What is the Duty to Mitigate? 

In contract law, the duty to mitigate refers to the legal obligation of a non-breaching party to take reasonable steps to minimize the losses they suffer due to the other party's breach of contract.

Reasonableness Standard: What actions are expected?

The duty to mitigate requires that the non-breaching party make “reasonable” good-faith efforts to minimize their losses based on the circumstances of each case. Factors that play into this reasonableness assessment include:

• Availability of comparable alternatives: If the non-breaching party can find a reasonably similar substitute for the breached contract (goods, services, etc.), they are usually expected to do so.
• Additional costs: Mitigation should not place an excessive financial burden on the non-breaching party. However, they might have to accept some increased costs if that's the only way to lessen overall damages.
• Time constraints: Urgency matters. If a non-breaching party needs to find a quick solution to prevent their business from shutting down, they might not be able to shop around for the absolute best deal.
• Business realities: Courts will consider industry practices and the specific needs of the non-breaching party's business when deciding if their actions were reasonable.

Note that there are some key situations where the duty to mitigate does not strictly apply such as where circumstances genuinely make mitigation impossible or extremely difficult, or in situations where attempts to mitigate might actually increase losses (for example, if a rush order to replace a broken machine would result in significantly higher costs and further production delays than a reasonable wait for standard delivery).

Common Scenarios Where the Duty to Mitigate Applies

While every contract breach is unique, the duty to mitigate frequently arises in a few familiar situations. Understanding these scenarios is key to acting reasonably and protecting your interests. Here's a breakdown of some common areas and potential actions:

Employment Contracts

• Wrongful Termination: If you've been wrongfully terminated, you can't sit back and expect your former employer to keep paying your salary indefinitely. You're expected to actively seek comparable employment. Refusing suitable job offers could lessen the amount of damages you can recover in a lawsuit.
• Employer's Breach: If an employer breaches an employment contract, they might try to mitigate their financial consequences by offering you a different position within the company or providing a severance package.

Sale of Goods

• Seller Doesn't Deliver: If a seller fails to deliver the goods you ordered, you'll likely need to find a substitute supplier. The cost difference between your original contract and the substitute purchase could factor into damages calculations.
• Buyer Refuses Goods: If a buyer wrongfully refuses to accept the goods they agreed to purchase, the seller has a responsibility to try to resell those goods to mitigate their losses.

Construction Contracts

• Contractor Abandons Project: If your contractor leaves a project unfinished, you may need to hire someone else to complete the work. These additional costs could be part of your damages claim against the original contractor.
• Owner Breaches: If an owner breaches a construction contract, the contractor can't just sit idle. They're expected to reasonably seek other projects to offset the lost income.

Service Contracts

• Provider Fails to Perform: If you hired someone for a service (like marketing, consulting, etc.) and they don't fulfill their obligations, finding a replacement provider might be necessary.
• Client Breaches: If a client cancels a service contract without a valid reason, the service provider must seek other clients to minimize their financial losses.

The Impact of Failing to Mitigate on the Recovery of Damages

If a party fails to take reasonable steps to promptly mitigate their losses, the compensation they can claim for a breach might be decreased. This reduction reflects the extent of losses they could have reasonably prevented through mitigation, including any consequential damages.

Example: Assume a buyer has a contract to purchase goods for $10,000, and the seller breaches the contract on January 1st, at which point the buyer’s duty to mitigate by promptly seeking substitute goods (covering) is triggered. Let’s further assume that the lowest price at which they can find reasonable substitutes is $12,500. Now, suppose the buyer delays this process until February 1st, during which they incur an additional $2,500 in lost profits due to production delays. Had the buyer acted promptly and obtained cover in January for $12,500, their damages resulting from the breach would have been limited to $2,500 (the difference between the original contract price and the cost of cover). Since they failed to mitigate, they will not be entitled to recover the full $5,000 (cost of cover + lost profits) but will be limited to the damages they would have incurred had they mitigated immediately upon learning of the breach.