Содержание
When a contracting party breaches a contract, the injured party is entitled to compensation for damages. But English law does not permit the injured party to simply sit back and watch losses mount. It requires the injured party to take reasonable steps to mitigate its losses — this is the principle of mitigation of damages.
For a trader facing non-performance of a GAFTA or FOSFA contract, understanding mitigation is a practical matter: what steps should be taken after a counterparty’s default to avoid losing the right to full recovery of damages in arbitration?
Three Rules of Mitigation
The doctrine of mitigation in English law comprises three interrelated rules. The classical formulation comes from Viscount Haldane LC in British Westinghouse Co v Underground Ry [1912] AC 673.
Rule 1: Avoidable Loss — a claimant cannot recover losses that could reasonably have been avoided
This is the fundamental rule. The injured party must take all reasonable steps to mitigate the losses caused by the breach. Losses that arose because the injured party failed to act are not recoverable.
In commodity trading, this typically means the following: if a seller fails to deliver goods, the buyer should consider a cover purchase in the market. If a buyer refuses to take delivery, the seller should consider resale to another buyer.
The law does not require the impossible. The injured party is not obliged to take loss-making, risky, or unusual steps. The standard is the conduct of a reasonable trader in similar circumstances.
Rule 2: Mitigation costs are recoverable
If the injured party incurs expenses in reasonable attempts to mitigate its losses, those expenses are recoverable — even if the mitigation attempts ultimately fail. For example, a buyer who paid brokerage fees on a cover purchase can include them in its claim, even if the cover purchase was later cancelled.
Rule 3: Avoided Loss — a claimant cannot recover losses that have actually been mitigated
The flip side of Rule 1. If the injured party has actually reduced its losses (for example, by reselling goods at a good price), it cannot ignore this fact and claim full damages. The court or arbitral tribunal will account for the actual losses incurred, not theoretical ones.
The “Duty” to Mitigate: What It Really Means
The term “duty to mitigate” has taken root in legal language, but it is formally incorrect. Pearson LJ in Darbishire v Warran [1963] 1 WLR 1067 CA provided the precise explanation: the injured party does not owe a duty to anyone to minimise its losses. It is free to act as it wishes — even incurring greater expenses than necessary. But it cannot shift to the wrongdoer the part of the loss that it could reasonably have avoided.
This was confirmed by Sir John Donaldson MR in The Solholt [1983] 1 Lloyd’s Rep. 605 CA: the claimant is entirely free to act in its own interests, but the defendant is liable only for that portion of the loss which was actually caused by his breach. The Supreme Court in [Bunge SA v Nidera BV [2015] UKSC 43](https://www.bailii.org/uk/cases/UKSC/2015/43.html) confirmed: the so-called duty to mitigate is not a duty owed by the innocent party to the guilty party.
The practical significance of this distinction: an arbitral tribunal cannot compel the injured party to take specific steps (for example, to buy goods in the market). But if it does not do so, the tribunal may reduce the amount of damages awarded.
The Reasonableness Standard: What Exactly Does the Law Require?
Mitigation is a question of fact, not law. The court assesses whether the claimant acted reasonably in the particular circumstances. This was established in Payzu v Saunders [1919] 2 KB 581 CA.
This means there is no fixed checklist of steps the injured party must take. Reasonableness is assessed in light of all the circumstances: the state of the market, available alternatives, the claimant’s financial position, and the urgency of the situation. An appellate court is reluctant to revisit findings of the trial court on mitigation, precisely because it is a question of fact rather than law.
What the Law Does NOT Require
The injured party is not obliged to:
- take risky or speculative steps
- spend disproportionately large sums to reduce losses
- act in the wrongdoer’s interests at the expense of its own
- accept the wrongdoer’s offer if it differs substantially from the original contract or requires waiver of contractual rights
In Strutt v Whitnell [1975] 1 WLR 870 CA, a home buyer who failed to obtain vacant possession due to the seller’s breach was not obliged to accept the seller’s offer to buy back the house. The court held that acceptance of such an offer would have amounted to unwinding the contract — something fundamentally different from mitigation of loss.
In Heaven & Kesterton v Etablissements François Albiac [1956] 2 Lloyd’s Rep 316, a buyer who rightfully rejected goods of insufficient quality under a CIF contract was not obliged to subsequently accept the same goods as part of mitigation.
Burden of Proof: Who Must Prove Failure to Mitigate?
The burden of proof lies with the respondent (the party in breach). It is the respondent who must convince the tribunal that the claimant could reasonably have taken certain steps to mitigate its losses but failed to do so.
In GAFTA/FOSFA arbitration practice, this means: if a respondent wants to argue failure to mitigate, it must:
- identify specific steps the claimant could have taken
- prove that these steps were reasonable in the circumstances
- show that the claimant’s inaction increased the loss
- raise this argument in advance — so the claimant can prepare its response
Mitigation Before Breach: When the Duty Has Not Yet Arisen
The injured party is not obliged to take mitigation steps before the breach occurs. If a counterparty announces its intention not to perform the contract (anticipatory repudiation), the injured party has a choice: accept the repudiation and begin mitigation immediately, or reject it and wait for the due date to arrive.
