The Mitigation Doctrine: A Proposal for its Regulation in Brazil

Copyright © 2024 Marcelo Lapolla, PhD.

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ISBN: 978-1-6632-6137-3 (sc)

ISBN: 978-1-6632-6138-0 (e)

Library of Congress Control Number: 978166326137

iUniverse rev. date: 03/18/2024

CONTENTS

Chapter 1

1.1 Context and outline

1.2 Research question and objectives

1.3 Structure of the thesis

1.4 Literature Review

1.5 Research methodology and its justification

Chapter 2

2.1 Introduction

2.2 The legal landscape

2.3 Limitations to the full recovery principle and the duty to mitigate loss: provisions, opinions and jurisprudence

2.3.1 The duty of good faith

2.3.2 The causation rule

2.3.3 The contributory fault rule

2.3.4 Venire contra factum proprium

2.3.5 Abuse of right

2.3.6 Reasonableness of lost profits

2.3.7 Late exercise of rights

2.4 Other uncertainties

2.5 Conclusion

Chapter 3

3.1 Introduction

3.1.1 The principle and its development

3.2 Practical operation

3.2.1 Scope of application

3.2.1.1 Performance and the duty to mitigate

3.2.2 Reasonable steps

3.2.3 Substitute transactions

3.2.4 Treatment of extra benefits and losses

3.2.4.1 Benefits gained

3.2.4.2 Losses incurred

3.2.5 Burden of proof

3.3 Theoretical matters: the foundations of mitigation and its relationship to other limits on recoverability

3.3.1 Grounds and justifications of the mitigation doctrine

3.3.1.1 Imposition of a burden on the innocent party

3.3.1.2 Encouragement of breaches of contract

3.3.2 The relationship between mitigation and other limits on recoverability

3.4 Conclusion

Chapter 4

4.1 Introduction

4.1.1 Families of the Civil Law system and the regulation of the mitigation doctrine

4.2 Application of the duty to mitigate loss in European Civil Law jurisdictions

4.2.1 Germany

4.2.2 France

4.2.2.1 Reform of the French Law of Obligations

4.3 Argentina

4.3.1 Mitigation of Loss in Argentina

4.4 Transnational Legal Instruments

4.4.1 Hague Uniform Law of International Sales (ULIS)

4.4.2 Vienna Convention on Contracts for the International Sale of Goods (CISG)

4.4.3 Principles of International Commercial Contracts (PICC)

4.4.4 Principles of European Contract Law (PECL)

4.4.5 Developments towards a Common European Sales Law (CESL)

4.4.6 Principles of Latin American Contract Law (PLACL)

4.5 Conclusion

Chapter 5

5.1 Introduction

5.2 Summary of findings

5.3 Issues arising from the research

5.3.1 Should the mitigation rule form part of a provision on contributory fault or should it be an independent provision?

5.3.2 Should the mitigation rule apply to both contract and tort?

5.3.3 Should the mitigation principle be conceptualized as a duty?

5.3.4 What standard of conduct should be expected of the innocent party?

5.3.5 How far should the mitigation principle reach?

5.3.6 Should mitigation apply only to the remedy of damages or should it also affect specific performance?

5.3.7 Should additional costs caused by mitigating measures be recoverable?

5.3.8 Should actual savings made and benefits gained as a result of mitigation reduce the compensation recoverable?

5.3.9 Is an express provision for substitute transactions needed?

5.3.10 Which party should bear the burden of proof?

5.4 How should Brazil regulate the duty to mitigate?

5.5 Proposed wording for a Brazilian mitigation rule

Table Of Cases

Table Of Legislation

Bibliography

ACKNOWLEDGEMENTS

My most sincere thank you to Professor François du Bois (a true inspiration I will carry all my life), Dr. Nicola Jackson, Teresa Rowe, Helen Newcombe and the staff at University of Leicester, for being by my side during these years. To my partner and brother Thiago Vezzi, who calmed me down and supported me when I needed. To my great friend Erik Navrocky, who helped me take so many steps along the way. To those who, in the years before or at the very end, inspired me and helped me make this project become possible: Eduardo Salusse, Sergio Marangoni, Eduardo Parente, Wilson Jabur, Marcello Klug, Carlos Artur Andre Leite, Eduardo Miranda, Marcel Cordeiro, João Daniel Rassi, Christian de Lamboy, Carlos Fonseca Monnerat and Gonzalo Fernandez. To all of those who supported me to keep moving or challenged me to continue. And above all, to God.

Dedicated to my beloved wife, who supported me the

whole way through and brought Helena and

Martin to our lives. To my parents, who pointed me to this direction.

To my sisters, nephews, nieces, in-laws and Nina, who understood and

tolerated my absence. To my grandmothers (in memoriam and in my heart).

To my country, wishing to contribute with a fair society. And to anyone

this might bring strength and inspire

resilience to go after their goals.

"only when the law seeks to find correlation with actual

developments is the legislator able to pave the way for

regulation that can truly come to full fruition."

(Anne Keirse, ‘Why the Proposed Optional Common European

Sales Law Has Not, But Should Have, Abandoned the Principle of

All or Nothing: A Guide to How to Sanction the Duty to Mitigate the

Loss’ (2011) 19 European Review of Private Law 976)

CHAPTER 1

1.1

Context and outline

Most, if not all, legal systems contain the so-called duty to mitigate loss doctrine. This duty (or principle; the most appropriate characterization will be discussed later), in broad terms, requires victims of wrongfully inflicted damage to take reasonable steps to limit their losses. Failure to do so limits their entitlement to recover damages from the wrongdoer who inflicted the damage.¹ Although traces of this doctrine and its application can be found in several court decisions in Brazil, the requirements and limits of its application, as well as its legal basis, have not yet received much attention in the Brazilian legal system and legal literature. Associated with this is the absence of an express provision regarding the duty to mitigate in Brazilian Civil Code² – which is meant to contain all rules applied to private relations.

The duty to mitigate loss made its first appearance in Brazil in doctrinal writings. Before that, there is no record of its application by courts, nor significant impact of the topic in the Brazilian legal landscape, in which the binding force of contracts has historically prevailed. This was so until former Minister of the Superior Court of Justice, Aguiar Júnior, introduced it as doctrine of mitigation in his work, originally dated of 1991. In Chapter 6 of his work, when debating the definitive breach of an obligation, the author stated:

Further on this topic, it is necessary to refer to the doctrine of mitigation, which requires of the creditor to collaborate, despite of the breach of the contract, in order to ensure that the resulting harmful outcome of the breach is not aggravated through his or her action or omission (original version: Ainda nesse tema, deve ser lembrada a doutrina da mitigação, pela qual o credor deve colaborar, apesar da inexecução do contrato, para que não se agrave, pela sua ação ou omissão, o resultado danoso decorrente do incumprimento).³

The topic did not receive much attention from legal commentators, nor did it reach the courts until 2004. The first Brazilian court to ground its decision on (or at least mention) the duty to mitigate loss was from the state of Paraná. The ruling, however, brought together several elements with no clear distinction of one from the other: the duty of good faith, duty of diligence, contributory negligence and causation – besides the doctrine of mitigation.⁴ This decision did not detail the application of the duty to mitigate loss, but it was followed by others which, again, combined the duty to mitigate with other principles, such as venire contra factum proprium, supressio, surrectio, verwirkung and erwirkung, with no detailed consideration as to any aspect regarding the application of the doctrine.⁵

In subsequent years, numerous decisions by Brazilian courts (throughout the different jurisdictions in Brazil’s constitutive states) made express reference to the duty to mitigate loss.⁶ These decisions give a sense of the current application of the duty to mitigate loss in Brazil – mostly present when decisions delve deep into the quantum of compensation. In one appeal decided by the State Court of São Paulo, the decision limited the recovery of damages for the claimant to the loss which the party would have experienced if he had acted reasonably (the court ruled that the claimant had chosen to experience further damage).⁷ In another decision by the same court, the claimant argued that the defendant should not be entitled to receive interest over the original debt, for it would allow him to profit from his own inertia in timely collecting the debt, in a manner arguably contrary to the duty to mitigate. The Court ruled against the claimant on the ground that it was the claimant’s lack of payment that caused the loss and the application of interest. The decision rejected the application of the duty to mitigate loss in the specific case, but did not deny its existence in the legal framework.⁸

Most importantly, in 2010, the Superior Court of Justice issued a decision with express reference to the duty to mitigate loss – supposedly following from good faith and the duties of loyalty and to cooperate – bringing it to the Brazilian legal scene in the following context:

Thus, objective good faith constitutes an ethical-legal standard to be observed by the parties in all phases of the contract. This means that, during all stages of the contract, the conduct of the parties must be based on probity, cooperation and loyalty (...). This gives rise to the duty to mitigate one’s own losses, or, in foreign law, the ‘duty to mitigate the loss’: the parties to a contract must take all necessary and possible measures to ensure that the loss is not aggravated. In this sense, the party on whom the loss falls must not deliberately remain inactive, for his or her inertia can cause unnecessary aggravation of the loss and unnecessary and avoidable damage to the other party, which infringes the duties of cooperation and loyalty. (original version: Assim, a boa-fé objetiva afigura-se como standard ético-jurídico a ser observado pelos contratantes em todas as fases contratuais. Ou seja, durante as diversas etapas do contrato, a conduta das partes deve ser pautada pela probidade, cooperação e lealdade (…). Com esse entendimento, avulta-se o dever de mitigar o próprio prejuízo, ou, no direito alienígena, duty to mitigate the loss: as partes contratantes da obrigação devem tomar as medidas necessárias e possíveis para que o dano não seja agravado. Desse modo, a parte a que a perda aproveita não pode permanecer deliberadamente inerte diante do dano, pois a sua inércia imporá gravame desnecessário e evitável ao patrimônio da outra, circunstância que infringe os deveres de cooperação e lealdade).⁹

In subsequent years, the Superior Court kept making reference to the mitigation doctrine as regularly and constantly as if it were actually part of the Brazilian legal system, whether as a parameter to quantify damages,¹⁰ or in connection with the duty of good faith and to prevent abusive exercise of rights.¹¹ Similarly, and also with diverse justifications as to the existing principles and provisions that allow its application, state courts have repeatedly and constantly made rulings based on the mitigation doctrine.¹² And since 2016, even the Supreme Court has mentioned the duty to mitigate loss in a few decisions, differing among each other as to its interpretation.¹³

This evidences that the duty to mitigate is now firmly established in the practice of Brazilian courts. However, as the Civil Code of Brazil fails to regulate the requirements and limits of this duty, judicial decisions have continued to base the duty to mitigate on other principles, in order to justify its application. This has prevented the development of a full understanding of this doctrine, the establishment of a coherent concept, and its consistent application. As a result of this, and although the courts keep applying it, it remains uncertain what the basis of the mitigation doctrine is in the Brazilian legal system, as well as what the principles are which justify and guide its practical application. As Chong states: the problem is that there is no provision in the legal system clearly regulating this duty (…) There is much to be studied about the duty to mitigate loss, specially to comprehend its requisites, in order to avoid its unnecessary and, mainly, incorrect application.¹⁴

1.2

Research question and objectives

This thesis aims to bring greater clarity to the treatment of the duty to mitigate in Brazilian law, and to propose the formulation of an express rule which would fill what appears to be a gap in the legislation and also to harmonize the application of this doctrine by the courts. In order to achieve that, the present study will explore the conceptualization and application of this duty in countries where it is more fully developed, so as to enable the understanding of its foundations and limits, in order to develop a formulation of this duty that would be suitable to the Brazilian culture and legal system.

In order to analyze the duty to mitigate loss, it is important to determine its meaning from the strictly legal view. In the context of this thesis, the expression refers to the conduct to be expected from an innocent party in order to limit the losses suffered as a consequence of the other party’s unlawful action or contractual breach. Although commonly referred to as a duty, the conduct to which it refers (to mitigate loss) may not be required from the party to whom it refers, as this duty does not correspond to a right that the other party could claim.¹⁵ The duty to mitigate, therefore, should not be understood as someone’s duty in the sense of obligation; instead, it refers to the conduct such party is expected to observe, so that limitations to the extension of this party’s right of recovery will not be applied.¹⁶

In other words, the mitigation doctrine refers to the actions the party is supposed to take in order to avoid losses which will otherwise not be recoverable from the defaulting party. In sum, the mitigation doctrine stipulates that one who does not act reasonably – an abstract concept, to be further analysed in later chapters – to avoid or mitigate their own losses will be subject to limitations in the extent of his or her rights of recovery. The result is that the measure of recovery is connected to the conduct of the innocent party in dealing with the consequences of the unlawful action or breach by the other party.¹⁷ As such, losses experienced as a result of the party’s inertia – when legally expected (required) to act – may not be subject to recovery.¹⁸

With this conceptual aspect taken into consideration, we will – nonetheless – continue to refer to the mitigation doctrine as the duty to mitigate loss, for this is the most common language by which it is referred in the jurisdictions analysed throughout this thesis and should not, if the point just made is taken into account, lead to any misunderstanding as to its nature.

Given the absence in the Brazilian Civil Code of an express duty to mitigate, the thesis will consider: why is there no mitigation provision currently: did the legislator simply forget it, or was it thought unnecessary or sufficiently addressed by supposedly equivalent doctrines and rules that are present? The point, here, is not to argue that all countries – including Brazil, then – should enact a specific rule to regulate the application of the duty to mitigate; rather, the point is to identify how courts in Brazil have dealt with this issue in the absence of a specific provision, and to further establish whether the legislative gap presents a justifiable concern from the legal perspective which calls for a new provision.

To this end, the thesis will critically analyse the different doctrinal bases which have been put forward in Brazil by writers and courts to support the application of this doctrine: the principle of good faith, the doctrines of avoidable losses, supressio and venire contra factum proprium, the concepts of causation and contributory negligence and common-sense elements like reasonableness.¹⁹ In this regard, the thesis will consider whether any of these provide an appropriate basis for applying this doctrine in Brazil, given the legal framework established by the Civil Code and the Constitution of Brazil. It will also reflect on whether these concepts and principles provide clear answer to central questions such as: When does the duty to mitigate arise: only in case of breach of contract, or also in case of an unlawful act (tort), or perhaps even more broadly? What standard of conduct does it impose and how is reasonableness measured? What is the scope of the duty: does it cover failures to reduce the loss caused or only failures to avoid aggravating the loss, how are extra costs caused by mitigation dealt with, and is the recoverable compensation reduced even by mitigating measures which were not required? On which party is the burden of proof?

This will provide a starting point which identifies uncertainties surrounding the application of the duty to mitigate by Brazilian courts, and to uncover the link between these and the absence of a specific rule regulating the principle. In this respect, the gap in legislation will be placed in the context of the Constitutional provision which establishes that no one will be obliged to do or not to do anything if not in virtue of law, present in art. 5, II of the Constitution of Brazil. The instability as to the enforceability of the mitigation rule – evidenced through the decisions and doctrine referred to above and further analysed in later chapters – not only justifies this research, but also legitimates the intention to contribute to the Brazilian legal framework by proposing the proper regulation of the mitigation doctrine.

Here it is important also to explain what this thesis does not do. Because the thesis takes as its starting point the fact that the duty to mitigate is now an established part of the practice of Brazilian courts, as was shown in the previous section, and aims to make a contribution to how it is regulated, it does not engage in an in-depth inquiry into to the deeper philosophical or economic justifications of such a duty. Although reference is made, when appropriate, to such justifications in order to shed light on the nature and extent of the mitigation principle, the aims of this thesis does not require a full justification as to why a legal system should adopt the mitigation principle. In relation to Brazil, others have already done that work²⁰ and this thesis does not aim to repeat that.

Identifying the difficulties caused by the legislative gap will lead to considering which aspects a new provision on mitigation should address (technically, according to codification best practices, and substantively, ensuring the most appropriate content for regulating the doctrine of mitigation). In this regard, the research will then unfold to cover questions such as how far a party must go to mitigate loss and how the effects of said action will affect both parties in the course of losses, remedies and recovery. It will also be necessary to consider whose burden it will be to prove relevant matters in case of litigation. Because these matters have been faced also in other legal systems, this raises questions about the international experience, as revealed by comparative law research. What lessons can Brazil learn from the experience of other countries?

