Mitigate before you litigate
- By Carl Peckinpaugh
- Feb 20, 2000
If a party to a contract fails to live up to its commitments, it is in breach
of the contract. Generally, the breaching party must compensate the innocent
party for any resulting damages it suffers.
When a person or organization is injured by a breach of contract, it
doesn't seem to make sense that the innocent party should have to take action
for the benefit of the party responsible for the breach.
However, for the innocent party to claim compensation for unfilled contractual
obligations, frequently it first must take action to minimize, or mitigate,
the extent of those damages. Failure to take timely action to mitigate the
consequences of the other party's breach may significantly limit the innocent
party's right to recover damages.
Under the Uniform Commercial Code, when a contract for the sale of goods
is breached by the seller, the buyer's right to claim damages for the consequences
of that breach may be limited unless the buyer has obtained "cover" for
the breach by acquiring replacement goods.
Conversely, when a contract for the sale of goods is breached by the
buyer, the seller may be required to mitigate its damages by reselling the
items to another buyer. In both cases, the non-breaching party is expected
to minimize the potential damages resulting from the breach.
The same thing is true for contracts involving services. When a contracting
party is aware of an alleged breach, it must take timely action, or it may
lose its right to complain. As stated in Ling-Temco-Vought Inc. v. United
States, "One side cannot continue after a material breach by the other...to
act as if the contract remains fully in force (although stopping performance
would be fair and convenient), run up damages and then go suddenly to court."
The rule is just as applicable when the government is a party to the
contract. For example, in Maizel Laboratories Inc., the Armed Services Board
of Contract Appeals disallowed an agency's attempt to revoke its acceptance
of allegedly nonconforming items, based on the contractor's alleged failure
to follow applicable quality-control procedures, because the agency had
been aware of the contractor's procedures during performance.
According to the board, "when the government with full knowledge of
a contractor's quality-control procedure permits the contractor to perform
the contract in accordance with such procedure, this results in a waiver
of any objections the government might otherwise have raised."
Clearly, when a contract is breached, it is wise to consider first any
need to mitigate before considering whether to litigate.
Peckinpaugh is corporate counsel for DynCorp, Reston, Va., and formerly
a member of the government contracts section for Winston & Strawn, Washington, D.C.