The respondent's damages - principles of mitigation
38 The compensatory objective of damages, for breach of contract or for other wrongs, is not given full effect. Limitations on recovery of loss are imposed by concepts of remoteness and foreseeability and causation. While compensating advantages (I use the phrase used by, amongst others, Professor Burrows in Remedies for Torts and Breach of Contract, 3rd ed, Ch 7) generally reduce recovery of loss, not all compensating advantages which, as a matter of "but for" causation, are gained in consequence of a guilty party's wrong, are taken into account. Obvious illustrations are insurance recovery, charitable assistance and (subject to statute) social security benefits. Of present relevance, a compensating advantage from the innocent party's mitigatory action is not always brought to account.
39 The innocent party must take all reasonable action to mitigate the loss to it consequent on the guilty party's wrong, and can not recover damages for any loss which it could have avoided but unreasonably failed to avoid (the avoidable loss principle). The loss claimed by the respondent was the rent payable to the appellant. The respondent could not have avoided that loss by anything it did or failed to do about payment of the purchase money. The respondent did not claim loss because it had to borrow the purchase money on more unfavourable terms in March 2004, or because it was adversely affected in its investment strategy. Although the asserted benefit could have been put as a contention that the respondent was obliged to take steps to realise a benefit from not having to outlay the purchase money on 19 July 2001 and until 11 March 2004, it was not so put. I do not suggest that the contention would have had merit. The appellant did not rely on the avoidable loss principle.
40 If the innocent party does take action to mitigate the loss to it consequent on the guilty party's wrong, even if the action goes beyond reasonable action, in general the guilty party is entitled to an allowance for the benefit to the innocent party from that action (the avoided loss principle). This was the basis of the appellant's submission.
41 That the benefit is not always taken into account was explained by Viscount Haldane LC in the leading case of British Westinghouse Manufacturing Co Ltd v Underground Electrical Railways Co of London Ltd at 689-91; it is convenient to set out a lengthy passage from his Lordship's speech -
"As James L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.
Staniforth v Lyall [(1830) 7 Bing; 169; 131 ER 65] illustrates this rule. In that case the defendants had chartered a ship to New Zealand, where they were to load her, or by an agent there to give the plaintiff, the owner, notice that they abandoned the adventure, in which case they were to pay 500l. The ship went to New Zealand, but found neither agent nor cargo there, and the captain chose to make a circuitous voyage home by way of Batavia. This voyage, after making every allowance for increased expense and loss of time, was more profitable than the original venture to New Zealand would have been. The Court of Common Pleas decided that the action was to be viewed as one for a breach of contract to put the cargo on board the plaintiff's vessel for which the plaintiff was entitled to recover all the damages he had incurred, but that he was bound to bring into account, in ascertaining the damages arising from the breach, the advantages which had accrued to him because of the course which he had chosen to adopt.
I think that this decision illustrates a principle which has been recognized in other cases, that, provided the course taken to protect himself by the plaintiff in such an action was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, a jury or an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage.
Recent illustrations of the way in which this principle has been applied, and the facts have been allowed to speak for themselves, are to be found in the decisions of the Judicial Committee of the Privy Council in Erie County Natural Gas and Fuel Co. v Carroll ,[(1911) A.C. 105] and Wertheim v Chicoutimi Pulp Co. [(1911) A.C. 30]. The subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business . This distinguishes such cases from a quite different class illustrated by Bradburn v Great Western Ry. Co . [1911] L.R. 10 Ex. 1, where it was held that, in an action for injuries caused by the defendants' negligence, a sum received by the plaintiff on a policy for insurance against accident could not be taken into account in reduction of damages. The reason of the decision was that it was not the accident, but a contract wholly independent on the relation between the plaintiff and the defendant, which gave the plaintiff his advantage. Again, it has been held that, in an action for delay in discharging a ship of the plaintiffs' whereby they lost their passengers whom they had contracted to carry, the damages ought not to be reduced by reason of the same persons taking passage in another vessel belonging to the plaintiffs: Jebsen v East and West India Dock Co. [L.R. 10 C.P. 300], a case in which what was relied on as mitigation did not arise out of the transactions the subject-matter of the contract .
