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What’s the duty to mitigate damages in a contract breach?

On Behalf of | Aug 23, 2023 | Business Law |

When a breach of contract occurs, the non-breaching party has a duty to mitigate their losses, and that responsibility cannot be ignored.

In other words, even though a party did nothing to cause the breach, they still have an obligation to try to minimize the fallout and avoid further losses. If a person or company fails to actively attempt to mitigate its damages, its ability to obtain full  recovery of damages caused by the other party could be lost.

What does this duty look like in a breach of contract claim?

Essentially, the party that’s innocent of the breach has to take reasonable steps to avoid unnecessary losses caused by the other party’s actions. This prevents the breaching party from having to assume unfair liability and losses.

Naturally, exactly what each side considers a reasonable effort to mitigate the damages often is a matter of dispute, but here are some potential examples for different kinds of contracts:

  • Supplier contracts: What if your supplier suddenly fails to deliver a component you need to manufacture your product? Instead of halting production entirely (and defaulting on contracts of your own), you would likely be expected to find a new supplier, even if you had to pay more for the component.
  • Distributor contracts: What if a store abruptly decides to refuse delivery of your goods, leaving you with a massive unused inventory? You might be expected to offload the excess through a discount market, at a reduced price.

Reasonable attempts to mitigate damages will look different in every situation, but they typically involve trying to find alternative solutions to whatever problem was created by the breach. In none of those situations would the at-fault party be absolved of their obligation to make your company financially whole again, but their liability when considered by the Court of how much it would take to make you financially whole again, rests on whether you used your best efforts to mitigate your losses.

If you or your company has experienced a breach of contract leading to damages, learning more about your legal obligations and options can help you avoid even bigger losses.