Thai Airways v KI Holdings: beware of profits when mitigating your loss
Gosschalks Associate, Phil Osborne, takes a closer look at the case of Thai Airways v KI Holdings Ltd. This ruling offers guidance to businesses on mitigating their losses when dealing with the late or non-delivery of essential products by a supply chain.
The law of mitigation
A Claimant, who has had its legal rights infringed, is entitled to recover damages. But the amount of any damages awarded are limited both to those losses that are not too remote to the Defendant’s breach (whether in contract or tort) and by the need for the claimant to mitigate its loss.
The courts will not allow a Claimant to recover damages for losses they’ve suffered but which they could reasonably have avoided. In other words, a Claimant can’t stand aside and let damages add up on the basis that it will be entitled to recover them in full from the Defendant in due course. Where a Claimant has made reasonable attempts to mitigate its loss, it can recover its loss from the Defendant even if those attempts were unsuccessful.
In the case of Thai Airways v KI Holdings Ltd, the Commercial Court has recently provided some useful guidance on how a Claimant’s attempts to mitigate its loss can affect the amount of damages it can recover in a claim.
The Claimant, Thai Airways, entered into a contract with the defendant, Koito, a Japanese aircraft seat manufacturer. The contract was for the supply of economy seats for its planes. Because of regulatory intervention, Koito was unable to fulfil its contractual obligations. Some seats were delivered late and others were not delivered at all.
When Thai Airways took delivery of its new planes from a third party without economy seating, it had to store them for 18 months until it had sourced seats from an alternative supplier. These seats were at a greater cost than it agreed to pay Koito. In the meantime, Thai Airways leased three planes from a third party to fill the gap in its fleet.
Kioto admitted liability to compensate Thai Airways for its breach of contract. But it disputed the amount of the damages Thai Airways was entitled to recover.
Thai Airways sought to recover all its costs in mitigating Kioto’s breach. Those expenses included the cost of sourcing the alternative seating plus the leasing of the three planes from a third party. This amounted to $162m.
Thai Airways argued that it was entitled to recover those costs without having to give credit for the profits it had earned from operating the leased planes. Because, it argued, the decision to lease those planes was the only reasonable step it could take to mitigate its loss. And any profits it earned as a result were incidental to the leasing arrangement and had not been chosen by Thai Airways.
Alternatively, it was argued that if Thai Airways did have to account for any benefits received, the burden was on Kioto to prove the benefits and the amount.
Kioto disagreed. It argued that any benefit Thai Airways had received as a result of the steps it had taken to mitigate its loss, including profits from operating the leased planes and fuel savings (because the alternative seating was lighter than the seats Kioto had contracted to supply), had to be taken into account when calculating the damages.
The court held that in assessing damages for breach of contract, credit must be given for any monetary benefit, whether chosen or not, which a claimant has or will receive as a result of an action reasonably taken to mitigate its loss. So, the increased profit Thai Airways obtained from the leased planes had to be deducted from the losses it had incurred.
The court also considered that it would have been enough for Thai Airways to lease the alternative planes for two years to mitigate its losses. The leasing of the planes for a third year was commercially motivated and Thai Airways could not recover the costs for the third year.
The court agreed that some of the alternative seats bought by Thai Airways had led to fuel savings. And that, in principle, this benefit should be credited against the recoverable damages if proven.
But the court held that the burden fell on Kioto to prove the benefits that Thai Airways had or would have received over and above the amounts it would have otherwise made had Kioto performed the contract.
The court found that Koito had failed to show the increased profits exceeded the cost of the leasing arrangement. It awarded Thai Airways the full cost of two years of the lease, amounting to about $107m. The court also held that Koito had failed to prove fuel savings in relation to the rest of the alternative seats, and these savings could not be credited.
What this means for you
This decision offers important guidance when considering the steps to take if you encounter issues of delay or non-delivery in your supply chain.
Where there is an available market for the goods, the court will expect the victim to act quickly and get replacement goods as soon as possible. But the victim is not expected to risk money or reputation in seeking to mitigate its loss.
This case confirms that, even where a party reasonably mitigates its loss, it will not be entitled to keep any benefits it gains as a result of taking the steps to mitigate. Although the burden of proving the benefit falls on the wrongdoer.
Where a profit is made by (or a benefit accrues to) the Claimant independently of the steps taken to mitigate its loss, that profit or benefit does not need to be taken into account.
Need advice? We can help you
Please call Phil Osborne today on 01482 324252 if you’re unsure of how the law of mitigation applies to you.
Or email firstname.lastname@example.org.
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