Mitigate before you litigate

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.