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Been let down by suppliers?

In Thai Airways v KI Holdings the High Court considered the steps which were taken by Thai Airways to reduce the damage caused following a breach of contract.  Thai Airways had contracted with KI Holdings to provide airline seats.  Some of the seats were not delivered at all and others were delivered late.  This meant there was a gap in Thai Airway’s fleet.  Following the breaches Thai Airways took a number of steps to mitigate its losses.  These included leasing three aircrafts.

KI Holdings argued that the damages awarded to Thai Airways should be calculated by way of loss of profits.  KI Holdings said that the actual profits should be compared to the profits Thai Airways would have made had the contract been performed.  As Thai Airways had not made this calculation KI Holdings argued the loss had not been proven.  However, the position of Thai Airways was that it did not have to establish a loss of profit because it had instead sought to recover the costs it had incurred in mitigating its loss.

Thai Airways accepted that if it had gained certain benefits from the action it took when mitigating its loss then those benefits should be brought into account when calculating damages.  However, it argued that no credit should be given here because the action taken was the only reasonable way to proceed and it did not seek the incidental and additional benefit.

The court did not agree.  It held that the relevant factor was not whether the innocent party had a choice to act in a certain way but whether the benefit which they obtained was pecuniary.  Where a reasonable step is taken to mitigate loss, money received, which would not have been received if the contract had been performed, will be brought into account in the calculation of damages – This is the case whether its receipt was an unavoidable consequence of mitigation or not.

Despite succeeding in its argument, KI Holdings had to prove that the net benefits which Thai Airways obtained from having the leased aircraft were sufficient to off-set all the losses resulting from the breach of contract.  KI Holdings failed to show this.  Calculating what the financial position would have been had the aircraft entered service on time was extremely complicated.  The evidence showed that Thai Airways had not generated sufficient profits from the leases to require an amount to be set off against its mitigation costs.  Thai Airways was therefore awarded the full cost of the leases for the relevant period which was some $107 million.

This case highlights how parties must be aware of the duty to mitigate.  The action an innocent party takes to mitigate its loss following a breach of contract will affect the damages it can recover from the defaulting party.  Steps taken by an innocent party to mitigate its loss must be reasonable.  Further, monetary benefits which result from the action taken by the innocent party to mitigate its loss may be deducted from the damages payable by the defaulting party.  Therefore, when a breach of contract occurs the innocent party should ensure that it makes the correct choices when mitigating its loss.

Clarke Willmott can advise on mitigation and all issues arising out of contract disputes.  For further information, please contact Owen Williams, Alex Jakubowski, Greg Saunders or Stuart Farr.