In a civil lawsuit, the plaintiff's goal is generally to be compensated for all of the harm suffered. But can the plaintiff sit back, “drive up” damages, and recover 100% of it from the defendant?
Generally, no. A person harmed by a breach of contract or tort must take reasonable steps to limit his or her losses. This is called the “duty to mitigate damages.” If the person fails to mitigate, a judge can reduce his or her damages.
This article looks at the duty to mitigate damages in Minnesota. It looks at the legal requirements and offers some practical tips to plaintiffs and defendants.
Basic Definition – Mitigation of Damages
“Mitigation” is a word that means to contain, limit, reduce. In the legal context, it refers to a plaintiff's duty to take reasonable steps to limit his or her losses. The plaintiff cannot “drive up”, “Trump up”, "milk", exaggerate, compound, or artificially increase the amount of damages.
Courts have said that, “[g]enerally, the party alleging a loss because of a tort or breach of contract has a duty to mitigate damages.” Bass v. Equity Residential Holdings, LLC, 849 N.W.2d 87, 92 (Minn. Ct. App. 2014).
For breach-of-contract cases, “[i]t is a well-settled principle of contract law that a nonbreaching party is duty-bound to use reasonable diligence to mitigate damages.” Deutz-Allis Credit Corp. v. Jensen, 458 N.W.2d 163, 166 (Minn. Ct. App. 1990).
For tort cases (negligence, trespass, etc.), the rule is sometimes called the “doctrine of avoidable consequences.” After being harmed, the injured person must reasonably avoid further loss. This often comes up in personal injury cases, where insurance companies argue that the injured plaintiff failed to see a doctor and treat the injury within a reasonable time.
If a plaintiff fails to mitigate, the court can reduce the damage award. For example, if a plaintiff claims $50,000 in damages but could reasonably have avoided $20,000 in losses, the plaintiff only gets $30,000. In other words, the plaintiff lost out on $20,000 due to his or her failure to mitigate.
Since mitigation has a significant effect on the plaintiff's damages, it is important for both parties to understand the concept before litigating the case.
Mitigation Clauses in Contracts
The duty to mitigate damages is a general principle of tort and contract law. It is a default rule that will apply to most civil cases.
However, parties may be able to modify this duty in a written contract. They could add a "no mitigation" clause that does not require either party to mitigate if there is a breach. A court might uphold it, but conceivably the court could still apply the default rules and require mitigation.
On the other hand, if the parties want a customized duty to mitigate, they could write it into their contract. Here is a very basic example of such a clause (do not use without tailoring it to your situation):
Mitigation of Damages: Notwithstanding any terms and provisions to the contrary, the parties shall each have the duty to mitigate, in every reasonable respect, any and all damages caused by a breach of this contract by the other party.
A court is less likely to require mitigation when the contract has an enforceable “liquidated damages” clause. A “liquidated damages” clause simply sets the amount of damages that a party will have to pay if it breaches the contract. A court is likely to award that amount, if appropriate, rather than calculating damages and considering mitigation.
General Rules for Contract Damages
To see how “mitigation” works in breach-of-contract cases, it is helpful to understand the basic rules of contract damages.
The mitigation issue comes up at the end of the “damage” analysis. Basic damage questions often include:
(1) has the plaintiff proven a right to damages?
(2) what total damages has the plaintiff proven under law?
(3) should the plaintiff's damages be reduced for failure to mitigate?
“In an ordinary civil action the plaintiff has the burden of proving every essential element of his case, including damages by a fair preponderance of the evidence.” Wick v. Widdell, 276 Minn. 51, 53-54, 149 N.W.2d 20, 22 (1967). Contract actions protect different interests than tort claims – contract damages “protect the interest in having promises performed.” D & A Dev. Co. v. Butler, 357 N.W.2d 156, 158 (Minn. Ct. App. 1984).
A plaintiff may recover those “damages sustained by reason of the breach which arose naturally from the breach or could reasonably be supposed to have been contemplated by the parties when making the contract as the probable result of the breach.” Lesmeister v. Dilly, 330 N.W.2d 95, 103 (Minn. 1983).
The measure of damages for breach of contract is generally the amount of money necessary to put the plaintiff in the position in which he would have been if the defendant performed the contract. Kellogg v. Woods, 720 N.W.2d 845, 853 (Minn. Ct. App. 2006).
