Duty to Mitigate As established in British Westinghouse Electric and

Manufacturing Co Ltd v. Underground Electric Railways Co of London Ltd [1912]

AC 673, the claimant cannot recover damages for losses that could have been
avoided through reasonable action.

Case Summary:
British Westinghouse Electric & Manufacturing Co Ltd v. Underground Electric
Railways Co of London Ltd [1912] AC 673

1. Facts:
The defendants (British Westinghouse Electric and Manufacturing Co Ltd)
supplied the plaintiffs (Underground Electric Railways Co of London Ltd) with
turbines which, in breach of contract, were deficient in power. The plaintiffs
accepted and used the turbines but reserved their right to claim damages. Later
they replaced the turbines with others which were far more efficient than those
supplied by the defendants would have been, even if they had complied with the
contract. The plaintiffs claimed to recover the cost of the substitute turbines as
damages.
The parties entered arbitration to determine the damages the defendant was
required to pay. The arbitrator found that
a. It was reasonable mitigation for the claimant to buy substitute turbines.
b. Even if the original turbines had been contract-compliant, the claimant still
would have benefited from replacing them with superior substitutes at the time
they did.
The arbitrator submitted a question to the High Court, asking whether the plaintiff
was entitled to recover the cost of the substitute turbines from the defendant. The
High Court answered in the affirmative, and the arbitrator made the award. The
defendant appealed.
British Westinghouse argued that the cost of the new turbines should not be
recoverable as damages because UERL would have replaced the old turbines
anyway to achieve greater efficiency.
2. Procedural History:
(a) The arbitrator held that replacing the defective turbines with Parsons turbines
was reasonable and mitigated the respondents’ losses.
(b) The respondents were awarded damages for excess coal consumption and the
costs of procuring and installing the Parsons turbines.
(c) The appellants appealed, contending that the pecuniary advantage gained from
the superior Parsons turbines should offset the damages.
(d) The Divisional Court and Court of Appeal upheld the arbitrator’s decision. The
appellants then appealed to the House of Lords.

3. Issues:

(a) Should the pecuniary advantages gained by the respondents from the
superior Parsons turbines be taken into account in calculating damages?
(b) Were the costs of procuring and installing the Parsons turbines recoverable
as part of the damages?
(c) Was the claimant entitled to recover the full cost of the new turbines, given
that they gave the claimant an economic advantage over what the defendant was
contractually obliged to provide?

(d) Whether the Respondent was entitled to recover damages for the alleged
poor performance of the equipment supplied by the Petitioner.

4. Petitioner arguments:

(a) The Petitioner argued that the equipment met the specifications agreed upon
in the contract.

(b) The Petitioner contended that any operational issues were due to factors
outside their control, such as installation errors or environmental conditions.
5. Respondent arguments:

(a) The Respondent claimed that the equipment was defective and did not
perform as promised, which led to significant financial losses.

(b) The Respondent argued that they were entitled to damages due to the
Petitioners breach of contract.

6. Law Applicable:

(a) The first is that proved a breach of a bargain to supply what he contracted to
get is to be placed, as far as money can do it in as good a situation as if the contract
had been performed. The fundamental basis is thus compensation for pecuniary
loss naturally flowing from the breach; but this first principle is qualified by a
second,

(b) which imposes on a plaintiff the duty of taking all reasonable steps to
mitigate the loss consequent on the breach, and debars him from claiming any part
of the damage which is due to his neglect to take such steps.

(c) This case emphasized the importance of assessing damages based on the
principles of reasonableness and mitigation.

(d) It clarified that the injured party should take reasonable steps to mitigate
their losses when a breach occurs and that the calculation of damages should be
based on what is reasonable in the circumstances.

7. Precedents Cited:

(a) Dunkirk Colliery Co v. Lever (1878) 9 Ch. D. 20 – ‘The person who has
broken the contract” is not to be ‘“‘exposed to additional cost by reason of the
plaintiffs not having done what they ought to have done as reasonable men, and the
plaintiffs” are not to be ‘‘under any obligation to do anything otherwise than in the
ordinary course of business.” As James, L.J., indicates, this second principle does
not impose on the plaintiff an obligation to take any step which a reasonable and
prudent man would not ordinarily take in the course of his business. But when in
the course of his business he has taken action arising out of the transaction, which
action has diminished his loss, the effect in actual diminution of the loss which he
has suffered may be taken into account even though there was no duty on him to
act.

