Mitigation – A Key Issue in the Assessment of Damages

Demystifying Valuation, Economic Damages + Forensic Accounting

A damages award must consider steps the plaintiff took, or reasonably could have taken, to mitigate the alleged losses. The defendant has the burden to prove that losses could have been avoided by reasonable efforts of the plaintiff without causing undo expense or risk.

Duty to Mitigate

One of the principles limiting recovery of damages is a plaintiff’s duty to mitigate, that is, avoid or minimize damages. This requires that a plaintiff take appropriate actions to overcome the damages allegedly caused by the defendant. This principle is summarized in the Restatement (Second) of Contracts: (*)

§350. AVOIDABILITY AS A LIMITATION ON DAMAGES

(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.

(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

The duty to mitigate applies in virtually every type of litigation. For example:

  • In a breach-of-contract case, a plaintiff should make reasonable efforts to replace lost business.
  • A manufacturer that suffers a business interruption should minimize the impact by resuming operations at a temporary location or outsourcing production if possible.
  • An antitrust plaintiff prevented from entering a particular market should explore opportunities to invest in alternative markets.
  • A wrongfully terminated employee should make reasonable efforts to find other employment.

Burden of Proof

A Plaintiff’s failure to mitigate is an affirmative defense – that is, the defendant, as the party responsible for any losses, has the burden to prove that such losses have been, or could have been, reduced or avoided through mitigation. It is important that a damages expert understand what steps, if any, were taken by the plaintiff to mitigate its losses so the financial impact can be measured.

Evaluating Mitigation Opportunities

Evaluating mitigation opportunities can be every bit as challenging as measuring alleged losses. This is particularly true when the plaintiff purportedly failed to fulfill its duty to mitigate.

Estimating the impact of mitigation alternatives requires considerable professional judgment by the damages expert. Both the plaintiff’s business and industry must be understood to determine whether a mitigation opportunity is reasonable. And if so, the expert must estimate its impact on alleged losses.

The expert must also consider whether income earned subsequent to the wrongful act is the result of mitigation efforts, or is income that would have been earned in addition to the alleged losses in the ordinary course. It should be noted that a plaintiff is entitled to recover any expenses incurred in its effort to mitigate – even if unsuccessful.

Damages Assessment

The plaintiff’s duty to mitigate is an important issue that can have a significant impact on a damages award. It is, therefore, important for attorneys on both sides, along with their financial experts, to address this issue early in the litigation process.

By Lynne Bouvea, CPA/ABV/CFF, ASA, CFE

(*) Published by the American Law Institute, the Restatement of the Law is a set of treatises on legal subjects that seek to inform judges and lawyers about general principles of common law, and is one of the most respected and well-used sources of secondary authority.