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    Business Law Legal Research Blog

    CONTRACTS: An Object Lesson in How Not to Mitigate Damages

    Posted by Paul A. Ferrer on Fri, Aug 20, 2021 @ 09:08 AM

    Paul Ferrer—Senior Attorney, National Legal Research Group

                Well-established contract law holds that when one party breaches a contract, the nonbreaching party must make reasonable efforts to mitigate its damages. The consequences of failing to mitigate are well illustrated by a recent Illinois appellate decision. See Mayster v. Santacruz, 2020 IL App (2d) 190840, 163 N.E.3d 246.

                The plaintiff owned and operated a Mathnasium math tutoring franchise. The franchisee entered into a binding purchase agreement to sell the franchise for $100,000. The parties bickered over several terms, but the disagreement did not justify the buyer's termination, which therefore constituted a breach. Soon after the breach, however, the buyer offered to reinstate the deal and buy the franchise for the same $100,000 originally agreed. The franchisee refused, choosing instead to raise the asking price to $130,000 to explore more profitable opportunities. The franchisee also declined the franchisor's suggestion that it advertise the franchise for sale in an internal publication that targeted Mathnasium owners, and would thus have been more likely to produce a new buyer. The trial court concluded that the buyer had breached the contract but that the franchisee could not recover any damages based on its absolute failure to mitigate. The only questions presented on appeal were whether the franchisee had failed to mitigate its damages and, if so, whether its failure barred it from recovering anything at all.

                The appellate court's analysis was governed by various well-established propositions of contract law. First, contract damages aim to put the nonbreaching party in the same, but not a better, position as if the contract had been fully performed. Second, the nonbreaching party must make a reasonable effort to avoid damages from the breach. And third, under the "doctrine of avoidable consequences," the nonbreaching party cannot recover any damages that might have been avoided through such a reasonable effort.

                Applying those principles, the appellate court agreed that despite the buyer's breach, the franchisee could recover no damages whatsoever because of its complete failure to mitigate. Once the buyer breached, the franchisee had to sell the franchise at whatever price it could obtain, and the franchisee could then recover as damages for the breach the difference between the original and new contract prices. Instead, the franchisee increased the asking price by 30% to try and profit from the breach, which itself constituted a breach of the franchisee's duty to mitigate. And, rather than jacking up the purchase price while seeking a new buyer, the franchisee could have mitigated its damages entirely merely by accepting the buyer's offer to reinstate the deal at the same $100,000 price originally agreed. Finally, the franchisee acted unreasonably in rejecting the franchisor's advice to advertise in the internal Mathnasium publication, which would have been more likely to produce a new buyer for the franchise. Because the franchisee utterly failed to make any effort to mitigate, the court concluded that the doctrine of avoidable consequences barred the franchisee from any recovery, especially given that the franchisee could have avoided all of its damages just by accepting the buyer's offer to reinstate the original deal.

                This case provides an object lesson in how not to mitigate damages and the consequences to the nonbreaching party of failing to do so. The franchisee may have seen the buyer's breach as an opportunity to sell the franchise for more than what the buyer had agreed to pay, but the franchisee could not do so and still hold the buyer liable in damages for the breach.

    Topics: contracts, Paul A. Ferrer, failure to mitigate, no recovery of damages

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