Second Circuit Court of Appeals Rules Breaching Party has Greater Obligation to Mitigate Damages

In APL Co. Pte Ltd. v. Blue Water Shipping U.S. Inc., No. 08-1516-cv (2d Cir. Jan 8, 2010), the Second Circuit Court of Appeals found that a breaching party to a contract dispute has a greater obligation to avoid costs and expenses associated with its breach than the non-breaching party, whose mitigation efforts should be judged by a "forgiving standard" of reasonableness.

In APL, the Plaintiff-Appellant, APL, had appealed from a final judgment of the district court judge which found Defendant-Appellee Blue Water liable for breach of contract, but reduced the amount of damages awarded after concluding that APL had failed to reasonably mitigate its damages. The parties' contract had obligated APL to ship twenty-nine (29) reefers of garlic to the port of Los Angeles, where it was to be picked up by Blue Water and delivered to its ultimate purchaser. The garlic was never picked up by Blue Water; became subject to various cargo holds; and demurrage accrued. Although APL made efforts to arrange for an auction of the garlic, the garlic was ultimately found to be unfit for sale and was destroyed.

In reducing the amount of damages awarded to APL, the district court faulted APL for its delays in disposing of the garlic, finding that the garlic would still have been fit for sale had APL acted more swiftly to clear the government holds on the cargo and effect a quick sale of the garlic. The Second Circuit disagreed. In vacating the district court's judgment reducing the amount of the damages awarded to APL, the Court stressed that an injured party must make reasonable efforts to mitigate its damages, with the breaching party to remain liable if such reasonable attempts at mitigation fail. Describing this as the "forgiving standard of reasonableness", the Court found that the district court had erred by failing to analyze Blue Water's own post-breach conduct and efforts to avoid any additional expenses and costs associated with its breach. Accordingly, the Court vacated the district court's judgment with respect to the reduction of APL's damages and remanded the matter to the district court for further proceedings.

Read a copy of the Second Circuit's Opinion in APL

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