When one party to a contract materially breaches the agreement, the non-breaching party is entitled to seek damages and is also discharged of its obligations under the agreement. If the contract involves the sale of goods governed by the Uniform Commercial Code (UCC), one of the primary issues in determining damages is whether the non-breaching party had a duty to mitigate (also known as the doctrine of avoidable consequences). This duty requires parties to a contract to try to minimize their losses if the contract is breached.
There is no legal obligation to mitigate but your losses will be reduced by the amount you could have recovered using reasonable mitigation efforts. This means efforts that wouldn’t require risk, injury, expense, burden, or humiliation on your part. The breaching party has the burden of proof to show that the other party failed to mitigate their losses. To show this, the breaching party must establish that no reasonable efforts to mitigate were taken by the non-breaching party and how much these efforts would have reduced damages. To help deflect a potential defense that you failed to adequately mitigate your damages, you should always document any mitigation efforts you take.
When a seller fails to deliver goods as required under a contract, the buyer can “cover” by obtaining the same or similar merchandise from another source. In many cases, this can be done by the buyer with minimal effort or delay in receiving the goods. In doing so, the buyer’s potential losses can be largely, if not entirely, avoided. The measure of damages when the buyer covers is the difference between the cost of cover and the contract price, together with any consequential or incidental damages. You deduct from the buyer’s losses any expenses the buyer saved as a result of the breach (UCC § 2-712(2)).
A buyer is not always able to cover, however, particularly when the goods are unique. Sometimes there is no real alternative source readily available to the buyer. In such instance, the UCC measure of damages is the difference between the market price for replacing the goods at the time the buyer learned of the breach and the contract price, together with any consequential and incidental damages.
The seller also has a duty to mitigate damages if a buyer fails to purchase goods according to the sales agreement. The seller must make reasonable efforts to sell the goods to another party. If it’s a private sale, the seller must give notice to the buyer of the proposed sale. There are several exceptions that may relieve a seller of its duty to mitigate. One is when the goods cannot be resold, such as those ordered on commission. In that case, the measure of damages is the full contract price. Another situation where the seller doesn’t have a duty to mitigate is when the goods are no longer in the seller’s possession.
If the seller resells the goods, the measure of damages is the difference between the resale price and the contract price, along with incidental damages. You subtract from this amount any expenses the seller saved as a result of the buyer’s breach. If, alternatively, the seller can (but has not yet) resold the goods, the measure of damages would be the difference between the contract price and the market price at the time of the buyer’s breach.
One situation where different rules apply is in a so-called lost volume sale. This is where a seller has lots of inventory and basically endless resale potential for its inventory. If a buyer defaults, the seller is entitled to recover its lost profit under the contract. The rationale is that this is the only way to put the seller in as good as a position as it would have been if the buyer hadn’t breached. There is no duty for the seller to mitigate since the measure of damages is lost profit under the contract.
The duty to mitigate in the event of a breach is an implied duty that is imposed by law on parties to a contract. You can always decide to expressly exclude the duty to mitigate in your contract. Or, you may decide to include a liquidated damages provision in your contract setting forth the specific damages that would be owed in the event of a breach. A liquidated damages provision is generally enforceable (and will override any duty to mitigate) as long as the liquidated damages are reasonable and the actual damages would be difficult to prove.