In contract law, it can be difficult to prove damages. There are many reasons for this – one of them is the duty to mitigate damages. The Supreme Court recently reaffirmed this duty. Basically, this duty requires a plaintiff to take reasonable steps to ensure that his damages are reduced. If a defendant breaches a contract and the plaintiff suffers a loss as a result of that breach, then the defendant will generally have to compensate the plaintiff for the consequential losses. However, the plaintiff cannot just decide to do nothing and sue for his loss – the plaintiff has to try to mitigate his losses. If he succeeds in mitigating his losses, his damages reduce accordingly. In fact, he may actually not have a cause of action because he suffered no damages (although one is entitled to get the expenses of mitigating damages). If he fails to mitigate his losses, the amount of damages awarded will be reduced accordingly. As the Supreme Court said in another case, “â€œ[l]osses that could reasonably have been avoided are, in effect, caused by the plaintiffâ€™s inaction, rather than the defendantâ€™s wrong.â€
The duty applies even in a unique situation where a company was created specifically for purchasing a particular property. In Southcott Estates v. TCD School Board a company was created by a land developer for the sole purpose of purchasing a land from the school board. The board breached the contract and did not complete the sale. The land developer bought other property but the actual plaintiff, the subsidiary company, did not do anything to mitigate its losses. The Supreme Court held (McLachlin C.J. dissenting) that the actual corporation that suffered the loss was required to mitigate it’s loss. It was not sufficient for the land developer to do so on its own behalf. Basically, the fact that the plaintiff was created for the sole purpose of purchasing that property was irrelevant to its obligation to mitigate its losses – “Those who choose the benefits of incorporation must bear the corresponding burdens”.
The Court also confirmed that the duty to mitigate applies even if one is applying for specific performance of the contract. However, if specific performance is available, then this may affect whether it is reasonable to mitigate. The doctrine of specific performance allows a contract to be fulfilled if damages would not be sufficient remedy. In land transactions, land is often seen as unique, and so a specific performance order requiring the sale to be completed is often granted by the court. However, in modern real estate, land is not necessarily unique as traditionally regarded by the common law. If money will compensate sufficiently, then specific performance will not be available. Here, the plaintiff tried to argue that because it had asked for specific performance, it did not have to mitigate its losses. The Supreme Court held that if the plaintiff had a substantial justification or a substantial and legitimate interest a refusal for not purchasing property may be reasonable. Essentially, the court is saying that where property is being bought as an investment property, then the land is unlikely to be unique and money will be a sufficient remedy.
The Supreme Court upheld the Court of Appeal’s judgment and awarded nominal damages of $1 to the plaintiff. The Chief Justice would have allowed the appeal as she thought the plaintiff did not act unreasonably in failing to mitigate its loss.
I do not believe this will be a very influential case. However, it is useful in showing strategies to take in contract cases. The question of whether to mitigate is hard one and will certainly depend on the circumstances of each case. But generally, it is not a good idea to do nothing at all, as this will certainly give the defence the opportunity to say that one ought to have taken steps to reduce the damages. At the minimum, it would seem to me that a plaintiff should investigate what it would take to reduce its losses.