The duty of contracting parties to mitigate damages – by Lizelle Donaldson

Lockdown.  Many of us have been forced into situations where we literally cannot move beyond the confines of our immediate surrounds.  We are indeed commanded to remain inert. 

This inertia is not limited to being physically confined. Where contracts are involved, many find themselves in a situation where they are unable to perform the obligations imposed on them in terms of the contracts to which they are party.  You may well have encountered the term “force majeure” in recent weeks: literally translated from the French, a superior force. 

And a superior force COVID-19 certainly is.  In contractual terms, this pandemic and the resultant lockdowns imposed worldwide will, without doubt, in many instances constitute an event of force majeure, rendering the performance of certain contractual obligations either wholly or partially impossible.  Many contracts contain explicit force majeure clauses. Many do not.  If no express clause is contained in the contract, a party may still be able to rely on the common law principle of a supervening impossibility of performance in order to be excused from performing its contractual obligations. Whether or not the contract to which one is a party contains such a clause, the lockdown currently prevailing could, depending on the specific context and facts surrounding the contract, constitute an event which results in the performance of the obligations of either one or both parties under the contract becoming impossible. 

The question which then invariably arises is: if the counterparty to your contract successfully manages to rely on force majeure or supervening impossibility of performance and does not perform its obligations under the contract, either wholly or partially, does that leave you without a remedy? The answer is quite simply, no. 

As a general principle our law accepts that where a party to a contract does not perform, the other party (which we shall refer to as the “innocent party”) may be entitled to either claim specific performance or to accept the repudiation and claim damages for the loss it has suffered due to the non-performance of the counterparty.

In circumstances where it is impossible for a party to perform, specific performance would clearly not be a viable remedy.  However, the innocent party could still have a claim for damages where it can show that it has suffered a loss arising from the other party’s failure or inability to perform its obligations. 

And this is where things get complicated.  Concomitant with the right to claim damages, our law also recognises as immutable the principle that the innocent party has a duty to mitigate the extent of the loss or damages it suffers.  It is not possible for the innocent party to claim damages which could have been avoided had it taken such steps as a reasonable person in the same position would have taken to reduce the extent of the damage or loss suffered.  This is the one time during lockdown that one cannot remain inert – one needs to act and act reasonably! It must be emphasised that such steps need be nothing more than what is commercially reasonable in the circumstances – the law does not expect the innocent party to go to extremes.  It must, however, act reasonably.

To illustrate with reference to a concrete example on which we have been consulted during the lockdown:

A supplier has a contract to manufacture and supply garments to a big clothing retailer.  The retailer notifies the supplier that due to the lockdown it is unable to sell clothing and it therefore anticipates that the seasonal forecast will be greatly reduced. It will instead of 500 garments now only require 200 garments from the supplier and is thus tendering payment for only 200 garments.  The supplier has already manufactured 250 of the garments under order. The retailer’s actions, in terms of the specific terms of the contract, constitute a repudiation of the contract by the retailer, notwithstanding the fact that it may have been occasioned by force majeure.  This would therefore entitle the supplier to accept the repudiation and seek damages for the loss it has suffered.  In the circumstances, a court would most likely calculate such loss with reference to either the actual costs incurred by the supplier in manufacturing the additional 50 garments for which it will now not be compensated, or the value of such garments at the price which the supplier would have been paid under the contract for such garments or a combination of these. 

If the supplier has already entered into contracts for the purchase by it of fabric, packaging and the like, it would need to examine the contracts in terms of which these have been ordered to determine if it is able in turn to cancel those orders.  It is important for the supplier to keep documentary proof of the steps it has taken to try and cancel such orders as this may in due course serve as evidence of the steps it has taken to mitigate its damages and may be taken into account in calculating the quantum of damages to which it is entitled.

If, however, the supplier, notwithstanding the notice from the retailer, proceeds to order and pay for further fabric and incurs costs to manufacture up to the original ordered number of 500 garments and then seeks to claim full payment and is refused, it would be hard pressed to claim all of such costs and/or lost revenue as damages. In the circumstances it could not be said that the supplier took reasonable steps to mitigate its losses.  At the very least, it could reasonably have been expected from the supplier to halt further production and not incur further costs in procuring raw materials to the extent it was able to do so. 

Accordingly, contracting parties are advised to use common sense and act in a commercially reasonable manner.  If a party receives a communication from the counterparty to a contract, claiming force majeure or that it is impossible for it to perform its obligations due to the lockdown, the knee jerk reaction may well be to perform all of one’s obligations and render an invoice at lightning speed.  This may prove not to be a prudent course of action. If a party has outstanding obligations under the contract and is able to continue performing those obligations, lockdown notwithstanding, it may none the less need to consider suspending its own performance as well.  It is not “business as usual” and by continuing to behave as if it is, one may find oneself out of pocket and unable to recover these expenses in due course.

Communication between contracting parties becomes crucial.  It is sage advice to engage with the other side to understand their circumstances and alert them to the challenges and issues faced by oneself.  Seeking advice from an attorney as to the extent to which the contract could indeed be considered as suspended as a result of inability to perform as well as one’s own ability to in turn take steps to cancel orders for raw materials etc. is also advisable.  Often parties are able to find a workable compromise which will enable them to weather the current storm and continue to work together beyond lockdown.