The plaintiff has the burden to demonstrate consequential damages “with a reasonable degree of certainty and exactness.” County of Blue Earth v. Wingen, 684 N.W.2d 919, 924 (Minn. App. 2004) (quotation omitted). Damages cannot be “remote, conjectural, or speculative.” Jensen v. Duluth Area YMCA, 688 N.W.2d 574, 579 (Minn. Ct. App. 2004). Among other losses, a plaintiff may recover lost profits “if they are a natural and proximate result of the breach and are proved with reasonable, although not absolute, certainty.” Olson v. Rugloski, 277 N.W.2d 385, 388 (Minn. 1979).
A fact-finder “need not adopt the exact figures of any witness in determining damages, and as long as its finding is within the mathematical limitations established by the various witnesses and is otherwise reasonably supported by the evidence as a whole, such finding must be sustained.” Fudally v. Ching Johnson Builders, Inc., 360 N.W.2d 436, 439 (Minn. Ct. App. 1985) (quotation omitted).
Legal Standard for Mitigating Damages (Breach of Contract)
“Mitigation” is a simple concept in theory. It prevents a plaintiff from unreasonably driving up damages. In breach-of-contract cases, it can be more difficult to apply and depends a lot on the circumstances.
“The general law on mitigation is that the wronged party must use ‘reasonable diligence and good efforts.'” Bass v. Equity Residential Holdings, LLC, 849 N.W.2d 87, 92 (Minn. Ct. App. 2014) (quoting Deutz-Allis Credit Corp. v. Jensen, 458 N.W.2d 163, 166 (Minn. Ct. App. 1990)). At a minimum, the plaintiff must take some affirmative actions to consider options and to limit the losses.
Amount of “Mitigation”
“A failure to attempt to mitigate damages will not bar plaintiff entirely from a recovery, but will only prevent the recovery of such damages as might have been avoided by reasonable efforts upon his part.” Apex Min. Co. v. Chi. Copper & Chem. Co., 340 F.2d 985, 987 (8th Cir. 1965) (citation omitted). This puts the focus on what damages the plaintiff could have “saved.” The plaintiff can still collect any other damages that were unavoidable, even if some damages are barred by a failure to mitigate.
Mitigation Depends on the Situation
Mitigation depends a lot on the factual circumstances. “What must be done in this respect will depend on the facts of the particular case. The rule exacts nothing unfair or unreasonable.” Deutz-Allis Credit Corp. v. Jensen, 458 N.W.2d 163, 166 (Minn. Ct. App. 1990) (quoting Wavra v. Karr, 142 Minn. 248, 251, 172 N.W. 118, 120 (1919)).
If the defendant offers to “cure” damage that he caused, the plaintiff might be required to mitigate damages by accepting a “cure”. DeRosier v. Util. Sys. of Am., Inc., 780 N.W.2d 1, 6 (Minn. Ct. App. 2010). However, a plaintiff is not forced to accept a new contract. “[W]hen one party to the contract defectively performs and subsequently offers to correct the breach through a new contract, the non-breaching party may generally decline the offer and still recover its full damages.” Id. at 7. But even that court recognized that “[s]pecial circumstances may rebut the reasonableness of the rejection [of a new contract] and call for exceptions to this rule.” Id.
If the plaintiff's mitigation efforts cost money, he may be able to recover those costs as “special damages.”
Impact of Liquidated-Damages Clause
Generally, if the contract has a “liquidated damages” clause that sets an amount of damages that a party will suffer if the contract is breached, mitigation may not be required. Fabian v. Sather, 316 N.W.2d 10 (Minn.1982). In that circumstance, the defendant will likely have to pay the liquidated sum set forth in the contract.
Mitigation – Affirmative Defense
The defendant must raise the mitigation defense in his or her first pleading. This is because “failure to mitigate damages is an affirmative defense[.]” Sayre v. Musicland Group, Inc., 850 F.2d 350, 354 (8th Cir. 1988). As such, the defendant has the burden to prove that the plaintiff failed to mitigate damages. Lanesboro Produce & Hatchery Co. v. Forthun, 218 Minn. 377, 381, 16 N.W.2d 326, 328 (1944).
Mitigation vs. Spoliation of Evidence
When a party takes action to mitigate damages, he or she must be careful to preserve evidence that could be used by a defendant in future litigation. If the party fails to preserve evidence, a judge could issue sanctions for “spoliation of evidence.”
