Canadian Business Contracts Handbook. Nishan Swais
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3.1b Mitigation
In addition to remoteness, another factor that will limit the ability to recover damages is the general requirement, at law, to mitigate one’s damages. That means that an injured party must take any reasonable step available to it to reduce the extent of the damage caused by the other party’s breach. The injured party cannot simply sit back and allow the losses to pile up or continue, while expecting the breaching party to pick up the tab. He or she must take reasonable steps to minimize those losses.
In our example, suppose the buyer had discovered that the brakes on the forklift were faulty before using it. Could the buyer have simply decided to drive the forklift anyway (or allow someone else to do it), blithely expecting that if she suffered any losses as a result she could simply recover them from you because of your breach? The answer is no. The law will only compensate an injured party for a loss that is due to the breach and not for the injured party’s failure to behave reasonably after the breach has occurred.
Reasonably speaking, the buyer would have to inform you of the defective brakes so that you could fix them, provide the buyer with a replacement forklift, or take whatever other step might be reasonably available to remedy the situation. To the extent that you refuse to do so, the buyer could then sue you to be compensated for the cost of repair or replacement. Note how, through the obligation to mitigate, the law ensures that both parties have taken steps to minimize losses and suffering.
3.2 Contributory behaviour
In addition to an obligation to mitigate, a party claiming compensation might also be subject to scrutiny about its own role in the occurrence of any loss, harm, or injury. If the injured party contributed to the breach, then the damages awarded by a court will take this into account and be reduced accordingly.
Returning to our example, suppose a court found that the destruction of the fuel storage tanks was not too remote to be compensable through an award of damages. Now suppose further that the fuel storage tanks were not properly protected according to safety regulations or the forklift driver not properly trained. Is it then fair to say that the destruction of those tanks was caused solely by the defective brakes? Would it not be fairer to say that the defective brakes only partially contributed to that destruction? Certainly, that is how a court would see it and would award damages proportionately according the parties’ relative contribution to the losses suffered.
3.3 Specific performance
Courts, in awarding damages for contractual breach, will seek to put the injured party in the position it would have been had the breach not occurred (i.e., award compensatory damages). However, there is another way a court could try to achieve that same result. It could force the breaching party to actually perform its contractual obligations. In legal terms, this is called ordering specific performance.
There is an intuitive appeal to suggesting that a court should require a breaching party to actually do (if possible) what it was supposed to do under a contract. However, because of the practical problems associated with specific performance, courts will only order it in circumstances where an award of damages would not provide adequate compensation.
Returning to our example, there is the practical problem of how an order for specific performance (i.e., delivering a forklift without faulty brakes) would undo all of the damage that has been caused. It certainly wouldn’t restore the fuel storage tanks. But that is an obvious case where specific performance would not work and an award of damages is the appropriate remedy.
Let’s consider a less obvious case: Suppose that you were to have delivered the forklift to the buyer on the 15th of the month and you did not do so. Instead, you decided to sell that same forklift to someone else because he was willing to buy it for a premium.
It could be argued that, in this case, a court should order you to specifically perform your contract with the first buyer, even if it requires breaching your contract with the one that was willing to pay the premium. Alternatively, if you already delivered the forklift to that buyer paying the premium, the court should order specific performance by requiring you to deliver another forklift to the first buyer.
When should you have to deliver the replacement forklift to the first buyer? What if that forklift was not something you regularly manufactured, or it is out of stock or obsolete? What if the cost of delivery to the buyer has increased significantly?
Also, what if the buyer no longer wishes to deal with you? Should the buyer be forced to accept another forklift from you? What if the buyer found a more scrupulous business from which to purchase a forklift? Should the parties be forced by the law into dealing with each other in circumstances where their contractual relationship has likely soured?
These are the types of practical questions a court would have to address in granting an order for specific performance and they are not easily answered. That is why an award of damages is the favoured option even though, at first blush, specific performance seems like an obvious way of resolving a dispute.
With an award of damages, the first buyer will both be able to take her business somewhere else and receive compensation for the losses she has suffered.
Now it should be noted that, in certain circumstances, specific performance may be the appropriate remedy. The classic example is where someone enters into a contract to purchase a unique and irreplaceable item such as a work of art by a famous artist. If you, as the seller, simply decide to hold on to the Picasso that you agreed to sell to a buyer because the market value suddenly tripled after you agreed to sell it, then it is only right that the buyer receive the painting itself and not just a return of the purchase price from you.
Not only would simply returning the purchase price through an award of damages not properly compensate the buyer for his or her loss (because the buyer would lose the benefit of the increase in value), but he or she could never replace that painting in the sense of obtaining the same, unique item.
The buyer might be able to buy another Picasso, but another Picasso is not that Picasso. It is not the irreplaceable one that the parties contracted for; despite its dollar value, an item that is priceless.
Of course, forklifts are not Picassos. That is why specific performance would be the appropriate remedy in one instance and not in the other.
3.4 Anticipatory breach
To this point we have examined the remedies available in the case of an actual breach of a contract. By actual breach we mean that the breach occurs at the time performance is required under the contract. For example, if the final payment for the forklift is due on the 25th of the month and the buyer does not pay you on the 25th, then the buyer’s breach occurred at that time it was to be performed (i.e., the 25th of the month).
As we saw, where an actual breach occurs, the injured party may sue for damages following the breach (or, in rare cases, seek an order for specific performance).
What happens where a party breaches an obligation before it must actually be performed? For example, what if the buyer tells you on the 14th that he or she is not going to make the final payment by the 25th? Do you have to wait until the 25th to see if what he or she says will turn out to be true (i.e., if the buyer is actually going to breach)?
The law says no. It recognizes the existence of what is legally termed anticipatory breach and provides for a kind of self-help remedy for the injured party where the breach involves an essential term of the contract. Specifically, anticipatory breach of an essential term of a contract grants the injured party the right to cease performing its obligations under the contract without itself being considered in breach. What constitutes an essential term is dependent on the specific contract in question, so no definitive answer is possible.
By notifying you in advance that he or she will not be making the final payment for the forklift when it becomes due, the buyer has anticipatorily breached the contract. As a consequence, you can sue the buyer when the time