Rules on the obligation to mitigate losses

Posted on: October 19th, 2015

There is a general and sometimes over looked principle in litigation that a party can not recover damages for any loss which could have been reasonably avoided. Accordingly, any party making a claim is required to take steps to minimise any loss and also to avoid taking unreasonable steps which may cause it loss. This is often referred to as the duty to mitigate.

A recent case has confirmed that this not only applies to litigation itself but also must be considered when parties are considering commercial settlements and resolutions.

In this particular case, a Judge found in favour of a firm of solicitors defending a professional negligence claim relating to their alleged negligence when drafting a corporate document for one of their former clients.

It was alleged that the solicitor’s advice had led to the former client being challenged by a national tax authority and resulted in a substantial liability. The former client had challenged the tax authority in court and attempted to agree a negotiated settlement with the tax authority. They eventually reached an agreement with the tax authority and then issued proceedings against the solicitors for negligence.

In this case the court ruled that the solicitors had given negligent advice and that this had led to liability to the tax authority. The solicitors argued that the former client had not correctly conducted the litigation against the tax authority and that if they had then the liability would have been less. Effectively the solicitors argued that the former client had failed to mitigate its losses by compromising the claim with the tax authority.

The court agreed with the solicitors that the former client had not fulfilled its obligation to mitigate its losses when it settled the claim with the tax authority. In the court’s view if it had not settled the claim against the tax authority and pursued the litigation the result could have been different.

This is an important reminder of the obligation to mitigate losses and even when settling a claim. We regularly advise on settlement negotiations and advise on the balance to consider both practically and commercially when settling a claim.