Creditors duty to mitigate

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The efforts which a creditor is required to take to mitigate its losses is often a difficult one to determine.

However, the recent case of Credit Suisse AG v. Arabian Aircraft & Equipment Leasing Co EC (QBD) has provided some helpful guidance on this issue.

Background

Credit Suisse applied for summary judgment against the lessor in respect of sums due upon termination of an aircraft lease. At the time of termination of the lease, the aircraft was in the possession of the manufacturer who were asserting a lien for $1.1 million.

Credit Suisse reached a settlement with the manufacturer which would allow for the aircraft to be sold.

In its claim, Credit Suisse gave credit for the proceeds of sale but the fair market value at the date of termination of the lease had not been calculated in accordance with the terms of the lease.

The Respondent alleged that the aircraft could have been put into good condition and sold before termination for a price that would have meant Credit Suisse being paid in full.

Furthermore, it claimed that Credit Suisse was responsible for the deterioration in the condition of the aircraft before it was sold which increased the amount of work required, causing an increase in the cost of getting the aircraft into a good condition.

Decision

Judge Mackie QC concluded that the Respondent had no real prospect of showing that Credit Suisse had a duty to protect the value of the aircraft. In particular, the duty to mitigate was not a high one and Credit Suisse did not have to justify every step that it had taken; it had to take reasonable steps and it was for the Respondent to show that it had not done so.

Furthermore, it was held that there was no evidence that Credit Suisse had acted unreasonably as the manufacturer was in a strong position and that the Respondent could have intervened at the time but that the argument on mitigation was an afterthought. It was accepted that the correct machinery for establishing the fair market value had not been operated so that the Respondent had a possible defence.

However, the Respondent was ordered to pay $2.56 million into court as a condition of defending the claim.

Conclusion

This decision highlights that a creditor need only take reasonable steps to mitigate its losses and that this duty is not a particularly high one to overcome.