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Mitigation of damages in arbitration practice: trite law or space for creativity?
The mitigation of damages is a well-known principle in international legal practice. However, in Ukraine there is no widely applied court and arbitration practice on the issues relating to mitigation of damages, and aggrieved parties may be unclear as to what should and can be done.
Scope of mitigation rule
The essence of mitigation of damages as a principle in contract law is that a plaintiff must take reasonable steps to reduce or minimise the damages for which it may subsequently claim. In particular, both Article 623(4) of the Civil Code and Article 226(3) of the Commercial Code require an aggrieved party to mitigate the loss suffered as a result of a breach of contract by the other party. In contracts for the international sale of goods, these provisions are overridden by Article 77 of the United Nations Convention on Contracts for the International Sale of Goods 1980, which provides that the aggrieved party must take reasonable measures to mitigate loss, including loss of profit; otherwise, it loses its right to recover damages.
However, the steps that the aggrieved party must take in order to comply with its duty to mitigate will depend on the facts of the case. Article 226(3) of the Commercial Code imposes an obligation to take steps to prevent accrual of losses; this contrasts with Article 77 of the United Nations Convention on Contracts for the International Sale of Goods, which merely requires parties to take reasonable measures to mitigate. Such inconsistencies may create substantial obstacles for a claimant and also provide a number of potential defences for the respondent - which may rely on any failure to take measures, whether reasonable or not.
Decisions of the International Commercial Arbitration Court
It is useful to review the arbitration practice of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of Ukraine to observe how the mitigation rules have been applied.
In a reported arbitration case, the tribunal substantially reduced a claim for loss of profit for failure to mitigate. The claimant asserted that due to the respondent seller's failure to deliver goods, it was unable to process them and thus lost profits that it would have made from the further potential sale of the processed goods. The tribunal held that the claimant's repeated notices addressed to the respondent, urging the latter to deliver the goods, could not be recognised as reasonable measures to mitigate losses pursuant to Article 77 of the convention. The tribunal noted that in order to comply with its duty to mitigate, the claimant had to purchase similar goods that were available on the market. As a result, the recoverable damages for loss of profit were substantially reduced from $1.6 million to $89,700.(1)
However, in another unreported case, the tribunal considered a claim for damages arising from non-performance of a contract of sale of goods by the respondent seller. There was a dispute as to whether the convention applied to the contract, and the tribunal held in the buyer's favour. The respondent nevertheless raised a defence on the basis that the claimant could have purchased substitute goods, potentially at a lower price, to mitigate its losses. The tribunal disagreed with the respondent and held that Articles 75 and 76 of the convention expressly exclude the purchase of substitute goods from the range of reasonable measures to mitigate losses.
In another case(2) a claimant seller which had not been paid by the buyer in a timely manner claimed damages in the amount of the fine that it had to pay to the Ukrainian tax authorities for breach of currency control regulations. In this respect the tribunal held that the claimant had failed to mitigate its losses by missing the time limit to refer the dispute to arbitration proceedings; had the arbitration proceedings been commenced within the time limit, the tax authorities would not have imposed a fine.
(1) International Commercial Arbitration Court at the Chamber of Commerce and Industry, Arbitral award no 48.
(2) International Commercial Arbitration Court at the Chamber of Commerce and Industry, Arbitral award no 51.
Source: International Law Office
Authors: Eugene Blinov, Roman Protsyshyn