Payzu Ltd v Saunders [1919] 2 KB 581 CA

Payzu contracted to buy silk from Saunders by instalments. After a late payment, Saunders refused further deliveries on credit but offered cash terms. Payzu refused and sued. The court held Payzu should have mitigated by accepting the offer.

Facts

By a written contract dated 9 November 1917, the defendant, a silk dealer, agreed to sell the plaintiffs 200 pieces of crepe de chine at 4s. 6d. per yard and 200 pieces at 5s. 11d. per yard. Delivery was to be as required between January and September 1918, with payment for goods delivered up to the twentieth of any month due on the twentieth of the following month, subject to a 2½ per cent discount.

The plaintiffs took a delivery in November 1917 worth 76l. They drew a cheque on 21 December 1917, but it was never received by the defendant. A replacement cheque was delayed and not sent until 16 January 1918. On the same day, the plaintiffs ordered further deliveries. The defendant, erroneously believing the plaintiffs to be in financial difficulty, wrote refusing further deliveries under the contract unless the plaintiffs paid cash with each order. The plaintiffs refused. The market price of silk rose, and the plaintiffs sued for damages, claiming the difference between market and contract prices.

Issues

The court had to determine: (1) whether the plaintiffs’ failure to make punctual payment for the first instalment amounted to a repudiation of the whole contract entitling the defendant to refuse further deliveries; and (2) if the defendant was in breach, whether the plaintiffs were bound in mitigation of damages to accept the defendant’s offer to continue supplying the goods at the contract price on cash terms.

Arguments

Defendant

Counsel for the defendant argued that the plaintiffs’ failure to pay punctually justified an inference that they intended to repudiate the whole contract, relying on Freeth v. Burr and Mersey Steel and Iron Co. v. Naylor, Benzon & Co. Alternatively, even if there had been a breach, the plaintiffs were under a duty to mitigate their loss by accepting the offer to deliver against cash.

Plaintiffs

Counsel for the plaintiffs argued that it was the defendant who had repudiated the contract. They contended that the doctrine of mitigation must be applied reasonably and should not become a fetish; it was not reasonable to expect a business person to enter into fresh contractual relations with a party who had just committed a breach. They referred to ss. 10 and 31(2) of the Sale of Goods Act 1893.

Judgment

Decision of McCardie J

McCardie J held that the plaintiffs’ late payment did not amount to a repudiation of the whole contract nor go to the root of it. Section 10 of the Sale of Goods Act 1893 provides that, unless a different intention appears, stipulations as to time of payment are not of the essence of a contract of sale, and s. 31 makes the question of repudiation on failure to pay for an instalment one dependent on the terms of the contract and the circumstances. The defendant’s letter of 16 January 1918 amounted to an unjustifiable refusal to perform her contractual obligations.

On damages, however, the judge applied the mitigation principle, drawing on Frost v. Knight, Brace v. Calder, and Lord Haldane’s statement in British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways Co. of London. He found that the defendant had bona fide offered to supply at the contract price against cash, and that the plaintiffs, who were in fact able to pay cash, should as prudent and reasonable people have accepted that offer. The plaintiffs were not entitled to recover the difference between market and contract prices, but only such loss as they would have suffered had they accepted the offer, including the lost period of credit and business inconvenience. Judgment was given for 50l.

Court of Appeal

The Court of Appeal (Bankes LJ, Scrutton LJ and Eve J) dismissed the plaintiffs’ appeal. Bankes LJ noted that the question of what a plaintiff should reasonably do to mitigate damages is one of fact, not law. He acknowledged that in cases of personal service, following serious insult, refusal of a fresh offer might be reasonable, but here nothing justified refusal of the defendant’s offer.

Scrutton LJ held that a plaintiff must take all reasonable steps to mitigate loss consequent on the breach and is debarred from claiming damages due to his neglect to take such steps. He rejected the submission that continuing contractual relations with the party in default must always be excluded from mitigation, observing that in commercial contracts it is generally reasonable to accept an offer from the party in default, though the question is always one of fact.

Eve J agreed, noting that any difficulty about the respondent’s alleged demand for a higher price was more apparent than real and had not been raised below.

Implications

The decision confirms and applies the principle that a claimant in an action for breach of contract must take all reasonable steps to mitigate loss and cannot recover damages attributable to a failure to do so. Significantly, it establishes that mitigation may require a claimant to accept a reasonable offer from the very party who has committed the breach, particularly in commercial contexts. The Court of Appeal emphasised that whether a claimant has acted reasonably in mitigation is a question of fact for the tribunal, dependent on all the circumstances, and not a rule of law.

The judgment also reinforces, through the application of ss. 10 and 31 of the Sale of Goods Act 1893, that time of payment is not ordinarily of the essence in sale of goods contracts, and that failure to pay punctually for one instalment does not automatically constitute repudiation of the whole contract.

The case is important to commercial practitioners advising claimants faced with a breach: refusing a reasonable offer from the party in default, even one made after breach, may substantially reduce recoverable damages. The court’s careful acknowledgement that different considerations may apply in personal service cases, or where the offer is not bona fide, marks the limits of the principle. It remains a leading authority on the duty to mitigate.

Verdict: The plaintiffs’ appeal was dismissed. The Court of Appeal upheld McCardie J’s award of 50l. damages, holding that the plaintiffs had failed to mitigate their loss by unreasonably refusing the defendant’s bona fide offer to supply the contract goods at the contract price on cash terms.

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