British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd 

Case name: 

British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd 

Court: 

House of Lords 

Year: 

[1912] AC 673 

Facts: 

The plaintiff, Underground Electric Railways Company of London Ltd, entered into a contract with the defendant, British Westinghouse Electric & Manufacturing Co Ltd, for the supply of steam turbines intended for use in the plaintiff’s power station. 

Upon delivery and installation, the turbines were found to be defective and inefficient. However, the plaintiff initially used them for a period before ultimately deciding to replace them with more efficient turbines manufactured by another company. 

The newly purchased turbines not only corrected the issues but also offered significantly greater performance and energy efficiency compared to what had been originally promised in the contract. As a result, the plaintiff experienced substantial operational savings over time. 

The plaintiff sought to recover damages for the breach of contract due to the supply of defective machinery. 

Legal issues: 

Whether the savings and improved performance resulting from the plaintiff’s decision to replace the defective turbines should reduce the amount of compensation they were entitled to receive for the breach. 

Ratio Decidendi: 

The key legal principle (ratio decidendi) established by the House of Lords is: 

A plaintiff in a breach of contract case is under a legal duty to take all reasonable steps to mitigate the loss arising from the breach. Any benefits or gains that result directly from the plaintiff’s mitigation efforts must be taken into account when assessing the amount of recoverable damages. 

The court emphasized that: 

• Mitigation of loss is not merely an option but a duty. 
• The standard of reasonableness is applied when evaluating the plaintiff’s mitigation actions. 
• Where the plaintiff’s mitigating action (in this case, buying new turbines) not only avoids further loss but also leads to a net gain, that gain must be deducted from the total damages. 

Thus, a plaintiff cannot profit from a breach of contract more than they would have if the contract had been properly performed. 

Outcome: 

The House of Lords held in favor of the defendant in part, stating that although the defendant had clearly breached the contract, the damages awarded to the plaintiff had to be adjusted to reflect the benefits gained from the plaintiff’s reasonable steps to mitigate the loss. 

In other words, while the plaintiff had a valid claim, it could not recover full damages because the new turbines ultimately resulted in greater efficiency and long-term cost savings than the original ones would have. 

Legal reasoning: 

The House of Lords, particularly through the speech of Lord Haldane, LC, offered detailed reasoning: 

• The primary purpose of awarding damages for breach of contract is to place the injured party in the position they would have been in had the contract been properly performed. 
• However, this principle must be tempered by the duty of mitigation: the injured party must act reasonably to reduce the loss. They cannot sit back and allow losses to accumulate, nor can they claim losses that could have been reasonably avoided.
• In this case, the replacement of the turbines was found to be a reasonable and prudent commercial decision, and it resulted in greater long-term efficiency and savings than the plaintiff would have obtained from proper performance of the original contract. 
• Therefore, the actual financial gain resulting from the replacement must be accounted for. The plaintiff’s net loss was less than they claimed, and the damages were reduced accordingly. 

Lord Haldane emphasized that: 

“The law imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach… and debars him from claiming in respect of any part of the damage which is due to his neglect to take such steps.”