The cases as to the measure of damages for breach of a covenant by a lessee to deliver up the demised premises in repair illustrate yet another class of authorities in which the qualifying rule has been excluded. In Joyner v Weeks [(1891) 2 Q.B. 31], the lessor had made a lease to another lessee by way of anticipation, to commence from the expiration of the term of this lease, and the new lessee had made no claim to be reimbursed the cost which he had incurred in repairing after the expiration of the demised lease. Wright J. held that the true test was the amount of diminution in value to the lessor, not exceeding the cost of doing the repairs. The Court of Appeal, including Lord Esher and Fry L.J., took a different view. They thought that there had been a constant practice of laying down the measure of damages as being the cost of putting into repair, and that in the particular class of cases with which they were dealing it was a highly convenient rule which ought not to be disturbed. Any other measure appeared to involve complicated inquiries. Moreover, the arrangement between the lessor and the new lessee was res inter alios acta with which the original lessee had nothing to do and which he was not entitled to set up ." (emphasis added)
42 In British Westinghouse Manufacturing Co Ltd v Underground Electrical Railways Co of London Ltd the claimant was sold defective turbines. It replaced them with turbines which were more profitable to operate than the defective turbines would have been. It was held that the benefit from the replacement turbines should be taken into account as an allowance against the cost of the replacement turbines, on the basis that the replacement of the turbines -
"…was not res inter alios acta, but one in which the person whose contract was broken took a reasonable and a prudent course quite naturally arising out of the circumstances in which he was placed by the breach. Apart from the breach of contract, the lapse of time had rendered the appellants' machines obsolete, and men of business would be doing the only thing they could properly do in replacing them with new and up-to-date machines." (at 691)
43 The appellant cited also Levison v Farin and Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc. In Levison v Farin the claimants were entitled to damages for breach of a warranty as to a company's financial position. They paid £8,500 more than the value of the company if the warranty had been true, but because of the losses which made the warranty untrue paid £2,940 less tax from its continued trading than would otherwise have been paid. It was held that the reduction in tax arose out of the transaction, and the damages were reduced accordingly. In Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc the claimant's fertilizer was contaminated. It bought some replacement fertilizer at an advantageous price, it seems better than the market price. It was held that the price advantage should be taken into account.
44 The avoided loss principle only applies so far as the innocent party in fact gained a compensating advantage. The guilty party bears the burden of proving that loss had been avoided and the extent to which it had been avoided: The World Beauty (1970) P 144 at 154, 158; Simonius Vischer & Co v Holt & Thompson (1979) 2 NSWLR 322 at 361; Monroe Schneider Associates (Inc) v No. 1 Raberem Pty Ltd (1991) 35 FLR 1 at 17. The appellant submitted to the contrary, relying on Erie County Natural Gas & Fuel Co Ltd v Carroll (1911) AC 105 at 118-9, but the decision turned on weak but sufficient evidence that the claimed expense of setting up new gas wells, had been recouped on sale of the gas wells which it was said the innocent party had the burden of rebutting; this was an evidentiary burden once there was evidence of compensating advantage. The appellant also submitted that no question of burden of proof arose in the present case because the respondent's defence to the claim for rent was "in the nature of a demurrer", but there is no substance in this submission. It was for the appellant to prove that the respondent had gained an actual benefit, and what benefit. The respondent may have been using borrowed money and not been advantaged by the delay, or been disadvantaged; if it was using its own money and left the purchase money idle, or used it unprofitably, the avoided loss principle did not require the allowance of a notional amount in favour of the appellant.
45 Viscount Haldane used different phrases, emphasised in the passage earlier set out, to identify when a compensating advantage was not to be taken into account. In many cases the dividing line has been expressed by excluding compensating advantages said to be collateral, a word taken up in the appellant's submissions. An illustration, also of what might be thought a difficult dividing line, is Lavarack v Woods of Colchester Ltd (1967) 1 QB 278, in which the plaintiff was wrongly dismissed, became employed by Martindale at a lower salary, and bought shares in Martindale and Ventilation which increased in value. The new salary and the increase in the value of the Martindale shares were brought to account, but not the increase in the value of the Ventilation shares, on the ground (per Lord Denning MR at 290-1) that that benefit was not a direct result of the dismissal but was an "entirely collateral benefit".
46 Professor Burrows says (Remedies for Torts and Breach of Contract, 3rd ed, p 157) that "indirect" compensating advantages are not deducted, and that -
"'Directness' puts a limit on the extent to which compensating advantages are deducted on the policy ground that it is unfair that a claimant should have its damages reduced by a benefit that is far removed from the wrong and is essentially coincidental to it. Directness therefore plays an analogous but reverse role to remoteness and intervening cause; they counter a rigid adherence to the compensatory principle by limiting the claimant's damages, whereas directness here counters compensation, as strictly applied, by increasing the claimant's damages."
