Duty to act reasonably in mitigating losses not onerous
MANTON HIRE v ASH MANOR CHEESE (CA) [2013]
The Court of Appeal (CA) considered whether a customer under a hire agreement for a fork lift truck had failed to mitigate its losses, by refusing to accept an unclear proposal made by the supplier to remedy a fundamental problem with the original truck supplied which meant that it was not fit for purpose. All contracting parties are under an implied obligation to take reasonable steps to mitigate their loss where they are the victims of a breach of contract. In commercial B2B contracts this will often take the form of accepting a reasonable offer from the party in default offering to take steps to rectify the breach.
Facts:
- Ash Manor Cheese (AMC) acquired a forklift truck from Manton Hire (M) through the mechanism of a third party hire agreement. After it was delivered, AMC realised that the truck was the wrong size and would not fit despite M having visited its warehouse to assess its suitability. The parties had some discussions about altering the forklift truck but these discussions broke down and AMC ultimately rejected the truck.
- Under the terms of the hire agreement, AMC was not entitled to stop making payments so it brought a third party claim against M for an indemnity in respect of its liability to the finance company. It was accepted that AMC had entered into the hire agreement in reliance on and in consideration of the representation or warranty by M that the truck was fit for the purpose for which it was hired, and that that representation or warranty was enforceable against M. The sole issue for decision was whether AMC had failed reasonably to mitigate its loss.
- M made an offer to AMC to alter the truck but the precise extent of the modification was completely unclear - no measurements were proffered. AMC was offered nothing by way of independent confirmation that the modification proposal, whatever it was, would be acceptable to the manufacturer or would comply with relevant safety legislation. M had also failed to involve the finance company whose permission would have been needed for any changes to be made.
- M maintained that if AMC had allowed it to carry out the alterations to the truck that it had offered to make, AMC would have suffered no loss at all. M therefore denied that it owed anything to AMC because AMC had failed to mitigate its loss.
- The County Court (CC) judge held that AMC had not unreasonably rejected M's offer because M had not articulated a clear offer.
- M appealed arguing that AMC ought reasonably to have invited or at least permitted M to make a more detailed offer of modification and by not doing so, it failed to act reasonably in mitigation of its loss.
Decision:
- M’s appeal failed. The CA found that AMC had not been provided with sufficient information about the proposal to remedy the position for it to make a fully informed decision as to whether the offer was one that should be accepted. Moreover M was the expert in the field. It fell on M to satisfy its customer that what it was proposing was lawful and that it could deliver its proposed solution.
- In evaluating whether AMC acted reasonably in mitigation of its loss, it is relevant to consider, as part of the general background, whether the contract breaker has admitted liability. The assessment of whether the injured party has acted reasonably has to take into account the ‘emergency’ situation in which it finds itself and should not be measured too harshly with the benefit of hindsight.
- The party in breach is not necessarily limited to making just one offer. In appropriate circumstances it may make further revised or improved offers which the injured party ought reasonably to consider and, if appropriate, accept. In some cases of extreme urgency there may, however, only be an opportunity to make a single offer. The CA decided that in this case the customer, whilst validly rejecting the offer that was made, had not completely closed the door on a clearer and improved offer being made.
- Consequently, the CA agreed with the CC that AMC had not unreasonably failed to mitigate its loss and M was liable to indemnify AMC in respect of the finance company’s claim.
Points to note:
- This is a reminder that the injured party is not under a very onerous duty or obligation to mitigate its loss and that the burden of proving failure to mitigate falls on the party who is the wrongdoer. The innocent party does not actually have to do or consider much in order to satisfy any obligation to act reasonably in mitigating its losses. In particular, they do not have to tolerate or accept sub-standard proposals or arrangements for fear of forfeiting their damages claim. The customer is not in most cases obliged to explicitly invite a more detailed proposal. Any offer made must contain all information as relevant for the injured party to be able to make a reasonable assessment of the offer and a fully informed choice.
- The wrongdoer should, when presented with a valid claim for breach of contract, ensure that it makes clear, detailed and suitable proposals to help that party minimise its losses. Making a prompt and reasonable proposal to rectify the initial breach of contract is very likely to be the best way to avoid substantial damages claims.