Many types of commercial litigation include the duty to mitigate. The duty to mitigate is an affirmative duty: a plaintiff must make reasonable efforts to reduce their losses. When a plaintiff does not, then their damages are reduced under the assumption they had taken reasonable efforts to reduce their losses, or they are excluded from seeking those damages altogether.
The duty to mitigate does consider whether the mitigation efforts were reasonable. This considers the costs of mitigation, whether the plaintiff has the means to pursue mitigation opportunities, and whether the mitigation efforts entail additional risks. But these mitigation efforts must be made in good faith.
There are two broad forms of mitigation: negative mitigation and positive mitigation. Negative mitigation consists of not taking action that would further increase damages, while affirmative mitigation consists of taking action to reduce damages. This article addresses the various forms of affirmative mitigation.
This article explores the various contexts where the duty to mitigate might be applicable and the complexities that surround it. Calculations involving the duty to mitigate can be complicated, and generally require an expert witness.
“Business interruption” is a broad, poorly defined concept. As such, the wrongs it covers, and the ways duty to mitigate are applied, are highly varied. Nevertheless, a plaintiff has an affirmative duty to reduce its damages, if applicable.
Business interruption generally comes in two varieties: breach of contract and business torts. The following are examples of common causes of business interruption, the ways the duty to mitigate are generally applied, and the ways an expert witness can be helpful when presenting them at trial.
Breach of Contract
Duty to mitigate damages under a breach of contract claim take slightly different forms depending on who breached the contract, though they follow a similar logic.
A breach of contract from the buyer generally occurs when a buyer rejects goods or fails to pay timely. As the plaintiff, the seller’s duty to mitigate takes the form of using reasonable business judgement to find a replacement buyer for the goods or services at issue. This is generally feasible when the goods or services are generic or undifferentiated. This may not be feasible for more unique and/or customized goods or services. Economic damages include the decrease in price received between the contract price and the price from a replacement buyer.
An element that is unique to the seller’s remedy is the question of whether the seller had the capacity to service both the lost sales and the replacement sales. If the seller has the spare capacity to service both the lost sale and the potentially replacement sales, then there is no reduction in damages for the replacement sale. The question is whether replacement sales, whether actual or hypothetical, are really the result of the initial transaction. Phrased another way, could both transactions have occurred independently? If they did, then some (if not all) of the subsequent sales are not replacement sales.
A breach of contract from the seller generally occurs when they fail to deliver. Duty to mitigate as the buyer generally translates to purchasing replacement goods or services. The requirement for good business judgement still applies. As with the seller’s remedies, this may or may not be possible depending on whether the subject goods or services were generic or specialized. Damages include the increase in price paid between the contract price and the price paid for the replacement goods or services, if any.
There also exists the possibility that the breach of contract led to additional business interruptions. In such cases, other remedies may be appropriate, including lost profits from decreases in business or lost customer relationships, loss of market share or competitive edge, and loss of reputation and goodwill.
There also exists the possibility, for both seller and buyer lost profits, that the damage will continue, which will require discounting of future lost profits to current dollars.
There are multiple kinds of business torts, and the remedies thereof are generally determined by the facts of the case. Any business interruption that takes time to overcome is a form of mitigation. Often that return to normalcy has not yet been reached at the time of trial. In that circumstance, a financial expert is generally needed both to determine for how long the damage will continue and the lost profits thereof. Remedies can include recission of contract, lost profits, and injunctive relief.
Tortious interference involves a party interfering in the contracts or relationships of another party. Remedies for tortious interference can include lost profits.
Business theft involves the unauthorized conversion of business assets. Normally this is a theft of trade secrets as opposed to physical assets. Damages depend on the asset taken and the availability of documents, but generally translate to either valuation of the lost asset, or disgorgement of unjust enrichment.
Fraudulent misrepresentation generally involves misrepresentation or misleading statements to induce other parties into a contract. Normal remedies include recission, but in the instance where that is not feasible, then the remedy is generally lost profits or lost business opportunities.
Commercial disparagement is a form of defamation. In a business context, this generally results in lost customers, which would translate to a lost profits calculation, and all that entails.
Related article: The Basics of Lost Profits
Personal Injury and Wrongful Termination
Most jurisdictions require a plaintiff to take reasonable steps to reduce their lost earnings. This generally takes the form of the plaintiff finding (or when they reasonably could be expected to have found) replacement employment. There is reasonably a delay between the date of incident and the date when replacement earnings as the plaintiff applies for another job. With a personal injury case, there will reasonably be an additional delay as the plaintiff recovers from their injury.
As with any duty to mitigate, if the plaintiff did not take reasonable steps to mitigate, then it becomes necessary to offset damages with their hypothetical earnings capacity.
What should I do?
Hire an expert (like us). As an expert, we will save you time and money because:
- We know the sorts of financial information that are needed to calculate economic damages in a variety of cases.
- We are intimately familiar with the financial information upon which economic damages rely
- We have the expertise to calculate and support appropriate discount rates for future damages
- We know how to perform the analyses described above
- We know how to perform and interpret the results of the statistical analyses that might be required
We can provide expert witnesses testimony in a simple, efficient manner so that triers of fact can understand otherwise complicated subjects.