Thursday, December 8, 2011

Mitigation of costs.

A commitment to mitigate costs requires a party to take reasonable steps to reduce the damages, injury or cost, and to prevent them from getting worse. You could potentially look for a requirement to mitigate costs if there is an injury caused by another party’s negligence, in a breach of contract of a contract but most commonly it is included as a requirement when you cancel orders or terminate an agreement. For example, if you require a supplier to mitigate costs associated with a cancellation or termination, they would be required to take reasonable steps to try to keep those costs to a minimum. In mitigating a cost, reasonable steps could include canceling their orders with their supplier, rescheduling work, selling the product to other parties, etc.

In mitigation language the key is in the use of the appropriate standard for the commitment to mitigate costs. For example if a supplier wants the standard for mitigating that they will use “commercially reasonable” efforts to mitigate the cost, what that would mean is if it would cost them more money to do it, they don’t have to do that. That negates the goal of having a mitigation obligation.

As a Buyer, to get a mitigation commitment that helps you reduce costs, you want to include a the standard or reasonableness. Meeting a reasonableness standard may require the supplier to spend money to mitigate the costs. That means that mitigation language should also include an obligation to reimburse the supplier for those costs of mitigation. To control those potential costs you would also want to place three requirements as conditions of your paying those mitigation costs. First, you want to pay actual costs. Second, you want those costs to be reasonable. Lastly, you also should include a statement to the effect that the total cost, including the cost of mitigation shall not exceed the purchase price. In a cancellation or termination you don’t want to pay more than what it would have cost if the work was completed..

Always check with your lawyer in drafting terms, but a mitigation clause could be something as simple as this:

“In the event of Buyer’s cancellation of an order or Buyer’s termination of this Agreement without cause, Supplier shall use reasonable efforts to mitigate any damages or costs. Buyer shall reimburse Supplier’s actual and reasonable costs required for Mitigation. The total cost to Buyer including the costs of mitigation shall not exceed the Price.”

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