This often comes up in the construction context, but also in other situations. When an owner alleges defective construction, a contractor usually wants to inspect it (to “cure” the problem or just to see its condition). The owner may want someone else to fix the problems. If the owner fixes the issue without letting the contractor see it, the contractor could be disadvantaged in defending a lawsuit. Accordingly, the judge could sanction the owner for failing to preserve evidence.
Minnesota case law sets forth the rules for “spoliation of evidence.” A party has a duty to preserve evidence when that party knows or should know that litigation is “reasonably foreseeable.” Miller v. Lankow, 801 N.W.2d 120, 127-28 (Minn. 2011). Spoliation of evidence occurs when a party fails to preserve property for another party's use as evidence in pending or future litigation. Id. at 127. Spoliation includes the destruction of evidence when done purposely or good faith. Id. One of the factors is the extent of prejudice to the party seeking the evidence. Id. at 132.
A judge can issue a range of sanctions to a party that “spoliates” evidence, including a dismissal of that party's claim or defense in severe cases of intentional destruction.
The point is to be careful if your mitigation efforts involve physical changes to potential evidence. If so, you might have to let the defendant see it before you alter its condition. At the very least, it may be important to take pictures, test the evidence, and preserve all data for disclosure in a future lawsuit.
Example of Mitigating Damages
An equipment dealer leases a crane to a construction company. The 5-year lease requires monthly payments of $1,000. The construction company makes payments for the first year, but fails to make any further payments and returns the crane in good condition. The creditor sues for breach of contract and seeks damages for 4 years of non-payment (48 months x $1,000 = $48,000).
Can the dealer do nothing and recover $48,000? Probably not. Unless the contract has a “no mitigation” clause, the dealer must take reasonable steps to re-lease it. If there are suitable companies that want to rent the crane, the dealer can limit its losses. If the dealer fails to re-lease the crane, the judge can cut off the damage claim. For instance, if the crane could be re-leased immediately for $1,000 per month, then the creditor may not recover much, if any, of the $48,000.
Practically speaking, the dealer is no worse off if it gets a new renter at $1,000 per month. The dealer shouldn't be able to “double dip” (collect $1,000/month on the new lease and also collect $1,000/month damages from the first renter).
But what if there is a time “gap” between the breach and a new renter? The dealer can generally claim that gap as damages. For instance, if it reasonably took a year to find a new renter, the creditor can claim those 12 months ($12,000) as damages but could not likely claim the remaining 3 years ($36,000).
What if the dealer cannot find a new renter? If the dealer has taken reasonable steps but cannot find a new renter, the original renter could be on the hook for the full $48,000.
What if the dealer cannot find a new renter to pay $1,000 per month? If the dealer can show that the only person willing to rent the crane would pay $500 per month, but dealer may have to re-lease it at that price. If the new lease for $500 per month starts in “year 3” of our example, the dealer should recover $30,000 ($12,000 for year 2 + $6,000 each for years 3-5).
As you can see, there can be a lot of variation in outcomes even for this relatively simple example. Mitigation makes a big difference in what the plaintiff can recover. For that reason, the parties must develop evidence to support their claims. Often, this means having an attorney that can conduct “discovery” (i.e., depositions, interrogatories, and subpoenas) on behalf of the party.
Mitigating Damages in Other Contexts
As mentioned above, mitigation commonly comes up in a range of civil cases, including breach-of-contract and tort cases. Here are some other common situations where mitigation-of-damages might come up.
When a worker sues a company for wrongful termination, the worker must generally take reasonable steps to find alternative work. Yancey v. Weyerhauser Co., 277 F.3d 1021, 1025 (8th Cir. 2002). If not, the worker's damages can be reduced. But keep in mind that it's not reasonable to expect the worker to take a job outside his or her field. Mitigation only requires the worker to “seek or accept local employment of a similar character. Thus, he need not seek or accept employment outside his line of business for which he has no special experience.” Hubbard Broad., Inc. v. Loescher, 291 N.W.2d 216, 221 (Minn. 1980) (citations omitted).
Most construction cases involve a contract, so the default mitigation rules for contracts will likely apply. Additionally, Minnesota has construction statutes that may have additional requirements for mitigation. For instance, the Minnesota home warranty statute has rules that give the builder a chance to "cure" alleged defects before the homeowner can sue. See Minn. Stat. 327A.02, et. seq. Construction issues can be unique and complex, so it may be necessary to speak with an attorney if you have problems with your contractor.
