Teaching Assistants: Victor Goldberg on Mitigation

What does it mean to mitigate damages?  Victor Goldberg provides an answer in the fifth chapter of his  second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD), and we recap it here in our sixth post on that book. Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  

The chapter discusses two UK cases, British Westinghouse Electric & Manufacturing v. Underground Electric Railways, and The New Flamenco.  In British Westinghouse, the plaintiff, British Westinghouse (BW) provided steam turbines used in the London Underground (UER) in 1902.  The turbines did not work properly, and UER incurred excess annual costs of £10,000, mostly for coal purchases.  After five years, UER replaced the BW turbines with Parsons turbines, which cost less than one third of what the BW turbines costed and saved UER £20,000 in annual fuel costs.  At the time, advances in steam engines were occurring at the rate of advances in computer technology today.  Although the turbines had a twenty-year lifespan, they were obsolete within five, with or without the defects. 

When BW sued on an unpaid balance of £85,398, UER counterclaimed for excess coal costs (either the £40,000 already incurred or the £240,000 that would be incurred over the life of the turbines).  In the alternative, BW maintained that it was entitled to the cost of the Parsons turbines, as that was the cost of UER's mitigation efforts (RLCD, 88-89).  The arbitrator awarded UER the mitigation damages it sought.  The High Court and the Court of Appeals upheld the award.  The House of Lords reversed (RLCD, 90).  UER would have replaced the obsolete BW turbines in any case (RLCD, 91).

In The New Flamenco, an owner and a charterer fell out while negotiating an extension of the charter period, and the charterer insisted on returning the ship at the expiration of the original charter term.  The owner claimed damages in the form of the €7,558375 it would have earned had the charter been extended by two years.  Two sets of facts intervened.  First, just after the charterer repudiated, the owner sold the vessel for €23,765,000.  Second, during what would have been the charter term, Lehman Brothers failed and the market for ships collapsed.  The ship's value was now only €7,000,000.

The charterer argued that the owner was better off for the breach, which induced the sale before the market collapsed (RCLD, 94).  Those familiar with Professor Goldberg's work will know that this is faulty reasoning, but both the arbitrator and, after reversal in the High Court, the Court of Appeal accepted that argument.  The Supreme Court reversed again.

The proper measure of damages is the change in the value of he contract at the time of breach.  If there were an available market for the re-charter of the vessel, the owner could mitigate.  The parties, it appears, did not put forward evidence of that market, thinking that the sale of the vessel rendered the availability of the charter market irrelevant.  However, Professor Goldberg points out, what we really need to know is whether the sale price of the vessel, which had somewhere between five and fifteen years of useful live ahead of it, reflected a new charter covering the next two years or assumed that the vessel would go unused for a time.  The sale itself is not mitigation; it is only a datapoint that helps us pinpoint the value of contract at the time of the breach (RLCD, 97-98).

In conclusion, Professor Goldberg comments on the confusion that ensues in both cases when courts treat either the purchase of new turbines or the sale of the New Flamenco as mitigation.  The turbines were obsolete, so there was no way to mitigate the damages done by their sub-optimal performance, nor would there be costs to be calculated going forward, because the turbines would have been replaced in any case.  The sale of the vessel only gives us data about the value of the contract at the time of the breach.  Its value after the 2009 collapse provides no information relevant to that question (RLCD, 99).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK