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IAI Actuarial Core Principles · Business Management · Implied terms, exclusion of liability, contractual remedies and damages

Arjun Actuarial Consultants engages a software vendor to deliver a pricing tool by 1 April. The vendor fails to deliver. Arjun's office could have bought a comparable ready-made tool for Rs 4 lakh within a week but chose to wait three months, incurring extra costs of Rs 6 lakh in overtime. Which principle most directly limits Arjun's claim?

The duty to mitigate limits the claim. A party affected by breach must take reasonable steps to reduce its loss and cannot recover loss it could have avoided. Buying a ready-made tool quickly was a reasonable step, so much of the extra overtime cost would not be recoverable.

  1. AThe duty to mitigate: no recovery for loss that reasonable steps after the breach would have avoidedCorrect
  2. BThe rule that damages must always be penal to deter the vendor
  3. CThe rule that only nominal damages are available for software contracts
  4. DThe rule that a claimant must first terminate the firm's other contracts
  5. The rule that losses are recoverable only if the vendor intended to cause them

Explanation

A party suffering breach must take reasonable steps to reduce loss, and cannot claim for loss it could have avoided. Buying a substitute for Rs 4 lakh was a reasonable step, so the excess overtime cost is likely irrecoverable. Damages are compensatory, not penal, and intention is not required.

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