Did you know you can waive the legal obligation to mitigate damages under a personal guaranty or security agreement? According to the Arizona Court of Appeals you can. Pi’Ikea, LLC v. Williamson, 234 Ariz. 284, 321 P.3d 449, 451 (Ct. App. 2014).
A basic principle of the law of damages is that one who claims to have been injured by a breach of contract must use reasonable means to avoid or minimize the damages resulting from the breach. West Pinal Family Health Ctr., Inc. v. McBryde, 162 Ariz. 546, 548, 785 P.2d 66, 68 (App.1989). Failure to mitigate one’s damages may be used as a defense to negate or reduce the damages sought “where the plaintiff by his own voluntary activity has unreasonably exposed himself to damage or increased his injury. ” SDR Assocs. v. ARG Enters., Inc., 170 Ariz. 1, n. 2, 821 P.2d 268, 271 n. 2 (App.1991), quoting McCormick on Damages, § 34 at 131 (1934).
What this means is that normally, a plaintiff in a breach of contract case must do all he/she reasonably can to mitigate any damages arising out of the breach of contract. If the plaintiff fails to reasonably attempt to mitigate his/her damages, the defendant can use that failure as a defense to reduce or negate the plaintiff’s claim for damages altogether.
But, according to the Pi’Ikea Court, the parties to a contract can expressly or impliedly agree to waive the duty to mitigate damages; in which case a plaintiff would have no obligation to try and lessen his/her damages resulting from a breach of contract.
Where this issue most commonly arises is in personal guaranties and security or collateral agreements which are used to secure other contractual agreements such as promissory notes or deeds of trust. More and more lenders are putting clauses in guaranties and security agreements which expressly waive the lender’s obligation to mitigate its damages arising out of a breach of a promissory note or deed of trust before suing on the underlying personal guaranty or security agreement. What this translates to in a real property foreclosure situation is that lenders can sue the guarantor without ever foreclosing on the property. Or, more often, lenders can sue the guarantor, obtain a judgment against the guarantor, and then seek to foreclose on the property to offset any deficiency and/or to satisfy the judgment. While Pi’Ikea is good for lenders, it does little to protect borrowers. As such, borrowers need to read guaranty and security agreements carefully and be sure they fully understand the consequences of signing any such documents, especially if they include mitigation of damages waivers.