- Arbitral Award
- ICC International Court of Arbitration 9594
CONTRACT FOR SUPPLY AND INSTALLATION OF INDUSTRIAL MACHINERY - BETWEEN A SPANISH COMPANY AND AN INDIAN COMPANY - REFERENCE TO UNIDROIT PRINCIPLES IN SUPPORT OF A SOLUTION ADOPTED IN ACCORDANCE WITH THE APPLICABLE DOMESTIC LAW (ENGLISH LAW)
DUTY TO MITIGATE LOSSES (ARTICLE 7.4.8 OF THE UNIDROIT PRINCIPLES).
Claimant, a Spanish company, entered into a contract with Defendant, a company based in India, for the manufacture and installation of industrial machinery. Once installed the machinery turned out to be defective. Despite Claimant’s offer to accommodate matters Defendant stopped payment but at the same time began to use the machinery thereby manufacturing defective goods which gave rise to claims for damages by its customers. Claimant and Defendant accused each other of breach of contract and Defendant also claimed consequential damages as a result of the malfunctioning of the machinery.
The contract contained a choice of law clause in favour of English law which the Arbitral Tribunal applied when deciding the merits of the case. However, in rejecting Defendant’s claim for consequential damages on account of the fact that Defendant had failed to take all reasonable steps to mitigate the loss consequent on Claimant’s breach, the Arbitral Tribunal not only referred to the leading English cases stating the duty of mitigation but found it appropriate to add that “[a] similar standard has been established internationally, primarily in the UNIDROIT Principles of International Commercial Contracts (1994) which state in sub-section 1 of Article 7.4.8 as follows: ‘The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps’.”
The general rule concerning damages under English contract law is that of restitutio in integrum: the party who suffered the damages should be put in the same position as it would have been if the contract had been performed. This principle is, however, subject to the following limitations: (1) the degree of likelihood, namely, the types of damage which a contract breaker shall be responsible for and (2) mitigation of the loss, a duty of the party who suffered the damages to limit or altogether avoid the consequences of the breach. (See also Beavan, “Limitations upon Damages in Contract”, Legal Executive 1996, July Supplement p. 10, which discusses the three significant limitations to the recovery of damages, namely: the remoteness of damage, causation, and the duty to mitigate loss.)
(1) The degree of likelihood
The requisite degree of foresight which may be attributed to the contract breaker was set by Hadley v. Baxendale 9 ExcI. 341 as either (a) the damage as may fairly and reasonably be regarded as arising naturally (according to the usual course of events) from tile breach or (b) damages which could have been foreseen by tile contract breaker because of special knowledge which he had at the time of making the contract. This rule was restated and revised in Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd.  2 K.B. 528 and the decision of tile House of Lords in CzarnikovLtd. v. Koufos  1 A.C. 350. In more recent cases this rule has again been reaffirmed. See Seven Seas Properties v. AlEssa  3 All ER. 577 and Kpohrarorv. Woolwich Building Society  4A11 E.R. 119. These principles are generally stated in section 53 of the Sale of Goods Act, 1979.
It may be presumed that when [Claimant] entered into tile Agreement with [Defendant] it knew that [Defendant] wanted to purchase [industrial machinery] to produce parts for their consequent sale to the . . . industry. It was not expressly provided in the Agreement when such [machinery] should be delivered in India and when it should start operating. However, at the meetings and in correspondence between the parties these dates were more or less fixed. There were delays, on some occasions due to [Claimant], on others to [Defendant]. In any event, it maybe presumed that [Claimant] knew that delay in the planning scheduled could cause [Defendant] to suffer damages, and that if the machinery did not comply with quality requirements it would have consequences in its productivity. However, it may not be presumed that, when signing tile Agreement, [Claimant] knew that [Defendant] was supposed to sell parts to its joint venture partner . . . from a certain date, nor the internal conditions of such joint venture. [Claimant] could have foreseen that if it did not conclude the whole commissioning process of tile machinery within a reasonable time and that if the machinery did not comply with quality requirements, [Defendant] would suffer significant loss. Tile question is whether [Claimant] could have foreseen that its delay would cause the large amount of loss claimed by [Defendant].
To sum up, both parties are responsible for delays and quality damages to the machinery. While [Claimant] should be held responsible for specific items where it is contractually liable and compensation is awarded to [Defendant], it is difficult, if not impossible, to assign responsibility for consequential damages when both parties share in that responsibility. Furthermore, it is necessary to take into account [Defendant]’s obligation to mitigate the losses as discussed below.
