The Duty of Mitigation in Franchise Disputes

  • January 17, 2024
  • Idan Erez, partner, Hoffer Adler LLP

Introduction

Franchise relationships are created by contract. Accordingly, when a party breaches a franchise agreement or rescinds it, the task of assessing damages requires the court or arbitrator to consider the contractual doctrine of mitigation.

This article briefly examines the application of the mitigation doctrine in franchise disputes. After identifying the underlying rationales behind mitigation, we will consider the circumstances under which franchisees and franchisors have a duty to mitigate, and the circumstances under which they do not. The conclusion reached is that both franchisees and franchisors are under a duty to mitigate their respective damages resulting from a breach of the franchise agreement; however, franchisees are not under a duty to mitigate their damages resulting from their rescission of the franchise agreement.

The rationales behind mitigation

Legal practitioners are well acquainted with the common law doctrine of mitigation in contract law: when confronted with a breach of the contract, the non-breaching party is typically required to take reasonable steps to minimize its losses arising from the breach. The court will usually reduce the amount of damages awarded to the non-breaching party by the amount of the loss that could have been avoided had the plaintiff taken reasonable steps to mitigate.[i]

Courts and scholars have identified various rationales underlying the duty to mitigate. A common explanation is that mitigation produces a "fair" outcome because it would be immoral or unfair to award the non-breaching party compensation for damages that it could have avoided by acting reasonably. Another explanation is that mitigation promotes the efficient use of market resources by directing the non-breaching party back to the marketplace;[ii] a related idea is that mitigation promotes efficiency by reducing the overall costs to both parties resulting from the breach.[iii]

Ultimately, these rationales are perhaps best understood as serving the fundamental objective of damages for breach of contract, which is to place the non-breaching party in the position it would have been in had the contract been performed.