For businesses that supply products or services that are in part sourced from a third party supplier, the reliability of that supplier is key. If a supplier fails to deliver on time or at all, a business can suffer very substantial losses, but not all losses can be recovered from the supplier.

Airplane ready for landing

Where a business has suffered loss as a result of a supplier failing to deliver, the business is under a duty to mitigate its losses. This means taking reasonable steps to try to minimise the loss suffered. Sometimes, taking such steps can result in an unexpected benefit for the business that has been let down. But should such benefit be taken into account by the court when considering the losses that the defaulting supplier should be liable for? This was the question that arose in the recent case of Thai Airways International Public Company Ltd v KI Holdings Co Ltd (2015).

The case involved an airline that had contracted with a manufacturer for the supply of economy class seats for some of its aircraft. The manufacturer delivered some of the seats late and some seats were not delivered at all. This breach of contract resulted in the airline having to store some of its aircraft until alternative seats could be found. In order to mitigate its loss, the airline purchased alternative seats and leased some aircraft from a third party. The airline made a claim against the manufacturer claiming (amongst other things) the cost of purchasing the alternative seats and leasing the aircraft from a third party.

In the court case, the manufacturer argued that the profits made by the airline in leasing the aircraft should be deducted from any award of damages from the court. The manufacturer also argued that the airline should account for any savings made by using the alternative seats, which were more expensive, but also lighter than the seats that the manufacturer had been due to supply.

The court agreed with the manufacturer that the profits made from operating the leased aircraft and any savings resulting from the use of lighter seats should be taken into account when assessing the damages for breach of contract. However, the judge also held that the onus was on the manufacturer to prove that the airline had actually derived a benefit from the steps it had taken i.e. the manufacturer had to prove that the airline had made a profit in leasing the alternative aircraft and prove the amount by which the profits made had exceeded the amount of profit that would have been made had the manufacturer supplied the seats in accordance with the contract terms.

This is an interesting decision that will be helpful to businesses when considering how best to try to mitigate the losses arising from a breach of contract by a supplier.

If you are involved in a dispute and would like advice on this or a related topic, please contact Catherine Mathews. Catherine specialises in commercial and contract litigation and has experience of many different forms of ADR, including mediation, adjudication and arbitration. She also deals with consumer disputes, including those relating to holidays, timeshare, cars and financial services. Catherine is a member of the Dispute Resolution Team in Exeter. She is listed as a leader in her field in Chambers 2014.