2. Duty to Mitigate

Like virtually all domestic legal systems, the CISG in its Art. 77 requires the aggrieved party to take reasonable efforts to keep its damages to a minimum:

A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. […]

First, it is important to note that the duty to mitigate under Art. 77 only applies to claims for damages, not to other remedies like the right to avoid the contract or claims for specific performance.

Under Art. 77 the aggrieved party is obliged to take all measures reasonable in the circumstances to mitigate its loss. What is reasonable is defined by the conduct of a reasonable third person in the shoes of the aggrieved party (Art. 8(2)). Due regard is to be had to practices between the parties and applicable usages (Art. 9).

Examples for reasonable measures of mitigation include informing the other party that non-performance might result in high damages, not using or selling defective goods, conducting a cover transaction (at least if compatible with the further performance of the contract), taking legal action against acts of administrative bodies and even accepting a buyer’s offer to pay a price that is lower than agreed but still higher than the price of a cover sale. Yet, a party can neither be reasonably expected to breach its contracts with its own customers nor to insure itself against potential consequences of a non-performance.

Art. 77 continues:

If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.

The legal consequence of a failure to mitigate damages thus is the reduction of the claim for damages in the amount by which it could have been avoided by the aggrieved party. Despite the use of the word “claim” in this sentence, Art. 77 cannot serve as basis for any claim. Accordingly, Art. 77 does not serve as basis for a claim for expenses made by the aggrieved party with the purpose of reducing the damage. These expenses can be claimed as normal damages under Art. 74-76. This sentence should, furthermore, not be misread in a way that it requires the obligor to expressly invoke the failure to mitigate damages in court proceedings. At least according to the prevailing opinion, courts and arbitral tribunals should give regard to any failure to mitigate damages ex officio.

Last modified: Friday, 23 October 2015, 6:22 PM