Remoteness of Damage, and the Duty to Mitigate

Three requirements, and each is a place where claims fail.

1. Knowledge, and the courts look for knowledge brought home to the defendant, not merely something he might have guessed.
2. At the time of the contract. Knowledge acquired later does not count, however clearly it is communicated.
3. Likely to result. A possibility is not enough; the loss must have been a likely consequence.

The leading Indian application

Karsandas H. Thacker v. Saran Engineering Co. Ltd., AIR 1965 SC 1981.

Facts. The appellant contracted to buy scrap iron from the respondent at a controlled price, intending to export it, and had resold it to a third party. The respondent failed to deliver. The appellant claimed damages measured by what the failure cost him on the export resale.

Held. The respondent did not know that the appellant was purchasing for export. Under section 73 the buyer was entitled to compensation only for loss which naturally arose in the usual course of things from the breach, or which the parties knew when they made the contract to be likely to result from it, and no compensation is to be given for remote and indirect loss. As the price was controlled, the loss which could naturally have arisen in the usual course of things was nil, and the claim failed.

Why it matters here. It is the Supreme Court applying both limbs and the exclusion of remote loss in a single case, and it shows exactly how a claim fails: the special purpose was real, the loss was real, and none of it was recoverable because the purpose was never brought home to the seller. It also shows that where a controlled price removes the ordinary market differential, limb one may yield nothing at all.

Mitigation: the Explanation to section 73

"In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account."

What it requires, and what it does not

It is not a duty in the strict sense. No one can sue the claimant for failing to mitigate. The consequence is simply that loss he could reasonably have avoided is not taken into account in estimating his damages.

The standard is reasonableness, judged at the time. The claimant must take reasonable steps, not every conceivable step, and he is not required to take risks, to spend money he does not have, or to damage his commercial reputation. He is judged on what was reasonable then, not with hindsight.

Reasonable expenses of mitigating are recoverable, even if the attempt fails, because they were incurred as a consequence of the breach.

Where the claimant makes a profit by mitigating, that gain is brought into account and reduces his loss.

Mitigation and anticipatory breach

Where the innocent party accepts a repudiation, his duty to mitigate begins at once, and he should go into the market then. Where he affirms, the contract continues, and the question of mitigation arises only when the breach becomes actual. This is a further practical reason why the election under section 39 matters. See [Breach of Contract, Actual and Anticipatory].

Remoteness and mitigation compared

A useful way to hold it: remoteness asks whether the loss is in; mitigation asks how much of what is in the claimant should have kept out.

A worked example

Gauri contracts to supply Harsh, a caterer, with two hundred kilograms of paneer on 10 December for a wedding, at four hundred rupees a kilogram. She fails to deliver.

• Harsh buys the same quantity on 10 December at five hundred rupees a kilogram. Limb one. The difference of twenty thousand rupees is loss arising naturally in the usual course, and buying the substitute is proper mitigation.
• He also pays two thousand rupees for an urgent delivery van to collect it. A reasonable expense of mitigating, recoverable even though it increases the immediate outlay.
• He does nothing, cancels the wedding order and loses his fee of one lakh rupees, although paneer was freely available. The Explanation applies: the means of remedying the inconvenience existed, so his damages are limited to what he would have lost had he bought a substitute.
• He loses a five year contract with a hotel chain because of the one failed wedding, and Gauri knew nothing of it. Not ordinary loss, and not known to the parties at the time of contracting. Remote and indirect, and irrecoverable. This is Karsandas Thacker in a different trade.
• Change one fact: when the contract was made Harsh told Gauri that the wedding was a trial order for a hotel chain and that a five year contract turned on it. The loss now falls within limb two, because the parties knew of it at the time of contracting.
• He buys the substitute at five hundred and, because of its better quality, wins an extra order worth thirty thousand rupees. The gain made through mitigating is brought into account, reducing his recoverable loss.

What it does NOT mean

"Any loss the breach caused is recoverable." Causation is not enough. The loss must also fall within one of the two limbs, and the second paragraph of section 73 excludes remote and indirect loss expressly.

"Notice of a special loss can be given at any time." It must be at the time the contract is made.

"Mitigation is a duty the defendant can sue on." It is not. Failure to mitigate simply reduces the damages.

"The claimant must take every step to reduce his loss." Only reasonable steps, judged at the time, without hindsight and without requiring him to take undue risks or expense.

"Money spent trying to mitigate is at the claimant's own risk." Reasonable expenses of mitigation are recoverable even if the attempt fails.

"Hadley v. Baxendale is the governing authority in India." The governing text is section 73. The English case is the origin of the two rules the section enacts, and it is cited for that reason.

Quick revision

• Remoteness, s.73: recoverable loss is that which naturally arose in the usual course of things, or which the parties knew when they made the contract to be likely to result. No compensation for remote and indirect loss.
• The two limbs enact Hadley v. Baxendale; in India the section governs and the case explains it.
• Limb two's three requirements: knowledge, at the time of the contract, of a likely result.
• Karsandas H. Thacker v. Saran Engineering Co. Ltd., AIR 1965 SC 1981: the seller did not know the buyer was buying for export; only ordinary loss was recoverable; the price being controlled, that loss was nil and the claim failed.
• Mitigation, the Explanation to s.73: the means which existed of remedying the inconvenience must be taken into account.
• Mitigation is not a duty that can be sued on; it reduces the award. The standard is reasonableness at the time. Expenses of mitigating are recoverable; gains made by mitigating are brought into account.
• Remoteness is tested at the date of the contract; mitigation at and after the date of the breach.

Test yourself

1. State the rule on remoteness in Indian law. Section 73 allows compensation for loss which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from it, and provides that compensation is not to be given for any remote and indirect loss or damage. These are the two rules of Hadley v. Baxendale in statutory form.

2. Why did the claim fail in Karsandas H. Thacker? Because the seller did not know that the buyer was purchasing the scrap iron for export, so the loss on the export resale fell outside the second limb, there being no knowledge at the time of contracting. It also fell outside the first limb: the price was controlled, so no loss naturally arose in the usual course of things, and the section excludes remote and indirect loss.

3. What does mitigation require of the claimant? That he take reasonable steps to remedy the inconvenience caused by the non performance, the Explanation to section 73 requiring the means which existed of doing so to be taken into account. He need not take every possible step, nor incur unreasonable risk or expense, and he is judged by what was reasonable at the time rather than with hindsight.

4. Can a claimant recover the cost of an unsuccessful attempt to mitigate? Yes. Reasonable expenses incurred in attempting to mitigate are themselves a consequence of the breach and are recoverable even where the attempt does not succeed. Conversely, where mitigation produces a gain, that gain is brought into account and reduces the recoverable loss.

5. Distinguish remoteness from mitigation. Remoteness asks whether a kind of loss is recoverable at all, and it is tested by what the parties contemplated at the date of the contract; loss outside both limbs is excluded entirely. Mitigation asks how much of an otherwise recoverable loss the claimant should have avoided, and it is tested by what he reasonably could have done at and after the date of the breach; it reduces the award rather than excluding the claim.