Catherine Shu

It is a well-established principle in contract law that the non-breaching party has a duty to mitigate losses after the realization of the breach. However, how long does this duty run? When should the non-breaching party be discharged from this duty? What date should the court look to when calculating damages after the breach? In a commercial setting where contracting parties have equal bargaining power, and in the absence of reliance, these questions are crucial to damage calculations because another well-established principle in contract law states that the proper amount of damages is the amount that places the non-breaching party in the same position it would have been in had the contract been properly performed.

An ongoing case arising out of the 2007–2008 Financial Crisis before the New York Supreme Court will have to deal damage calculation issue in relation to duty to mitigate.[1] Before the crisis, UBS entered into a collateralized loan obligation (“CLO”) agreement with Highland Capital Management (“HCM”) under which UBS was the issuer while HCM was the securitizer. Under the agreement, UBS bought assets identified by HCM and held them in a synthetic warehouse until they were securitized. HCM had to respond to margin calls if the marked-to-market value of the assets UBS held fell below an agreed threshold before they were securitized. When HCM fell short on its margin call obligation, UBS sued HCM for fraudulent conveyance, among other claims. Justice Marcy Friedman of NYS Supreme Court Commercial Division denied HCM’s motion to dismiss. 

During a 2-week bench trial in July 2018, UBS claimed a loss of over $600 million, citing multiple cases supporting its view that, assuming there was a breach, it was possible to mitigate immediately after the breach given the macroeconomic condition at the time. HCM counterclaimed that it did not breach, and concededly, even if it did breach, UBS did not suffer any actual losses.[2] Both parties were generous in giving Justice Friedman a daunting task by providing convoluted damages calculations done by various expert witnesses. While a post-trial decision is still pending, it is possible to discuss some of the potential legal issues and policy concerns about damages calculations.

First, assuming the contract did not specify whether unrealized losses can be recognized, a court has to decide what the actual losses suffered by the non-breaching party were. In the case, UBS argued that “damages are intended to return the parties to the point at which the breach arose and to place the nonbreaching party in as good a position as it would have been had the contract been performed.”[3]  A court may follow this principle in calculating expectation damages to make UBS whole if HCM did breach. HCM did not dispute that the “injured party should not recover more from the breach than he would have gained had the contract been fully performed.”[4]  However, HCM argued that damages should be “limited to the economic injury caused by the breach.”[5]  In effect, UBS believes it suffered over $600 million of actual losses whereas HCM believes UBS did not since UBS recovered a significant amount of losses it suffered during the financial crisis by selling its warehouse assets years later after their price bounced back. 

Alternatively, a court may be concerned about the special circumstances under which the dispute arose. A breach of contract during a financial crisis may be fundamentally different from other breaches and may warrant special treatment by the court as an idiosyncratic risk that private actors cannot get rid of may have been high at the time. One of the difficulties facing the court, in this case, is that it arose from the financial crisis. Thus, whether the breach was reasonable and which party was the least cost avoider may be relevant. In a way, contract law can be interpreted as not so much punishing non-performance of contracts, but rather as providing predictable default rules to contracting parties so they can make more informed choices when designing terms of the contract. From this perspective, a court may place more emphasis on the actual loss of the non-breaching party over time than losses on the date of the breach, e.g. the day when HCM missed its margin call payment.[6] 

Finally, a court may consider who is the least cost avoider when deciding damages assuming there was a breach. In this pending lawsuit, since both parties are sophisticated players in the financial market, it could be argued that the plain language of the contract that shows objective intent should govern rights and obligations, as well as whether there was a breach. Nonetheless, a court may consider whether a multinational bank (UBS) has a more diversified portfolio and was, therefore, more risk-tolerant than HCM during the financial crisis. On the other hand, a battle between expert witnesses from both sides could play a significant role in shaping the decision as the court relies on their expertise in calculating damages arising from a complex commercial dispute.

Since both the facts and procedural posture of this case are rather complex, and since the law governing the duty to mitigate may be unsettled as a financial crisis may qualify as a special circumstance, it is difficult to predict the final decision based on publicly available documents. Nonetheless, the actual losses UBS suffered, the special circumstances under which the dispute arose, and the least cost avoider between the parties may be focal points for the court.



[1] Joe Rauch, UBS Sues Highland for Failed 2007 CDO Deal, Reuters (June 29, 2010),

[2] Brief for Defendant, UBS Securities LLC v. Highland Capital Management, L.P.,  (NYSCEF Doc. No. 618), available at

[3] Brushton-Moira Cent. Sch. Dist. v. Fred H. Thomas Assocs., P.C., 91 N.Y.2d 256, 261 (1998).

[4] Freund v. Wash. Square Press, Inc., 34 N.Y.2d 379, 382 (1974).

[5] Inchaustegui v. 666 5th Ave. Ltd. P’ship, 96 N.Y.2d 111, 116 (2011).

[6] Broome v. Biondi, 17 F. Supp. 2d 211, 288 (S.D.N.Y. 1997) (“Even if [Plaintiff] could claim damages associated with the sale of her apartment, these expenses have to be offset by any profit she made through that sale.”).