Introduction

1. The artwork titled “Take the Money and Run” made the headlines recently. According to news reports, the artwork is so named because the artist in question, instead of producing the actual work that he was commissioned by the museum to do, delivered two blank canvases as his final product and appropriated the 534,000 Danish krone meant to be used as part of the original commissioned work. Notwithstanding the apparent breach of contract, the museum went ahead to display the two blank canvases at the intended art exhibition because the artwork’s backstory still matched the overall theme of the exhibition.

2. It is not difficult to think of other examples where an aggrieved or innocent party takes similar steps or measures when faced with a breach of contract situation. After all, the adage goes “when life gives you lemons, make lemonade” and it is just natural human reaction to make the best out of the worst situations. These actions - if successful - invariably minimize the impact of the breach of contract and reduce the potential losses that may be suffered by the aggrieved party. In legal parlance, such actions are known as discharging one’s duty of mitigation.

3. Legal disputes in relation to mitigation typically revolve around whether the action taken by the aggrieved party is sufficient to mitigate the loss: the defaulting party often contends that the aggrieved party should have but did not do what was reasonably expected to stop or reduce the losses that the aggrieved party had allegedly suffered. The defaulting party then contends that any damages payable by the defaulting party to the aggrieved party should be moderated downwards to take into account this failure to mitigate.

4. Less often but of equal importance are cases where the actions taken by the aggrieved party resulted in a sufficiently large pecuniary benefit to the aggrieved party that may eclipse the losses it had purportedly suffered in the first place. For instance, the display of the artwork “Take the Money and Run” may go viral and draw a larger crowd to the exhibition than originally projected by the museum. Similarly, a purchaser who bought a defective property on negligent advice may have overpaid for the property in reliance of that advice but the purchaser may subsequently resell the property at a significant capital gain in a rising property market. The question in such cases is whether the pecuniary benefit to the purchaser from the resale (in the case of the second example) should be taken into account by the Court when assessing damages against the negligent vendor or consultant. The term “over-mitigation” was used by Lord Justice Mustill in the case of Hussey and another v Eeels and another [1990] 2 WLR 234 to describe this legal conundrum.

5. In this article, we will consider the question of whether and if so, when the Court should give credit to the defaulting party for the aggrieved party’s over-mitigation in assessing damages against the defaulting party. Although our focus will be on lease agreements, the principles discussed in this article may be of broader application to other forms of contract.

Claim for breach of contract in leases

6. Given the competitive and saturated (and often times, challenging) retail landscape in Singapore, it is not uncommon to find frequent turnover in retail spaces and in turn, frequent repudiatory breaches of contracts by retail tenants regardless of whether the tenancy market is declining, stagnating or rising.

7. It is also not uncommon to find that aside from the aforesaid repudiatory breaches of contract, retail tenants are also often in breach of other parts of their respective lease agreements such as failing to pay rent, and failing to reinstate the premises to its original condition and to return vacant possession of the premises to the landlord at the time of the premature and unlawful termination of the lease.

8. Correspondingly, the legal claims that landlords may bring against their retail tenants after the premature and unlawful termination of the respective lease agreements will often comprise of multiple heads of claim such as the outstanding rental arrears up to the time of the termination, loss of rent for the period in which the premises remain vacant, costs of finding a replacement tenant, shortfall in rent payable by the replacement tenant, loss of rent during the rent-free period accorded to the replacement tenant, costs of reinstating the premises to its original condition, and costs of disposing items left over on the premises.

9. The manifold breaches of contract and different heads of claim make leases a useful case study to understand the application of the doctrine of over-mitigation.

Over-mitigation in leases

10. Over-mitigation in leases can sometimes occur in a rising tenancy market. In such optimal conditions, the landlord may be able to find a replacement tenant relatively quickly and at a much higher monthly rent. When the difference in rent payable by the replacement tenant under the replacement lease is calculated against that payable by the original tenant under the original lease for the remaining period of the original lease term, the landlord may sometimes be said to have obtained a financial benefit that overshadow some if not all of the financial losses purportedly caused by the original tenant to the landlord.

11. We illustrate this with an example:

X leases a premises for three years to Y at a monthly rent of S$3,000. At the end of first year, Y runs into financial trouble and is unable to continue operating its business at the premises. Y then leaves the premises abruptly. X regards Y’s departure as an act of repudiation which it accepts; the lease is thus terminated with two years left to run. When X recovers possession of the premises, X discovers that Y had failed to reinstate the premises to its original condition and further failed to clear out all its belongings from the premises. X thus had to incur costs of reinstatement of S$5,000 and costs of disposal of S$1,000. X also had to engage a real estate agent at a cost of S$1,500 to market the unit. Fortunately, X was able to find a replacement tenant after three months. The replacement tenant’s lease was also for a period of three years but at a higher monthly rent of S$4,000 with a one month rent free period.

12. From the example identified above, it is apparent that the landlord suffered losses of up to S$19,500 as a result of the original tenant’s repudiatory breach of contract. This consists of loss of rent of up to S$12,000 (being the three months period which the premises was vacant and the one month rent free period given by the landlord to the replacement tenant), reinstatement costs of S$5,000, costs of disposal of S$1,000 and costs of finding a replacement tenant of S$1,500.