47 The learned author says (at p 158) that, where the compensating advantages have been gained from action taken by the claimant subsequent to the tort or breach of contract, "the test for directness appears to turn on whether the compensating advantage derived from actions taken by the claimant to avoid the consequences of the wrong". He adopts the first part of the statement in McGregor on Damages, 17th ed, 269 (7-101), the full statement being -
"In any event, it is suggested that the basic rule is that the benefit to the claimant, if it is to be taken into account in mitigation of damage, must arise out of the act of mitigation itself; this approach has been adopted by the courts in quite a number of cases. It may be regarded as simply another way of expressing Viscount Haldane's requirement that the transaction giving rise to the benefit "must be one arising out of the consequences of the breach".
48 References to indirect or collateral benefits are not helpful when faced with novel circumstances, and a test of "arising out of the act of mitigation" is itself not easy of application. In Hussain v New Taplow Paper Mills Ltd (1988) 1 AC 514, which was concerned with payments to an injured employee under a workplace health insurance scheme, Lord Bridge referred (at 528) to the difficulty of articulating a single guiding rule to distinguish receipts by a plaintiff which are to be taken into account in mitigation of damage from those which are not, and to the common law treating the matter "as one depending on justice, reasonableness and public policy." I venture to repeat what I said in Tyco Australia Pty Ltd v Optus Network Pty Ltd [2004] NSWCA 433 at [253], that "collateral" -
"….combines notions of causal significance and judgmental attribution of responsibility in law (positive or negative) for benefits and burdens consequent upon mitigating conduct. In Naumann v Ford (1985) 2 EGLR 70 at 74 it was asked "whether any benefit to the plaintiff could be said to relate sufficiently closely to a particular head of damage as to be appropriate to be set off against it", and in Johns v Prunell (1960) VR 208 at 211 it was said that the law "endeavoured to form a kind of moral judgment as to whether it is fair and reasonable that the defendant should have the advantage of something which has accrued to the plaintiff, by way of recoupment, or other benefit, as a result of the defendant's infringement of the plaintiff's rights"
49 In Koch Marine Inc v D'Amica Societa di Navigazione ARL ("The Elena d'Amico") (1980) 1 Ll L R 75 Robert Goff J asked why, as a matter of principle, the buyer of undelivered goods who has to buy in from elsewhere cannot add any increased cost to its damages if the market rises, and need not bring any saving to account if the market falls. His Lordship said that it was necessary to look to the principles of mitigation, and that they were -
" … all really aspects of a wider principle which is that, subject to the rules of remoteness, the plaintiff can recover, but can only recover, in respect of damage suffered by him which has been caused by the defendant's legal wrong. In other words, they are aspects of the principle of causation." (at 88)
50 His Lordship said, referring to and citing from the speech of Viscount Haldane in British Westinghouse Manufacturing Co Ltd v Underground Electrical Railways Co of London Ltd, that "there must be a causative link between the breach of contract and the action or inaction in question to bring into play the principle of mitigation of damage". He answered his question that generally the decision not to take advantage of the available market (and his Lordship's reasoning would extend to a decision to take advantage of the available market) was -
" … the independent decision of the innocent party, independent of the wrongdoing which has taken place. It takes place in the context of a pre-existing wrong but it does not, to use Viscount Haldane's expression, 'arise out of the transaction'." (at 89)
51 I find this analysis valuable. In arriving at recoverable loss, remoteness and foreseeability and intervening cause are limitations on causation in fact. In arriving at reduction in recoverable losses by compensating advantages, being indirect or collateral or not arising out of the act of mitigation itself (whatever phrasing be used) is a limitation on causation in fact. Causation in law involves appreciation of the purpose of the causal inquiry (Environment Agency (formerly National Rivers Authority) v Empress Car Co (Abertillery) Ltd (1999) 2 AC 22 at 31; Chappell v Hart (1998) 195 CLR 232 at [62]; Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2001) 215 ALR 385 at [54]-[55]; Travel Compensation Fund v Robert Tambree [2005] HCA 69 at [45], [51]), and "determination of a causal question always involves a normative decision" (per McHugh J in Allianz Australia Insurance Ltd v GSF Australia Pty Ltd at [55]; see also Travel Compensation Fund v Robert Tambree at [28], [46]). That does not mean that the decision turns on a value judgment whether the guilty party ought to be held liable to pay damages (Travel Compensation Fund v Robert Tambree at [28], [46]), but deciding whether the compensating advantage is indirect or collateral or does not arise out of the act of mitigation itself may require "the making of a value judgment and, often enough consideration of policy considerations" (Allianz Australia Insurance Ltd v GSF Australia Pty Ltd at [55] per McHugh J).