Personal Injury Claims
Negligence is a common tort for personal injury claims. A “[p]lainfff has a duty to mitigate damages by acting reasonably in obtaining treatment for her injury.” Adee v. Evanson, 281 N.W.2d 177, 180 (Minn. 1979) (citing Couture v. Novotny, 297 Minn. 305, 211 N.W.2d 172 (1973)). This does not require the plaintiff to have a “major surgical operation” or a form of medical treatment “when the prospect of success is uncertain or when there is a chance of unsatisfactory results.” Couture, 297 Minn. at 309-10, 211 N.W.2d at 174-75.
In the tort context, mitigation is sometimes called the “doctrine of avoidable consequences.” Bemidji Sales Barn, Inc. v. Chatfield, 312 Minn. 11, 19, 250 N.W.2d 185, 189 (1977). Insurance companies often make this argument to limit the plaintiff's damages.
Tort claims also involve a similar concept called “comparative fault.” Generally, this focuses on actions by the plaintiff that caused the injury. In contrast, mitigation and the “avoidable consequences” doctrine focus on post-injury actions. The comparative fault statute at Minn. Stat. § 604.01, subd. 1a states:
"Fault" includes acts or omissions that are in any measure negligent or reckless toward the person or property of the actor or others, or that subject a person to strict tort liability. The term also includes breach of warranty, unreasonable assumption of risk not constituting an express consent or primary assumption of risk, misuse of a product and unreasonable failure to avoid an injury or to mitigate damages, and the defense of complicity under section 340A.801. Legal requirements of causal relation apply both to fault as the basis for liability and to contributory fault. The doctrine of last clear chance is abolished.
Evidence of unreasonable failure to avoid aggravating an injury or to mitigate damages may be considered only in determining the damages to which the claimant is entitled. It may not be considered in determining the cause of an accident.
UCC “Sale of Goods” Cases
The Minnesota Uniform Commercial Code (UCC) applies to the “sale of goods.” This includes goods sold to consumers or between “merchants.” While the default mitigation rules for contracts will generally apply, the UCC also has special rules involving “commercial reasonableness.” For instance, the UCC contemplates that the parties will seek alternative goods or inputs if the other party breaches the contract. See Minn. Stat. § 336.2-708 (seller's damages); Minn. Stat. § 336.2-718 (limitation of damages). These concepts are, “to an extent, borrowed from common law doctrines of mitigation of damages and the rule of avoidable consequences.” Deutz-Allis Credit Corp. v. Jensen, 458 N.W.2d 163, 166 (Minn. Ct. App. 1990). The takeaway is that the UCC might require the injured party to take specific mitigation steps before it can recover damages.
It often makes sense for a landlord to re-lease the property when a tenant breaches the lease. However, courts have not always required the landlord to mitigate damages.
Under a traditional common law view, “landlords are under no obligation in Minnesota to mitigate damages after a tenant abandons leased premises.” Markoe v. Naiditch & Sons, 303 Minn. 6, 7, 226 N.W.2d 289, 291 (1975). Likewise, another court stated that “[i]n Minnesota, commercial landlords are under no obligation to mitigate damages by reletting abandoned premises.” Odens Family Props., LLC v. Twin Cities Stores, Inc., 393 F. Supp. 2d 824, 830-31 (D. Minn. 2005) (citing Control Data Corp. v. Metro Office Parks Co., 296 Minn. 302, 208 N.W.2d 738, 740-41 (1973); Gruman v. Investors Diversified Services, Inc., 247 Minn. 502, 78 N.W.2d 377 (1956)).
On the other hand, the court in Provident Mutual Life Ins. Co. v. Tachtronic Instruments, Inc., 394 N.W.2d 161 (Minn. Ct. App. 1986) stated that:
Under Minnesota case law, even when a lease has been terminated the landlord is entitled to an amount equal to the “damages resulting from the breach with the attendant obligation upon the [landlord] to use reasonable efforts to mitigate such damage subsequent to the breach.”
(citing Gruman, 247 Minn. at 508, 78 N.W.2d at 381; Newberg v. Conley, 190 Minn. 459, 252 N.W. 221 (1934)).
Since there may be some uncertainty about the landlord's duty to mitigate, it is often “best practices” for the landlord to look for a new tenant.
