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Mitigating your loss

At the beginning of this week we looked at the position regarding Mark Hughes and the termination of his contract. One important thing to bear in mind is how rules regarding mitigation of damage and loss impact upon a payout in those circumstances.

On the face of it let us take a football manager, Mr X, who has a contract to manage Y FC for four years at an annual salary of 1 million. If he is sacked 18 months from the end of his contract then he has lost effectively the benefit of salary of 1.5 million. We will assume for these purposes that the sacking is not for gross misconduct or other conduct which would amount to a repudiation of the contract. (Examples of gross misconduct include; deliberate disloyalty to the club of a serious sort, for example encouraging a player not to sign for his own club but to sign for another club which the manager proposed to leave his existing club to manage; the manager putting his hand in the till; the manager accepting a bribe; these are all the sort of things which can justify immediate termination of contract. (Known as a "repudiation" or "repudiatory breach" of the contract). In those circumstances the contract is treated as having ended because there was a sufficiently serious breach which the other side decided to accept to put the contract to an end. In those circumstances understandably, assuming of course that such facts are proved (since they will often be hotly in dispute), no compensation will be payable. If therefore the sacking is not as a result of a repudiatory breach, then that in itself is a termination of the contract.

Ordinarily when a contract is broken the injured party has a choice as to whether to "accept" the repudiation of the contract by the other party, and sue them for damages, or to keep the contract alive (which of course is not inconsistent with seeking any damages which follow from the particular wrongful act). However with employment contracts ordinarily the position is different. The courts as a general rule do not want to get involved in trying to enforce any agreement that would involve the court in effectively trying to supervise it and make people work together. Therefore if someone is sacked it would only be in the most unusual circumstances that the court would effectively prevent the sacking taking effect. (There are it should be noted certain reinstatement rights given to employment tribunals).

If someone breaks the contract with you (or indeed causes you certain other types of loss) you are expected to "mitigate" that loss. That means taking reasonable steps to minimise the loss. Let us say that a publisher stated that they would publish your story and pay you an advance of 1 million. They enter into a contractual obligation to that effect. You have complied with every obligation of the contract. Then they decide to breach the contract. You would be expected to see if someone else would take up publication. If for example someone else was prepared to do it and you could get 100,000 out of it, then your loss would be 900,000 (i.e. the 1 million less 100,000) not 1 million. You could not just decide that you would not take any efforts to exploit what you had.

Where someone is sacked the question then is what their loss has been. For example if the manager was immediately appointed to another club who was paying him even more, then his loss would only relates to the period before he got that new employment. However merely earning money which would not be inconsistent with having carried on the previous employment would not be problematical, because that could have been earned anyway. (Thus for example, unless prohibited by the contract, money earned from a newspaper column would not count). Of course in reality managers will often not move to another club before the compensation has been sorted out, because attempting to take on a new job was trying to sort out fallout from the old one is extremely difficult.

Different considerations can apply again if the terms of the contract provided that there be an immediate payout of a specified amount to buy out the contract. Of course one argument in favour of the employee in such circumstances would be that unlawful termination of the contract has a damaging impact of itself. It stops the person being in the public eye and having the opportunity to show what their abilities are.

Thus any party who suffered a breach of contract has an obligation to take reasonable steps to minimise their losses. The duty is not a particularly high one. You have to make an effort. You do not have to be perfect.

Michael J. Booth QC