ash had not acted unreasonably.

Comment

The question of what steps an innocent party will be expected to take to mitigate its loss is necessarily fact-sensitive. In some circumstances, a claimant may be expected to accept an offer from the defendant in order to eliminate or reduce the loss. The claimant might even be expected to initiate negotiations, and a failure to do so may be held to be unreasonable - though, conversely, there may be cases where the defendant's conduct has been so poor that the claimant cannot reasonably expected to deal further with him. 

The court is likely to take into account the relative positions of the parties in deciding what is reasonable. Here the court pointed out that Manton was the expert in the field, and so it was for Manton to satisfy Ash that its proposal was lawful and that it could deliver its proposed solution. Issues of timing may also be important; where time is of the essence, there may realistically be only one chance for the defendant to make an offer before the claimant makes other arrangements (as in Copley v Lawn [2009] EWCA Civ 580, a decision referred to by the court). All will depend on the circumstances.