Out-Law News 3 min. read

Commercial court: airline could not recover full costs if 'not strictly necessary to mitigate loss'

An airline was entitled to claim some of the costs of leasing new aircraft from a manufacturer that breached a contract to supply seats, the commercial court has ruled. However, it could not recover the full cost as it had entered into a longer lease than strictly necessary to mitigate its loss.

The judge also found that future savings on fuel costs that Thai Airways would make because the new seats it had sourced were lighter than those that the manufacturer, Koito, would have provided should be taken into account when calculating damages. However, the burden of proof was on the manufacturer, rather than the airline, to establish "the fact and amount of any such financial saving", he said.

Commercial disputes expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that the decision showed "the sort of detailed analysis" a court would carry out in order to ensure that compensation awarded fairly reflected the loss suffered.

"It is a well-established principle that damages for breach of contract are designed to put the claimant in the position he would have been had the contract been properly performed," he said.

"A part of this is the claimant's so-called duty to take reasonable steps to mitigate his loss. For example, where there is an available market for the goods or services the defendant has failed to provide, then the claimant should go into the market to purchase substitute goods or services. Damages will reflect the difference between the cost of the original and replacement goods or services," he said.

"The difficulty in this case was in distinguishing between costs and benefits resulting from the breach and those resulting from Thai Airways' own action or inaction, or rather in determining whether, in taking the various mitigating steps Thai Airways took, it acted reasonably. The case shows that where a claimant takes steps which may be entirely justifiable from a commercial point of view but not strictly necessary to mitigate loss, it should not be assumed that the full costs of taking those steps will be recoverable from the defendant," he said.

Thai Airways is the national airline of Thailand. It had contracted with Koito, a Japanese manufacturer, to purchase economy class seats for three groups of aircraft. Some of the seats were delivered late, while others were not delivered at all. The breaches of contract meant that the airline was prevented from using five new aircraft for around 18 months until replacement seats were sourced from another supplier.

The largest item of damages claimed by the airline as a result of the breach of contract was the cost of leasing replacement aircraft from a third party for a three-year period, at a cost of just under $162 million. It also claimed $21m for the cost of buying and installing the replacement seats. The questions for the court to decide were the extent to which these costs had been caused by the breach of contract and not by the airline's own actions, and the extent of any additional benefits obtained by the airline that should be deducted from the damages award.

"In essence, the question is one of causation," said commercial disputes expert Richard Dickman. ""The mitigation rules are designed to identify which costs and benefits were caused by the breach, and which result from the claimant's own action."

"The judge helpfully distilled the test down to whether the claimant has acted reasonably in response to the defendant's wrong. If it has, then the costs and benefits associated with doing so are included in the calculation of damages. Insofar as the claimant has not acted reasonably, then damages are assessed as if it had," he said.

In the commercial court, Mr Justice Leggatt said that one of the consequences of these rules was that an aggrieved party could have "acted in a way which was reasonable from the point of view of its own business interests or personal objectives and yet not have adopted what the law regards as a 'reasonable' response to the defendant's breach of contract or other wrong for the purpose of assessing damages". In this case, although Thai Airways' main reason for leasing the replacement aircraft was to mitigate its loss, "that reason would not have justified leasing the aircraft for three years rather than two", he said.

"The choice of a three rather than a two year lease term (with an option to extend for a further two years) was driven by other commercial considerations," he said. "I accordingly find that the decision to lease the aircraft for a third year was not a step which was taken nor which it would have been reasonable for Thai to take in mitigation of loss, and is therefore not attributable to Koito's breaches of contract."

Similarly, if Koito could prove that the airline had saved or would save money as a result of purchasing replacement seats in mitigation of its loss then the amount saved "must be brought into account in the assessment of damages", the judge said.

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