In the context of GAFTA/FOSFA trading contracts, this is closely tied to the default clause mechanism. On anticipatory breach, the date of default and the beginning of mitigation is one of the most contested issues in arbitration practice.
However, once the injured party accepts the repudiation, the duty to mitigate arises immediately. For example, a buyer who accepts the seller’s repudiation will have its damages limited to the price at which it could have purchased goods in the market from the date of acceptance of the repudiation — even if the price rises further by the delivery date.
Mitigation in GAFTA and FOSFA Practice
In GAFTA and FOSFA arbitrations, mitigation questions most often arise in two situations.
Situation 1: Cover Purchase / Resale (Buy-in / Sell-out)
When a seller fails to deliver, the buyer can purchase similar goods in the market (buy-in). When a buyer refuses delivery, the seller can resell (sell-out). The buy-in / sell-out procedure itself, provided for in GAFTA default clause, is essentially a formalised mitigation mechanism.
If the injured party does not conduct a buy-in / sell-out and the market moves against it, the respondent may argue that a timely cover transaction would have reduced the loss. However, proving this is not easy: one must show that the cover transaction was actually available in the specific market, at the specific time, for the specific commodity.
Situation 2: Breach Party’s Settlement Offer
It is not uncommon after default for the breaching party to offer partial performance, substitute goods, or settlement on modified terms. Is the injured party obliged to accept such an offer? There is no automatic obligation — but refusal may affect the amount of damages awarded if the court or tribunal considers the refusal unreasonable.
The key question is how much the breaching party’s offer differs from the original contract and whether accepting it amounts to a waiver of contractual rights.
In Payzu v Saunders [1919] 2 KB 581 CA, a silk merchant refused to supply goods on credit (mistakenly believing the buyer was insolvent) but offered to continue supply for cash at the same contract price. The buyer rejected the offer. The Court of Appeal held that the refusal was unreasonable: essentially the same goods at the same price were offered, with only the payment terms differing. The buyer’s damages were limited to the loss of the credit period.
However, Payzu v Saunders is far from a universal rule. Courts have repeatedly reached the opposite conclusion where the breaching party’s offer differed substantially from the contract:
- In Strutt v Whitnell [1975] 1 WLR 870 CA, a seller who failed to provide vacant possession offered to buy back the house. The buyer refused, and the court upheld this: acceptance would have amounted to undoing the contract — abandoning the transaction entirely, not mitigating loss within it.
- In Heaven & Kesterton v Etablissements François Albiac [1956] 2 Lloyd’s Rep 316, a buyer who rightfully rejected goods of insufficient quality under a CIF contract was not obliged to subsequently accept the same goods as mitigation. If goods were rightfully rejected, the wrongdoer cannot use mitigation to force the other party to accept what it had a right to refuse.
Furthermore, in Gul Bottlers (PVT) Ltd v Nichols Plc [2014] EWHC 2173 (Comm), the court found it reasonable to reject an offer from a party whose conduct had caused a complete lack of trust. This is important for trading practice: if a counterparty has systematically breached its obligations, the injured party is not obliged to continue business relations for the sake of mitigation.
Thus, the injured party is entitled to reject a breaching party’s offer if: (a) the offer differs substantially from the contract terms; (b) acceptance would amount to a waiver of contractual rights; (c) acceptance involves commercial risk that the injured party need not bear; (d) the breaching party’s conduct has destroyed trust to such an extent that continuing the relationship is unreasonable.
Mitigation’s Connection to Damages Calculation under GAFTA/FOSFA
The doctrine of mitigation is closely intertwined with the damages formula under the default clause. The standard formula — the difference between contract price and market price on the date of default — already incorporates an element of mitigation: it assumes the injured party could have purchased (or sold) goods at market price.
This means that in most cases using the standard GAFTA default clause calculation, the mitigation question is resolved automatically. Mitigation disputes more often arise when:
- the injured party claims damages exceeding the difference between contract and market price (for example, additional costs due to delay)
- the injured party has not conducted a cover transaction and claims damages at market price which has changed by the time of arbitration
- the breaching party offered settlement which the injured party rejected
- the market was illiquid and a cover transaction was objectively unavailable
For more detail on damages calculation under GAFTA and FOSFA contracts, see the article “Damages Calculation under English Law and GAFTA/FOSFA Contracts“.
Conclusion
Mitigation of damages is not a formality but a principle that genuinely affects the amount of recovery in arbitration. Three key points: the injured party must take reasonable steps to reduce losses, costs of reasonable mitigation are recoverable, and the burden of proving failure to mitigate rests with the breaching party. In GAFTA/FOSFA practice, the default clause formula already incorporates the mitigation principle, but disputes arise when circumstances extend beyond the standard calculation.
If you have questions about mitigation of damages or need assistance preparing for GAFTA/FOSFA arbitration, contact me:
