The creditor's duty to mitigate its own loss as a result of the debtor's default during the pandemic

The general clause of objective good faith, present in all contracts by legal force, imposes lateral duties on the parties. Apparently, the issue is simple: the parties must behave in pursuit of the performance of the contract. However, it reveals levels of complexity as, according to the jurisprudence of the Superior Court of Justice (STJ), the parties — notably, the creditor — have the obligation to mitigate the losses suffered.

The duty to mitigate one's own loss has no express legal provision in the Civil Code. This is a doctrinal and jurisprudential construction that has gained wide acceptance among Brazilian courts, especially after the judgment of Special Appeal nº 758.518/PR in 2010. In the judgment, it was decided that the party harmed by the default must adopt all necessary measures and possible so that the damage is not aggravated.

According to the jurisprudence of the STJ, anyone who remains inactive after breaching the contract violates the duties of loyalty and cooperation imposed by the general clause of objective good faith — which constitutes an act of abuse of rights. The consequence of this abuse of rights is the reduction of the compensation owed by the defaulting party, who will not be obliged to repair the losses that could be avoided through loss mitigation.

Evidently, the general duty to mitigate one's own loss is not absolute, nor does it require the party injured by the breach to adopt any and all measures abstractly capable of reducing the damage suffered. What is sanctioned is the inexcusable inertia of the victim of the damage in seeking a reasonable solution to avoid worsening their own situation. In this sense, the STJ has recognized that the creditor is not obliged to harm himself by trying to reduce his losses, nor to act contrary to his business activity.

It should be noted that this standard of reasonableness is widely accepted not only by national jurisprudence, but also by several international conventions and standards sometimes used in international trade, such as the CISG (Contracts for the International Purchase and Sale of Goods) and the principles of UNIDROIT (International Institute for the Unification of Private Law). Both conventions contain provisions very similar to the jurisprudential construction of the STJ, although their specific application and interpretation contains some particularities arising from their international character.

The reasonableness standard varies depending on the specific case. What may be considered reasonable for a certain industrial segment or a certain niche may not be so in other markets. It is important to consider here the practices widely accepted by the market for that type of business, the culture of the parties involved in the transaction, the value of the operation involved and, mainly, what the parties agreed in cases of default. In long-term transactions, the past conduct of the parties can be a strong indicator of the applicable standard of reasonableness.

The costs and expenses incurred to try to mitigate the losses are part of the compensation due, even if the measures adopted by the party prove to be incapable of effectively reducing the total losses. From the moment the legal system imposes on the creditor the burden of trying to reduce their losses, the measures adopted to mitigate the damage become a necessary consequence of the default. On the other hand, it is important to keep in mind that the reasonableness criterion also applies here, meaning that absolutely unreasonable expenses will not be compensated.

One of the most emblematic cases of contractual default caused by the new coronavirus pandemic is that of Chinese companies. Due to the severe containment and social distancing measures imposed by the Chinese government since February 2020, these companies failed to comply with several previously signed export contracts.

Delays in the delivery of products and inputs imported from China have resulted, according to surveys, in a shortage that already affects 70% of national companies operating in the import sector. In this context, one must ask what measures should be taken by Brazilian companies. Would they be forced to adopt measures aimed at mitigating the impacts of Chinese default on the production chain, under penalty of losing their right to compensation? It seems to us that the answer will depend on the measures made available to the party to avoid worsening the losses. As previously stated, the burden of mitigating one's own loss is not absolute, subject to the precepts of reasonableness applicable in each specific case.

Another very common example that can be cited is the acquisition of inputs from other suppliers — possibly with accumulated stock from months prior to the pandemic, or with operations in countries less severely affected by Covid-19. In this case, experience suggests that the measure would be considered reasonable and, in principle, could lead to a reduction in the value of the compensation if the creditor remained inactive. However, there are some particularities to be analyzed before drawing a definitive conclusion.

The first of these is the factual possibility of purchasing products from a third party, given that many of the imported products are non-fungible and cannot be replaced by similar versions supplied by other market agents. Furthermore, it is possible that the time needed to quote a new supplier makes it impossible to conclude the new deal in time to avoid chain default, which would again make the measure ineffective and eliminate the duty to mitigate.

From another perspective, one can think about cases where the measure is economically unfeasible. The law of supply and demand stipulates that the scarcity of the desired product tends to result in an increase in price, which can sometimes make replacing the product with another supplier impractical. In such cases, it has been interpreted that the burden of mitigating one's own loss requires the creditor to take minimum measures to identify the possibility of replacing the product — such as, for example, obtaining quotations — but does not require the creditor to actually acquire the merchandise or request the sending an official written quote.

A third scenario is the legal impossibility of mitigating the loss via purchasing the merchandise from a third party. The case, although less common, has considerable practical application in the context of long-term contracts, in which the Brazilian importer guarantees exclusivity to the foreign exporter in exchange for considerable discounts. In this situation, the measure would be considered unreasonable, as it would require the importer to breach the exclusivity clause to mitigate the damage caused to it.

Even in apparently simple situations, such as the substitution of goods from other suppliers, there are complexities in the specific case that can drastically alter the conclusions. An apparently reasonable measure can quickly change context considering economic, factual and legal factors. In this scenario, the conclusion that seems right to us is that the creditor should not remain inactive.