(2) Mitigation of losses
According to McGregor, the rule for mitigation of losses is based on three principles:
(a) The first and most important states that the plaintiff must take all reasonable steps to mitigate the loss to him consequent upon tile defendant’s breach and cannot recover damages for any loss he could have avoided but has failed, through unreasonable action or inaction, to avoid.
(b) The plaintiff can recover for loss incurred in reasonable attempts to avoid loss.
(c) Tile plaintiff cannot recover for avoided loss.
Concerning the first rule, the law requires the plaintiff to take all reasonable steps to mitigate tile loss consequent on the defendant’s breach, and refuses to allow him any loss which is due to neglect to take such steps. This rule is illustrated in the leading case of British Westinghouse Co. Ltd. v. Underground Electric Rlvs Co. of London Ltd.  AC. 673 at 689, where Lord Haldane stated the following:
The fundamental basis is thus compensation for pecuniary loss naturally flowing from the McGregor on Damages, 15th. edition, 1988 breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part of the damage which is due to his neglect to take such steps. The plaintiff’s duty to mitigate is not a duty to himself but to the defendant, as specified by Lord Pearson in Darbishire v. Warren:  3 All E.R. 310.
The true meaning is that the plaintiff is not entitled to charge the defendant by way of damages with any greater sum than that which he reasonably need to expend for the purpose of making good the loss. In short, he is entitled to be as extravagant as he pleases but not at the expense of the defendant.
On the other hand the nature of the mitigation of damage has been defined as a question of fact and not a question of law in Pavzu Ltdv. Sanders  2 K.B. 581.
A similar standard has been established internationally, primarily in the Unidroit Principles of International Commercial Contracts (1994) which state in sub-section (1) of article 7.4.8 as follows:
The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps. This brings us back to an examination of whether [Defendant] took all reasonable steps to mitigate the loss consequent to [Claimant]’s breach of quality/delay. In its closing brief, [Defendant] argued that it acted to mitigate its loss by accepting the machinery since should it have rejected the machinery it would have certainly incurred much greater losses. However, [Defendant] did not seem to consider the possibility of mitigating its loss through negotiation and accommodation. [Defendant] should have accepted the offers made by [Claimant] after the commissioning to sign a provisional acceptance of the line. In Payzu Ltd. v. Sanders  2 K.B. 581, Lord Scrutton indicated that according to his experience in considering what steps should be taken to mitigate the damage, continued relations with the party in default should be included. Likewise, he compared service and commercial contracts pointing out that “in commercial contracts it is generally reasonable to accept an offer from the party in default”.
In any event, supposing [Defendant] could have deemed this offer unacceptable (though it was not), what did [Defendant] do to effectively mitigate its losses? [Defendant] continued using the machinery to produce a large amount of parts, in spite of its alleged collapsing state, and it cannot be said that [Defendant] took serious measures to repair the defects in the [machinery]. Only when. . . and.. . carried out their studies for the purpose of this arbitration in October 1997, more than a year after [Claimant] had left India, were those problems dealt with. [Defendant] had ample opportunity to mitigate its losses at an earlier stage and it only took reasonable steps to do so once these arbitration proceedings were filed.
Several cases illustrate this rule. In Simon v. Pawsons &Leafs  38 Corn. Cas. 151 (C.A.) the plaintiff ordered certain material from the defendant which he promised to stock for the plaintiff, but he failed to do so, as a result of which, the plaintiff lost an appointment as maker of clothes to a school. The Court of Appeals refused to award her damages for such loss of appointment because, inter alia, she knew of the defendant’s breach and had opportunity to buy equivalent material but made not attempt to do so. In Tucker v. Linger  21 Ch. D. 18, a landlord failed to supply materials to the tenant (in breach of covenant) to repair the premises and the tenant failed to recover for damages caused to crops in his barn due to bad weather because the barn had not been repaired, since he ought to have provided himself with materials to carry out the repair and charge the landlord with its price.
Under these circumstances recovery of losses due to [Claimant]’s alleged breach of quality is not granted since the losses were mitigable and could have been contained by [Defendant] through either further negotiation (by accepting [Claimant]’s offer) or by having taken the timely steps required to repair the machinery.’}}
Excerpts of the award published in
ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 73-76.}}