13. However, as a result of the replacement tenant taking over the premises, the landlord could also be said have received a corresponding economic benefit of S$20,000 being the additional S$1,000 per month from the replacement tenant for the remaining 20 months of the original lease term which it would not have obtained had the original lease remained afoot.

14. If one applies a straightforward profit and loss accounting to the example identified above, it can be said that the landlord had not only suffered no actual economic loss, but it had in fact gained a benefit from the tenant’s breach of contract. In other words, the landlord had overly mitigated its loss.

Credit from any over-mitigation is ultimately still limited by the principles of causation

15. While the use of a straightforward profit and loss accounting to calculate the landlord’s losses is instinctive and arguably at first glance even an attractive option, its overly simplistic nature means that caution must be applied when undertaking such an approach. Indeed, the profit and loss accounting should not be applied blindly without regard to its underlying rationale; otherwise it could lead to a perverse and irrational outcome and the defaulting party may end up unjustly benefitting from its own wrong.

16. Instead, the proper approach of dealing with the over-mitigation should be to first ascertain what the defaulting party’s breaches of contract are, and then determine whether the act of mitigation in question arises from or is connected to each of the ascertained breaches of contract. To put it another way, the main question to ask is whether there is sufficient causation between the benefit and a particular breach: if there is insufficient causation, the benefit should not be taken into account when determining damages of that breach.

17. Although there does not appear to be any local cases in Singapore dealing with this legal issue yet, the causation analysis mentioned above is the prevailing approach applied in the United Kingdom following the UK Supreme Court’s decision in Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain [2017] 1 WLR 2581 (Fulton).

18. The facts in Fulton are quite straightforward: the charterer of a vessel was found to be in repudiatory breach of contract for redelivering the vessel to the owner two years early. The owner was unable to recharter the ship as there was no available chartering market. The owner thus decided to sell the vessel and sold it in October 2007 for U$23.765 million. It was agreed between the parties that had the owner sold the ship when the charterer redelivered it at the end of the two years in November 2009, the owner would have received only US$7 million because of prevailing economic conditions following the collapse of Lehman Brothers and the then global financial crisis. When the owner sued the charterer for its loss of profit from the premature termination of the charterparty, the charterer argued that the financial gain to the owner from the sale of the vessel in October 2007 (as compared to November 2009) should be taken into account and in doing so, the owner had suffered no real financial loss.

19. The UK Supreme Court held that the benefit to the owner from the sale of the vessel need not be taken into account because there was no relevant causal link between the sale and the premature termination of the charterparty. The Court recognized that while the premature termination may have been the occasion for selling the vessel, it was not the legal cause of it. Accordingly, it found in favour of the owner and allowed the appeal.

20. The facts in Fulton may not be wholly analogous to the tenancy example identified above, but the principles laid down by the UK Supreme Court are no less applicable: in order for the defaulting party to successfully bring the benefit to the aggrieved party into account, the defaulting party must be able to show that the benefit had been caused by the breach or by a successful act of mitigating that breach.

21. Applying the causation analysis to the tenancy example, the replacement lease is at best only connected to the landlord’s loss of rent arising from the pre-termination of the original lease. The replacement lease is not in any way connected to the original tenant’s failure to pay rent prior to the termination of the lease, or the original tenant’s failure to reinstate and return vacant possession of the premises at the time of the termination of the lease.

22. In this regard, any increased rent payable by the replacement tenant under the replacement lease to the landlord should only be brought into account when calculating the landlord’s loss of rent for the remainder of the original lease term. The other losses suffered by the landlord should in theory remain unaffected: the landlord in the tenancy example should therefore still be entitled to recover all outstanding rental arrears at the time of the termination, the costs of reinstatement of S$5,000 and the costs of disposal of S$1,000 from the original tenant.

23. There is also a compelling case for the landlord to be able to recover the costs of finding the replacement tenant (i.e. the sum of S$1,500 in the tenancy example above) since allowing such a claim is arguably consistent with the third rule of mitigation laid down by the Singapore Court of Appeal in The “Asia Star” [2010] 2 SLR 1154 namely that an aggrieved party may recover any expense incurred in the course of taking reasonable steps to mitigate its losses.

24. That being said, this final head of claim of costs of finding a replacement tenant will eventually merit further consideration in light of the earlier House of Lords decision in British Westinghouse Electric and Manufacturing Company Limited v. Underground Electric Railways Co of London Ltd (No 2) [1912] AC 673 where the Court seemingly held that the benefit from a mitigation may be brought into account not only against the loss of profit but also against the costs incurred in mitigating the loss.

Conclusion

25. As analysed above, over-mitigation does not necessarily mean that the aggrieved party is unable to recover against the defaulting party.

26. At the end of the day, it is necessary to undertake a causation analysis in order to answer the question of what are the losses that an aggrieved party can still recover against a defaulting party in such situations.

27. The causation analysis represents a fair balance between the aggrieved and the defaulting parties: if the benefit genuinely arose from the breach or the successful act of mitigating the breach, then credit should no doubt be given because there is essentially no loss suffered by the aggrieved party from that particular breach of contract. Conversely, if the benefit is unconnected to the breach in question, then credit should not be given because the aggrieved party had still suffered a loss that is not left uncompensated.