Understanding The Duty To Mitigate Losses After A Breach Of Contract

If you enter into a contract with another person, and he or she fails to keep his or her end of the bargain, then you may be entitled to some form of compensation. However, the law requires you to take measures to reduce your potential loss. The example below will help you understand how this works in practice.

The Scenario

Suppose that you are a landlord, and a company seeking to expand its branches to your region approaches you for a business space. Completion for office spaces is high due to low supply, and the company offers to pay you an attractive rent of $15 per square inch. Since this is $5 more than other offers, you decide to sign a two-year lease that involves quarterly rent payments every year.

Suppose that after three months, the company realizes that the market isn't as ripe as it first believed, and it winds up its operations in the area. Angered, you decide to sue it for breaching the contract, and expecting to be compensated for your loss of rental income for the remaining period of the lease. The case drags on for a year, during which time your premises remains empty (after all, you are expecting a significant compensation). If you ever find yourself in such a scenario, don't be surprised if the court decides that you will not receive compensation for the whole $15 dollars that you could have earned had the company honored the contract.

Why It May Happen

This is a very likely scenario because many jurisdictions expect businesses to take reasonable measures to mitigate their losses when they experience breaches of contract. For example, in the case above, the law expected you to look for other renters, even at lower rental costs.

Moreover, you can't defend yourself merely by claiming that you tried, but were unable to find another renter. The court will need to see evidence for the same, especially if the business property market isn't doing badly in your area. For example, you may be required to show that you posted your property at relevant property listing sites or to prove that you tried to contact the previous clients that offered you lower prices. You can only be compensated for the whole amount if you can prove that you failed to get a client despite your best efforts.

These cases tend to be very complicated. As you can imagine, it isn't easy to prove that you couldn't get a client despite your best efforts; the defendants can always come up with novel suggestions on what you could have done. Therefore, it is in your best interest to consult a corporate lawyer as soon as you experience a breach of contract. Apart from preparing your lawsuit, the lawyer will help you to explore the available avenues for mitigating your losses.