Real estate disputes generally involve contracts, so the general mitigation rules should apply.
For example, when a buyer signs a purchase agreement but fails to close on a home, the seller may have an obligation to sell to another suitable buyer. Often, the seller can choose to (a) sue the original buyer for “specific performance” requiring the buyer to close, or (b) sue the buyer for breach of the purchase agreement and seek damages (in which case the seller may have to mitigate by selling to a new buyer).
There may be many other types of real estate disputes involving the duty to mitigate. Other situations may require the owner to protect the land by keeping up the utilities, insurance, taxes, outdoor areas, and other things.
Practical Tips for Plaintiffs to Avoid Mitigation Problems
- Control the risk at the time of contracting. Ideally, a plaintiff does not want a duty to mitigate damages. If the party wants to dispense with this risk, he or she could insist on a “no-mitigation” clause in the written contract. There is no guarantee that a court would uphold such a clause, but it generally does not hurt to include the clause and argue for no mitigation.
- Consider using a liquidated-damages clause if you can estimate your likely damages in the event of a breach. It could dissuade a judge from finding a duty to mitigate. These clauses are not always upheld, but could potentially be helpful. If a party thinks he or she could get higher damages than the parties can agree to in a liquidated damages clause, then that party perhaps should exclude it from the contract.
- If you see signs that the other party will breach the contract, evaluate your alternatives for limiting losses. Have a contingency plan in place.
- If the other party has clearly breached, take steps to mitigate. This could mean promptly contacting other suppliers, vendors, tenants, or customers for alternative goods or services.
- For sale-of-goods transactions, comply with any UCC requirements and make sure your actions are “commercially reasonable.”
- Consider any offers by the defendant to “cure” the breach. You don't have to sign a new contract, but the other party might have a right to “cure” under some circumstances (i.e., residential construction).
- Document your efforts to mitigate damages. Note any communications you had with alternative buyers, sellers, renters, etc. Keep track of any costs required to mitigate damages (listing costs, transportation, etc.). Also make note of any actions you declined to take and the reasons for them. Generating these records could help you prove your claim to damages in a potential lawsuit.
- Where appropriate, keep the defendant updated on your mitigation efforts. If the defendant has better alternatives, it would helpful to hear those alternatives at that time rather than at a later trial. If the defendant knows of your mitigation plans and does not object, you may be in better position to show that your efforts were reasonable.
- Remember that you only have to take “reasonable” steps to mitigate. If there are no reasonable alternatives, then you might not have to do anything further.
- If you have a tort claim for personal injuries, make sure you promptly see a doctor and follow any recommendations.
- If there is an ultimate lawsuit, put the defendant to his burden to prove that you failed to mitigate damages.
Practical Tips for Defendants to Avoid Mitigation Problems
- Control the risk at the time of contracting. Favorable contract language can limit exposure for a party that breaches the contract. It may be helpful to include a mitigation clause in the contract.
- Consider making an offer to “cure” the problems alleged by the plaintiff. Also, consider making an offer to amend the contract (if you can perform that amended contract).
- Remind the plaintiff of his or her duty to mitigate damages.
- If you know of better ways for the plaintiff to mitigate damages (such as having a suitable alternative person), suggest it to the plaintiff.
- If the plaintiff's claimed damages are excessive, analyze what a reasonable person would have done to get alternative goods or services.
- Find a witness that can testify that he or she was a suitable alternative and would have responded to a listing or advertisement by the plaintiff.
- Know your rights and obligations under the UCC if your transaction was for the “sale of goods.”
- Raise the mitigation defense in your answer or first responsive pleading. Also, develop affirmative evidence to show that the plaintiff failed to mitigate damages.
A party must “mitigate” damages by taking reasonable steps to limit the losses. If not, a judge could drastically reduce the plaintiff's damages. Therefore, it is risky for a plaintiff to do nothing or to “drive up” the claimed damages.
Mitigation is also an issue for the defendant, who should demand that the plaintiff mitigate damages and, where appropriate, suggest a suitable alternative for goods or services.
The bottom line is that mitigation can significantly impact the outcome of civil cases. As such, the parties should understand the duty to mitigate and develop evidence to support their mitigation arguments.
If you need legal advice or representation on a contract dispute or other civil litigation, Contact Us for a free consultation. With offices in Shakopee (Scott County) and Litchfield (Meeker County), we serve clients throughout the Twin Cities and Greater Minnesota.