Finally, the ultimate objective is to propose and formulate a new provision to be added to the Brazilian Civil Code, which will be designed to resolve current uncertainties and tensions and to bring about a harmonious application of the duty to mitigate loss by parties and courts.

1.3

Structure of the thesis

The thesis will be divided into five chapters.

This first chapter provides a general outline of the topic and presents how the thesis will be developed.

The second chapter turns to Brazil, investigating in detail the local legal position. At this point, the thesis will present the rules relevant to the duty to mitigate in local legislation, and proceed to analysing its current application by the courts. This chapter will also analyse Brazilian legal writings on the duty to mitigate. This will evidence the lack of uniformity and absence of clear legal grounds for requiring mitigation. Doing this will identify the tensions surrounding the mitigation doctrine and differences of opinion regarding its existence and, ultimately, will demonstrate the need to fill a legislative gap. In doing so, this chapter will set the agenda for the comparative studies in the following chapters.

The third and fourth chapters will explore the experience of selected other jurisdictions, belonging to the Common Law and Civil Law families, respectively, as well as the texts of relevant transnational instruments. General studies of the literature will be followed by the identification of the rule concerning the duty to mitigate loss (if any) that is locally applied by courts. The objective of these chapters will be to develop an understanding of how different countries interpret and decide, through their legal systems, similar questions related to the duty to mitigate losses, as well as to identify the specific issues and difficulties that need to be dealt with. Where these exist, attention will also be paid to how any legislative or codal rules concerning the duty have been formulated.

The final chapter will build on this to develop a possible solution for the legislative gap in Brazil. It will summarize and apply the lessons that can be learnt from this comparative survey, and use these to make an original contribution in the form of a proposed new Civil Code provision to regulate the duty to mitigate loss in Brazil – benefiting from foreign experience, but yet responding to the local needs and concerns identified in Chapter 2.

The proposal will take into consideration the specific character of a Civil Code as being more than a simple collection of rules. Structured in a certain and systematic order to facilitate consultation and reference, codes represent a homogeneous, unitary, rational system, which aspires to be a logical and complete construction, erected under the foundation of principles that are assumed to be applicable to all the reality that the law must discipline.²¹ Therefore, the new rule will be designed to fit in and be compatible with the existing principles and provisions of Brazilian law.

1.4

Literature Review

Preliminary research has shown that little academic work has been directed at this matter in Brazil, and no established approach has been adopted.²² Therefore, the local literature concerning the duty to mitigate loss is limited. There are only three book-length monographs, in Portuguese, on the topic, respectively by Lopes,²³ by Kulesza²⁴ and by Andrade Martins.²⁵ The first two investigate mitigation only in relation to contractual claims, and the scope of each is limited by the author’s specific objectives. Kulesza’s study analyzes the development of the mitigation principle in the light of the reciprocal evolution of legal systems, focusing especially on the interaction between international trade law instruments and the domestic contract law of states, including Brazil. Lopes focuses on identifying the appropriate doctrinal basis for the mitigation principle as it has developed in Brazil in the existing provisions of the Civil Code as well as on finding an ultimate justification for the principle with the aid of the economic analysis of law. This thesis does share the concerns of these works, notably in relating the theory and practice of mitigation to the experience of other legal systems and in presenting a proposal for the insertion of a new mitigation provision into the Civil Code. However, the comparative investigation is limited and by now outdated,²⁶ and the proposal is presented without express consideration of alternatives or explanation of the choices made, so that there remains scope and need for further work which may challenge Lopes’s conclusions and proposal. Finally, Andrade Martins analyzes the application of the mitigation principle in both torts and contractual claims, and even classifies Brazilian court precedents on the basis of whether they have properly or improperly applied the mitigation doctrine in the view of the writer. The author concludes that the updating of the Brazilian legal system with regards to mitigation is an urgent matter,²⁷ but makes no concrete proposition in this regard.