Mitigation of damages is governed by clear principles, but courts can face difficulties when applying those principles to the facts of any dispute
Key points
- Cases involving mitigation of damages often depend as much on their own facts as well-established legal principle
- The Court of Appeal has recently held that an increase in the value of a property should not be considered as mitigation
- A different factual background could have resulted in a different decision
Last summer, this column praised the Court of Appeal’s decision in Bacciottini and another v Gotelee & Goldsmith (a firm) [2016] EWCA Civ 170; [2016] PLSCS 94 for the clarity it brought to some of the key questions surrounding a claimant’s duty to mitigate its loss (“Claimants: do your duty”, EG, 4 June 2016, p91).
Although the duty to mitigate is a slight misnomer – because a claimant does not have to do anything – it remains relevant to claims in both contract and tort because an innocent party’s damages will be assessed as if it has taken reasonable steps to minimise the loss it has suffered.
Bacciottini reiterated two principles that underpin how the duty is applied by the courts. First, the question of mitigation should be addressed on a case-by-case basis, with the extent of the duty depending on the specific facts of each dispute. Second, if a claimant has actually mitigated its loss (irrespective of whether or not the steps it has taken to do so were reasonable) then the courts will not compensate it for loss that it would have suffered were it not for the mitigation. You are not entitled to damages to compensate you for a loss that you have not actually suffered.
Towards the end of 2016, a different Court of Appeal revisited the duty to mitigate when deciding Quilter v Hodson Developments Ltd [2016] EWCA Civ 1125; [2016] PLSCS 310. In doing so, it highlighted how both of the Bacciottini principles are interrelated. The interpretation the courts give to the specific facts can often decide the question of whether or not a claimant has actually mitigated its loss.
The facts
In January 2012, Alison Quilter purchased an apartment from Hodson Developments at Chobham Lakes in Surrey for £240,000. She sold it in 2014 for £275,000. The debate about mitigation in this case centred on whether the courts should take account of that £35,000 increase in price when considering the damages to be awarded to Quilter.
Quilter’s claim arose out of misrepresentations she alleged had been made by Hodson prior to exchange of contracts. When answering the standard question in pre-contract enquiries as to whether or not there were any past or current disputes regarding the property, Hodson had omitted to refer to complaints brought by other residents at Chobham Lakes about the biomass boiler that was supposed to provide hot water and heating to the entire development, but which only worked intermittently.
At first instance (and before the Court of Appeal’s judgment in Bacciottini was published), HHJ Saggerson held that Hodson’s failure to disclose those disputes was a negligent misrepresentation, entitling Quilter to compensation.
Damages for negligent misrepresentation are normally assessed on a tortious basis and the judge relied on the leading textbook, McGregor on Damages, for confirmation that the correct amount to award Quilter was the difference between the true value of the apartment with the defective heating and the actual price she paid for it. He awarded her damages of £15,000.
In relation to mitigation, the judge then had to consider whether or not to take account of the £35,000 increase in the value of the apartment by the time Quilter sold it. Did the sale at this increased price (which was well in excess of the damages awarded) constitute a mitigation of her loss sufficient to mean that Hodson did not have to pay anything? The judge held that the increase in value was something that Quilter was entitled to keep. It should not be treated as mitigation of her loss because she would have in fact made a profit of £50,000 (and not £35,000) had she paid the appropriate price for the apartment in 2012. Hodson appealed on this point (as well as a number of others).
The appeal
Floyd LJ, who gave the unanimous judgment of the court, dismissed each of Hodson’s arguments. In relation to mitigation, Hodson sought to rely on the principle confirmed by Bacciottini that a claimant should not be compensated for loss that it has, in fact, mitigated. Hodson also referred to British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 as authority for the principle that, where a subsequent transaction (Quilter’s sale at a profit) was part and parcel of the transaction induced by the misrepresentation (the original purchase), the profit from the subsequent transaction has to be taken into account when calculating any damages.
Floyd LJ got around both cases by stressing that, as a matter of fact, the two transactions were entirely separate. At all relevant times, Quilter needed a family home and the sale arose “in the ordinary course of her domestic life rather than being due to the defects in the heating system”. As such, she was entitled to retain the benefit of the increase in value.
The court also addressed the fact that the heating was being fixed by the NHBC under its guarantee scheme. Relying on “well-established principles” stretching back to Bradburn v Great Western Railway [1874] LR 10 Exch 1, Floyd LJ held that the fact that a claimant has been able to use an insurance policy to reduce or extinguish their loss is not something to be taken into account when considering mitigation.
Mitigation is often a key issue in cases involving property and construction. Bacciottini and Quilter suggest that we can expect more jurisprudence on this issue in future.
Stuart Pemble is a partner at Mills & Reeve LLP
