British Westinghouse Electric v Underground Electric Railways [1912] AC 673

KEY POINTS

• A party who suffers a breach of a contractual agreement is entitled to be compensated for the losses they have incurred as a result of the breach.

• However, this principle of compensation is tempered by the duty of the injured party to mitigate their losses.

• The injured party must take reasonable steps to minimise the losses caused by the breach. If the injured party fails to mitigate their losses by not taking reasonable measures to prevent further harm, they may be barred from claiming damages for the portion of the loss that could have been avoided through reasonable actions.

FACTS

• A contract was formed between the appellants and the respondents, where the appellants were to provide and install eight steam turbines and eight turbo-alternators of a certain capacity.

• Disputes arose regarding the performance and efficiency of the provided machines. The respondents claimed damages amounting to over £280,000 due to excessive coal consumption, and alternatively, they sought the cost of installing improved Parsons turbines with a higher capacity, purchased elsewhere.

• After several years of the machines functioning defectively, the respondents decided to replace the appellants' machines with the Parsons turbines, which were more efficient and economical. An arbitrator was appointed to settle the dispute. The appellants claimed the unpaid balance of the machine price, while the respondents counter-claimed for the damages they suffered due to the breach of contract.

• The arbitrator found that the purchase of the Parsons machines was a reasonable decision, mitigating potential losses and being financially advantageous for the respondents. Furthermore, the superiority of the Parsons machines was so significant that even if the appellants' machines had met the contract's conditions, replacing them with Parsons machines would have been financially beneficial for the respondents.

JUDGEMENT

• The court found in favour of the appellants, stating that they are entitled to the costs.

COMMENTARY

• This case emphasised the importance of assessing damages based on the principle of reasonableness and mitigation.

• It clarified that the injured party should take reasonable steps to mitigate their losses when a breach occurs and that the calculation of damages should be based on what is reasonable in the circumstances.

ORIGINAL ANALYSIS

• Plaintiff bought defective turbines from Defendant and for a while used them, before purchasing ones of a superior quality, and which would have been of a superior quality, even if the defective turbines had worked. Plaintiff then sued for the extra petrol that the bad turbines had consumed while in use AND the whole cost of replacing them. 

• HL ruled that the extra benefit gained from having superior quality turbines had to be taken into account in assessing the damages since this extra benefit (and cost of acquiring it) had nothing to do with the original contract. Where Plaintiff took steps naturally arising from the breach, as here, it is necessary to look at any additional benefits which he thereby acquired and to "balance loss and gain.”- Viscount Haldane. 

• He also states that in accordance with the principle that Plaintiff is supposed to be placed in as good a situation as if the contract had been performed, the aim is to reverse the pecuniary loss flowing from the breach and discount any incidental benefits.

• The plaintiff has a “duty of taking all reasonable steps to mitigate the loss consequent on the breach,” and failure to do so will reduce the amount recoverable by the plaintiff.