Payzu Ltd v Saunders 27 Jun 1919 [1919] 2 KB 581, CA

A seller wrongfully repudiated a contract but offered to continue supplying goods on a cash-only basis. The buyer rejected this and sued for damages based on the higher market price. The court held the buyer should have mitigated their loss by accepting the reasonable new offer.

Facts

The plaintiffs (Payzu, Ltd.) entered into a contract with the defendant (Mrs Saunders) for the purchase of a quantity of silk, to be delivered in instalments over nine months. Payment for each delivery was to be made within one month. The plaintiffs failed to make the first payment on time because their cheque went astray. The defendant mistakenly concluded that the plaintiffs were in financial difficulty and wrongfully repudiated the contract. She refused to make any further deliveries under the original credit terms but offered to continue supplying the goods at the contract price if the plaintiffs agreed to pay cash with each order. The plaintiffs, who were able to pay in cash, rejected this offer. They instead purchased the goods on the open market at a higher price and brought an action against the defendant to recover the difference between the market price and the contract price as damages.

Issues

The central legal issue was the proper measure of damages for the breach of contract. Specifically, the court had to determine whether the plaintiffs had a duty to mitigate their loss by accepting the defendant’s new offer, even though it came from the party who had breached the contract. The question was whether the damages should be the full difference between the contract and market price, or a lesser sum reflecting the loss the plaintiffs would have sustained had they accepted the defendant’s revised offer to sell for cash.

Judgment

The Court of Appeal upheld the decision of McCardie J. at first instance, holding that the plaintiffs had acted unreasonably in rejecting the defendant’s offer and had failed in their duty to mitigate their loss. The damages were therefore limited not to the difference in market price, but to the loss they would have sustained by accepting the new offer (i.e., the loss of the benefit of credit terms).

Reasoning of the Court

Bankes L.J. stated that the duty to mitigate is a question of fact in each case, not a question of law. He articulated the test as follows:

In commercial contracts it is generally reasonable to accept an offer from the party in default. However, all the circumstances of each particular case must be considered. The plaintiffs’ financial ability to make cash payments was a material fact. In the circumstances I see no reason why the plaintiffs should have been unable to adopt the perfectly reasonable course which the defendant offered them.

Scrutton L.J. concurred, explaining the underlying principle of mitigation:

The question therefore is what a prudent person ought reasonably to do in order to mitigate his loss arising from a breach of contract. … In a case of breach of a contract for the sale of goods the prima facie measure of damages is the difference between the contract price and the market price of the goods at the date of breach. But that is not the only measure of damages; and the law is that the plaintiff must take all reasonable steps to mitigate the loss.

Scrutton L.J. distinguished this commercial sale from cases involving personal services or confidence, where it might be unreasonable to expect the innocent party to continue dealing with the party in default. Here, the only change was from credit to cash, which in the commercial context of the case, and given the plaintiffs’ ability to pay, was a reasonable offer they should have accepted to minimise their loss.

Implications

The case is a leading authority on the legal principle of mitigation of loss in contract law. It establishes that an innocent party has a duty to take all reasonable steps to minimise the loss caused by a breach. Crucially, this can include accepting a new, albeit different, offer from the party who was originally in default. Whether it is ‘reasonable’ to accept such an offer is a question of fact dependent on the specific circumstances, including the nature of the contract and the practicality for the innocent party. The decision confirms that a plaintiff cannot recover for losses that they could have reasonably avoided, and it qualifies the standard ‘market price rule’ for assessing damages in sale of goods cases.

Verdict: The appeal was dismissed. The court affirmed that the damages should be limited to the estimated loss the plaintiffs would have incurred by paying cash for the goods, not the larger sum representing the difference between the contract and market price.

Source: Payzu Ltd v Saunders 27 Jun 1919 [1919] 2 KB 581, CA