Introduction

1. It is a well settled principle that when parties enter into a contract with each other, it is expected that they will fulfil their respective obligations under the contract and enjoy the benefit(s) therein, whether monetary or otherwise. However, when one party cannot / chooses not to fulfil its obligations as stated in the contract, there is said to be a “breach” of the contract. Due to the breach, by one party the other party / parties to the contract may suffer and hence the law, provides for the suffering party to receive compensation for loss / damages from the party who has breached the contract. In India, the said principle is statutorily placed in Section 73 of the Indian Contract Act, 1872 (“the Act”). However, the suffering party’s right to claim compensation / damage from the party breaching the contract is caveated by two principles, which are in alternative to one another, i.e., (i) such damages / loss should have naturally arisen in the usual course of things; and / or (ii) parties knew about the likelihood of such a breach when they entered into the contract. 

2. Section 73 of the Act also states that the compensation being claimed by one party from the other party, cannot be premised on a remote and indirect loss or damages sustained due to the breach. While the caveats have been expounded by the courts in India, the explanation appended to said Section puts an obligation on the suffering party to mitigate its damages prior to claiming compensation from the party who has breached the terms of the contract. The said explanation is reproduced hereinbelow: 

“In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.” 

          (emphasis supplied)

3. While the term “mitigate” and “mitigation” have not been defined in the Act, simply put, the concept underlying mitigation is that the party claiming damages from the other is duty bound to take all reasonable steps to reduce the severity of its losses further to the breach. The said principle assumes significant importance, as if the party claiming damages in a court of law, is unable to show the efforts undertaken by it for mitigating damages pursuant to the breach, it is debarred from claiming any part of the value of the damages which arose due to its neglect to take such steps / efforts. The aforesaid exposition of mitigation was first expounded upon by the Hon’ble Supreme Court of India (“Supreme Court”) in Murlidhar Chiranjilal. 

4. Mitigation is stated to be governed by 3 (Three) rules; (i) the loss claimed by the party suffering due to the breach, cannot be claimed if the same could be avoided by taking reasonable steps; (ii) if the party suffering due to the breach, avoids / mitigates its loss, the same cannot be recovered from the party which has breached the contract even if the steps taken are more than what was reasonably expected from the suffering party; and (iii) where the party suffering incurs expense by taking reasonable steps to avoid or mitigate the loss resulting from the breach of the other party, the amount of loss incurred could be recovered from the party which has breached the contract. The said rules raise an interesting proposition, i.e., what is the meaning of “reasonable steps being undertaken by the suffering party” 

What does taking reasonable steps mean in the context of mitigation of losses? 

5. Reasonable steps to be taken by the party suffering towards mitigation of damages generally mean what a reasonable / prudent person would do under similar circumstances. While faced with a similar query in Rainbow Ace, the Hon’ble Bombay High Court placed reliance on the Halsbury’s Law of England, particularly the 4^th edition, Vol. 12 wherein under point 1194, the standard of conduct to be adopted by the suffering party has been enunciated upon. The point clarifies that the question of whether a party has acted reasonably would largely depend on the facts and circumstances of each case and the same is not a question of law. However, the point recognizes that one test for adjudging reasonable conduct would be the prudent man test as iterated above. 

6. While the aforesaid proves that an obligation is cast upon the suffering party to minimise its losses and act in a manner, a prudent man would, the extent of such obligation ought to be looked at. As held repeatedly by various courts in England and India, the suffering party is to make reasonable efforts to minimise the losses however, the suffering party is not required to minimise the loss, at the expense of its commercial reputation. This would mean that a party which is already suffering due to the breach of contract is not expected to expend more money to minimise the damages caused due to the breach of the contract by the other party / parties as held by the King’s Bench in Jewelowski. 

7. While the suffering party cannot be expected to minimise the losses at the expense of its commercial reputation, it is necessary to consider whether the duty to mitigate can contractually be done away with by consent of the parties while entering into a contract. 

Duty to mitigate : a statutory mandate or not? 

8. While Section 73 of the Act places an obligation on the suffering party to mitigate its losses prior to claiming damages in every circumstance, the Hon’ble Lahore Court (“the Court”) in Ralli Brothers Ltd. held that when parties to a contract express agree for the duty to mitigate to be excluded, an obligation cannot be placed on the suffering party to do even what is reasonable as the same is clearly understood between the parties when entering into the contract. In the present case, there was an agreement between the parties where the suffering party was to provide goods to the party who committed the breach. Despite entering into a contract, one party did not accept the goods resulting in the breach of contract. The contract expressly recorded that in the event of a breach, the goods could be sold at anytime as per the wish and at the option of the suffering party. 

9. Having sold the goods much after the breach had occurred, damages were claimed from the party who had breached the terms of the contract. An argument was sought to be made to state that had the goods been sold right when the breach occurred, the party suffering could have benefited more and hence the amount claimed as damages was incorrectly computed. The Court while rejecting the aforesaid proposition held that the rigours of Section 73 of the Act do not invalidate the understanding arrived between parties to a contract. Further, it was held that when an express understanding is recorded between parties to a contract, a Court cannot relieve the party committing the breach on equitable grounds. 

10. Further, even when a contract is silent on efforts to be undertaken towards mitigation, a party is well within its rights to contend that upon breach of a contract for purchase of a highly specialized good, there was no question of mitigation as the said goods / technology had been specifically designed to suit the needs of the party committing the breach as held in the case of Maharashtra State Electricity Distribution Company Ltd. by the Supreme Court. However, such a plea will have to be examined in reference to the facts and circumstances of each case. 

Conclusion

11. The aforesaid exposition of law of mitigation leaves no doubt that every party entering into a contractual transaction, upon breach, ought to be aware of its burden to mitigate, enabling it to quantify damages / losses and seek for the same in a matter. However, it is well settled that when a plea of damages is agitated and the defense put forth is that of lack of mitigation, the onus of proof is on the party contending that the losses were not mitigated adequately, i.e., the party committing the breach. It is always necessary for the party suffering losses to mitigate the same as well as plead the efforts undertaken / losses incurred while mitigating in its pleadings. The same would assist and invariably lead to reflecting good conduct on part of the party suffering losses. The same would also instil confidence in an adjudicating authority to award appropriate damages as the case may merit, having taken into consideration the efforts to mitigate by the suffering party. 

Nikhilesh Koundinya, Senior Associate, Solomon & Co. 

About Solomon & Co.

Solomon & Co. (Advocates & Solicitors) was founded in 1909 and is amongst India’s oldest law-firms. The Firm is a full-service firm that provides legal service to Indian and international companies and high net-worth individuals on all aspects of Indian law. 

“Disclaimer” 

The information contained in this article is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The application and impact of laws can vary widely based on the specific facts involved. As such, it should not be used as a substitute for consultation with a competent adviser. Before making any decision or taking any action, the reader should always consult a professional adviser relating to the relevant article posting.

Copyright © 2026 Solomon & Co., All rights reserved.