(b) Staniforth v. Lyall (1830) 7 Bing. 169 – In that case the defendants had
chartered a ship to New Zealand, where they were to load her, or by an agent there
to give the plaintiff, the owner, notice that they abandoned the adventure, in which
case they were to pay £500. The ship went to New Zealand, but found neither
agent nor cargo there, and the captain chose to make a circuitous voyage home by
way of Batavia. This voyage, after making every allowance for increased expense
and loss of time, was more profit- able than the original venture ta New Zealand
would have been. The Court of Common Pleas decided that the action was to be
viewed as one for a breach of contract to put the cargo on board the plaintiff’s
vessel for which the plaintiff was entitled to recover all the damages which he had
incurred, but that he was bound to bring into account, in ascertaining the damages
arising from the breach the advantages which had accrued to him because of the
course which he had chosen to adopt. I think that this decision illustrates a
principle which has been recognized in other cases, that, provided the course taken
to protect himself by the plaintiff in such an action was one which a reasonable and
prudent person might in the ordinary con- duct of business properly have taken,
and in fact did take whether bound to or not, a jury or an arbitrator may properly
look at the whole of the facts and ascertain the result in estimating the quantum of
damage.

(c) Privy Council in Lrie County Natural Gas Company v. Carroll (1911 A.C.
105) and Wertheim v. Chicoutimi Pulp Company (QYI11 A.C. 301) - Recent
illustrations of the way in which this principle has been applied and the facts have
been allowed to speak for them- selves are to be found in the decisions of the
Judicial Committee of the’. The subsequent transaction, if to be taken into account,
must be one arising out of the consequences of the breach and in the ordinary
course of business.
(d) Bradburn v. Great Western Railway Co (1874) LR 10 Ex 1 – where it was
held that in an action for injuries caused by the defendant’s negligence a sum
received by the plaintiff on a policy for insurance against accident could not be
taken into account in reduction of damages. The reason of the decision was that it
was not the accident but a contract wholly independent of the relation between the
plaintiff and the defendant which gave the plaintiff his advantage. Again, it has
been held that in an action for delay in discharging a ship of the plaintiff's whereby
he lost his passengers whom he had contracted to carry, the damages ought not to
be reduced by reason of the saine persons taking passage in another vessel
belonging to the plaintiff.

(e) Jebsen v. Bust and West India Docks Company (LR. 10 C.P. 300)- a case in
which what was relied on as mitigation did not arise out of the transactions the
subject-matter of the contract. The cases as to the measure of damages for breach
of a covenant by a lessee to deliver up the demised premises in repair illustrate yet
another class of authorities in which the qualifying rule has been excluded.

(f) Joyner v. Weeks (1891, 2 Q.B. 31)- The lessor had made a lease to another
lessee by way of anticipation, to commence from the expiration of the term of this
lease, and the new lessee had made no claim to be reimbursed the cost which he
had incurred in repairing after the expiration of the demised lease. Wright, J., held
that the true test was the amount of diminution in value to the lessor, not exceeding
the cost of doing the repairs. The Court of Appeal, including Lord Esher, M.R., and
Fry, LJ., took a different view. They thought that there had been a constant practice
in laying down the measure of damages as being the cost of putting into repair, and
that in the particular class of cases with which they were ‘dealing it was a highly
convenient role which ought not to be disturbed. Any other measure appeared to
involve complicated inquiries, Moreover, the arrangement between the lessor and
the new lessee was res inter alios acta, with which the original lessee had nothing
to do, and one which he was not entitled to set up.

8. Legal Analysis:
(a) The House of Lords reiterated the principle that damages aim to compensate the
claimant for losses directly and naturally resulting from the breach.
(b) The respondents acted reasonably by replacing the defective turbines with
Parsons turbines, mitigating further losses.
(c) The pecuniary advantages gained from the superior Parsons turbines were
incidental and unrelated to the breach, arising from the respondents’ independent
decision to install more efficient machines.
(d) The appellants could not benefit from the respondents’ prudent business
decisions, as those advantages were beyond the scope of the contractual breach.

