The duty of a plaintiff to mitigate its damages is a long-standing tenet of contract law. In effect, if an injured party can reduce the harm to it as a result of the breaching party’s conduct, then it has a legal obligation to do so. A failure to exercise this duty may result in a defendant prevailing on an affirmative defense based on this theory and therefore a reduction in a plaintiff’s damages.
When facing a failure to mitigate defense, a plaintiff will want to raise two issues: 1) whether it had a duty to mitigate, and 2) if so, when did it attach. The consensus across jurisdictions is that the requirement to mitigate damages begins post-breach. The analysis of the applicability of the duty becomes more nuanced, however, when a party has notice that a breach is forthcoming or damages have yet to be incurred.
No Duty to Foresee a Breach
A recent decision by the Armed Services Board of Contract Appeals states the principal succinctly: “we are not aware of any authority that requires a party to foresee the possibility that a breach may occur and to take steps to mitigate its potential resulting damages before a breach has actually occurred.” Appeal of CiyaSoft Corp., ASBCA Nos. 59913 (June 3, 2022). A survey of jurisdictions reflects courts taking a similar position and indicating the issue is well-settled. A party is not required to expect or anticipate a breach in order to trigger a duty to mitigate.
Notice of Forthcoming Breach
Although a party may not be required to foresee the possibility of breach, it may nevertheless trigger a duty to mitigate if it has reason to know a breach is forthcoming. Some courts take the position that the duty to mitigate damages arises when the injured party has notice that the other party will not perform. Actual non-performance does not have to occur before the duty begins; notice or signs of an impending breach are sufficient to require the (potential) injured party to make reasonable efforts to avoid or prevent losses.
Breach but No Damages
Finally, instances may arise when the breach occurs (or is forthcoming) but the injured party has not sustained damages. At least in Texas, courts take the position that it is not the damages themselves that trigger the duty to mitigate, but knowledge of the breach that ultimately causes the damages. Meaning, a plaintiff cannot escape the duty to mitigate, or defer its duty, until it suffers damages. It must attempt to prevent incurring them once it knows of the impending or actual breach.
Subcontractors should insist on language in the subcontract agreement that requires the prime contractor to notice it of any potential government action that may cause the prime to breach the subcontract terms and conditions.
The subcontract agreement should state that any notice of a likely breach must be in writing.
Should the potential aggrieved party have reason to believe that a breach may occur but has not been formally noticed of it, that party should, in writing, obtain a confirmation of whether the counterparty expects a breach. And if a confirmation is not received, it should evaluate the facts of the situation with counsel to determine whether the circumstances create a reason to believe breach will occur and therefore whether the duty to mitigate has been triggered.
Implement internal mitigation procedures commensurate with the three conditions that trigger the duty: there is reason to believe a breach will transpire, notice of impending breach has been given, and an actual breach has occurred.
Do not wait for damages to be incurred prior to instituting mitigation efforts.