Mitigation of Damages: What Every Business Owner Needs to Know

Mitigation of damages is a contract law concept that arises if a contract is breached. It means that the non-breaching party may be required to take steps to minimize their losses after the other party breaches the contract.

Despite having done nothing wrong, a non-breaching party may have an obligation to not only avoid further loss because of a breached contract, but to also actively minimize the results of the breach. To the average observer, this may seem very unfair. However, this concept consistently arises in business disputes, and your knowledge of mitigation principles could improve or reduce your recovery in a breach of contract lawsuit.

What is the Duty to Mitigate Damages?

The duty to mitigate damages is a contract concept that simply means that the party who did not breach the contract cannot take advantage of the breach. This duty protects a breaching party from unfair liability. This duty also prevents recovery of any damages that could reasonably have been avoided.

Under New Jersey contract law, the test is typically whether you have made a reasonable and diligent effort to minimize the loss by taking advantage of any reasonable business or employment opportunities that may be available under the circumstances. If a party fails to mitigate damages properly, the court might reduce the amount of damages that they can recover by the amount that the court believes the party could or should have mitigated.

By way of example, imagine a contract between two parties for the delivery of certain goods. If, at the time of expected performance the breaching party does not deliver the goods, the non-breaching party still has an obligation to make a reasonable attempt to obtain those goods by other means in order to fully recover damages.

Contract mitigation principles also often arise in cases where one party breaches a lease. If a tenant breaks a lease and vacates the premises without legal justification, the landlord must use reasonable efforts to try to rent the property to another tenant as soon as reasonably possible in an effort to mitigate the losses.

In the employment context, the mitigation of damages principle would arise when an employee alleges wrongful termination. Such an employee is obligated to reasonably attempt to find similar employment. As in the other scenarios, failure to do so may result in a reduction of any damages awarded by the court.

What “Reasonable Efforts” Usually Means

In practice, “reasonable efforts” is the key phrase that drives most mitigation disputes. The law generally does not require the non-breaching party to take extraordinary measures or accept a clearly inferior substitute just to reduce the breaching party’s exposure. Instead, the question is usually whether a prudent business owner, facing the same circumstances, would have taken similar steps to limit the loss.

Mitigation also has a timing component. The duty typically arises once the breach occurs (or once it becomes clear performance will not happen), and delays can matter.

For example, if a supplier fails to deliver a critical component, waiting weeks to source an alternative may be viewed differently than making prompt inquiries on the same day. Likewise, if a tenant abandons a commercial space, a landlord’s efforts to re-let the space as soon as possible can become central evidence of whether the landlord acted reasonably.

Remember to Document Your Mitigation Efforts

Documentation is another overlooked issue. Even when a party does take appropriate steps, the ability to prove those steps can affect the outcome. Keeping emails with replacement vendors, records of bids or quotes, marketing listings, broker communications, and job applications can help show your diligence in avoiding further losses. Without that paper trail, the breaching party may argue that losses could have been avoided, and the court may be left to guess at what “should” have happened.

Key Takeaway

Failure to mitigate losses can turn a fairly straightforward breach of contract lawsuit into protracted and costly litigation. If you are the victim of a contract breach, you must be diligent about mitigating your losses. New Jersey law does not require you to make a heroic effort, but you must be able to show that your actions were reasonable under the circumstances.