9. Holding:
(a) The court held that the Petitioner was liable for the damages incurred by the
Respondent due to the defective equipment.
(b) The pecuniary advantages from the superior Parsons turbines were not
deductible from the damages.
(c) The costs of procuring and installing the Parsons turbines were recoverable as
part of the respondents’ damages.

10. This Case is Authority For:

Contract damages should not place the innocent party in a better position than they
would have occupied had the contract been properly performed. Where a party
mitigates their loss in a way which puts them in a better position than if the
contract had been properly performed, ‘the effect in actual diminution of the loss
he has suffered may be taken into account even though there was no duty on him to
act’ (Viscount Haldane LC).

11. Judgment:
The court held that UERL could recover the cost of the new turbines as damages.
However, the court also held that the benefit UERL received from the increased
efficiency of the new turbines should be deducted from the damages. This is
because UERL had a duty to mitigate its loss.
Lord Justice Vaughan Williams stated:
"The plaintiff company is entitled to be placed in the same position as if the
contract had been performed, but this does not mean that in every case he is
necessarily entitled to recover the whole of the loss which has directly resulted
from the breach of the contract." The House of Lords held that in assessing the
damages for the breach any loss sustained by the plaintiffs had to be balanced
against any gain to them arising directly out of the steps they had taken to lessen
the consequences of the breach. Although the plaintiffs had not been bound to buy
the new machines, having done so the consequential gain in profits and saved
expenses had to be brought into account. The savings exceeded the cost of the
machines and so the plaintiffs recovered nothing under this head.
Giving the leading judgment, Viscount Haldane LC, 688–9, ‘the quantum of
damage is a question of fact’. He set out the principles for determining the measure
of damages.
The first is that, as far as possible, he who has proved a breach of a bargain to
supply what he contracted to get is to be placed, as far as money can do it, in as
good a situation as if the contract had been performed. The fundamental basis is
thus compensation for pecuniary loss naturally flowing from the breach; but this
first principle is qualified by a second, which imposes on a plaintiff the duty of
taking all reasonable steps to mitigate the loss consequent on the breach, and
debars him from claiming in respect of any part of the damage which is due to his
neglect to take such steps.
The duty to mitigate is not to ‘take any step which a reasonable and prudent man
would not ordinarily take in the course of his business.’ Only reasonable steps.
UER could not claim for the cost of the new turbines. Damages for breach of
contract were to place the injured party so far as possible in the position they
would have been had the contract been performed. Any additional profits made
because of acts done in mitigation should be considered when quantifying
damages. The savings made by using the new turbines exceeded the cost of the old
turbines and as damages were a question of fact, the cost of the new turbines was
not recoverable.

12. Decision:
The Privy Council held for the defendant. The fact that the substitute turbines gave
the claimant an economic advantage over what the contract should have provided
was a relevant matter when determining what the defendant was liable to pay. The
current award placed the claimant in a better position than they would have
occupied than if the contract had been performed, which did not accord with the
usual principles of contract damages. So, the Privy Council remitted the case back
to the arbitrator to recalculate the award, bearing this in mind.

13. Key Points:

*British Westinghouse Electric and Manufacturing Company v. Underground
Electric Railways Company of London*, is a landmark case in contract law,
particularly concerning the principles of damages. Although this specific case is
not detailed in the provided document, the excerpts from other judgments reference
its principles, particularly in relation to the measure of damages and the obligations
of parties under contracts. In the context of the provided excerpts, the principles
from the *British Westinghouse* case can be inferred as follows:
(a) **Measure of Damages**: The measure of damages in a breach of contract
case is typically aimed at putting the injured party in the position they would have
been in had the contract been performed. This includes both general damages
(which arise naturally from the breach) and special damages (which may arise
from specific circumstances that were communicated to the other party).
(b) **Duty to Mitigate**: The injured party has a duty to mitigate damages,
meaning they must take reasonable steps to reduce their losses after a breach has
occurred.
(c) **Foreseeability**: Damages should be foreseeable to both parties at the time
the contract was made. If the damages are too remote or not communicated, the
breaching party may not be held liable for those losses.