CN07 - English Court of Appeal provides further guidance on broad axe mitigation defences

Following recent rulings by the Supreme Court (UKSC) in Sainsbury's v Mastercard and the Competition Appeal Tribunal (CAT) in Royal Mail and BT v DAF, the Court of Appeal has provided further clarification on the scope of the "broad axe" principle as it applies to mitigation defences in its judgment on an appeal by defendants in the long-running ball bearings cartel litigation. 

Key takeaways 

• Mitigation defences cannot be based on "broad economic or business theory" alone, and require at least some plausible factual foundation for the assertion that the claimant would have taken actions to mitigate its loss.
• 'Reasonable inferences' that a claimant had or would have mitigated must be able to be properly drawn from the facts of a case.
• There must be a causal link between the alleged overcharge and the steps taken by a claimant to reduce its costs in some other way.

Background to the claim

Following a 2014 EC infringement decision which found that NTN and others had engaged in a collusive tendering cartel in relation to quotations for vehicle ball bearings over a 7 year period, Fiat Chrysler commenced follow-on damages proceedings in the UK valued at an estimated £80 million.

NTN introduced a mitigation defence which argued that Fiat Chrysler would have 'off-set' any losses brought about by the alleged overcharge by securing increased discounts from its other suppliers. This defence was struck out by the CAT in the first instance, leading NTN to appeal to the Court of Appeal.  

The parties settled the entire claim shortly after the appeal hearing, and before the Court of Appeal handed down its judgment. 

NTN's mitigation defence

In summary, NTN's defence was:

(i) in the first instance, that there was no overcharge; and

(ii) in the alternative, that if there was an overcharge, then the claimants would have off-set any increase in prices by reducing supply costs for other goods and services through its cost control systems.

Critically, NTN did not claim that it had any actual knowledge or evidence that the Fiat Chrysler claimants had off-set their losses. Instead, NTN alleged that it could be reasonably inferred that the claimants would have done so if there had been an overcharge. 

Counsel for NTN submitted that, following the UKSC's apparent endorsement of the application of the "broad axe" principle to the issue of pass-on in Sainsbury's, the CAT had been incorrect in its conclusion that mitigation defences require at least some plausible factual foundation for the assertion that the claimant would have taken actions to mitigate its loss. 

However, for the reasons outlined below, the Court of Appeal found that the CAT had correctly applied the UKSC's guidance in Sainsbury's and dismissed the appeal in its entirety. 

Issues on appeal

The issues for the Court of Appeal to determine were:

1. Where a supplier has overcharged a purchaser, can the supplier seek to reduce the amount of damages owed to the purchaser by claiming that the purchaser mitigated its loss by off-setting?
2. In particular, can the supplier plead a mitigation by off-setting defence without any actual evidence that the purchaser did in fact mitigate its loss in this way, but only on the hypothetical assertion that a 'reasonable' inference can be drawn that the purchaser would have done so?

The Sainsbury's decision

In its decision in Sainsbury's, the UKSC widened the scope for defendants to advance and prove mitigation defences where they allege that claimants passed on price increases to their customers.

The UKSC ruled that the extent of any mitigation, which in many cases may be impossible to determine accurately, does not need to be calculated as a precise amount. Rather, the court may assess a claimant's mitigation in accordance with the "broad axe" approach (per Lord Shaw in Watson, Laidlaw, & Co. Ltd. v. Pott, Cassels & Williamson).  However, the UKSC also recognised that a question of "legal or proximate causation" between the overcharge and the alleged mitigating acts by the claimant.

Once the defendants have advanced a mitigation defence, there is a "heavy evidential burden" on the claimant to "provide evidence as to how they have dealt with the recovery of their costs in their business".

The Royal Mail decision

Following the UKSC's decision in Sainsbury's, DAF (one of the OEMs fined by the EC in 2016 for participating in the Trucks cartel) looked to introduce the issue of mitigation in their defence of Royal Mail and BT's claim. 

The CAT held that, whilst a defendant is unlikely to have enough evidence to prove that a claimant took steps to mitigate at the pleadings stage, the UKSC in Sainsbury's did not permit a defendant to raise a mitigation defence based on "broad economic or business theory" alone, and that there must be a plausible factual basis for the assertion that the claimant would have taken such steps. 

In particular, it confirmed that "there must be something identifiable in the facts of the particular case that gives rise to a prima facie inference that there may well be a direct causative link between the overcharge alleged and the prices paid by the claimant for other supplies that reduced the amount of the loss resulting from the overcharge".

Elaborating on this point, the CAT identified possible examples of factual patterns which may give rise to a reasonable inference of mitigation, including (i) the claimant’s knowledge of the nature and amount of the overcharge, (ii) the relative ease with which the claimant’s business could be expected to reduce costs, and (iii) the fact that other supplies made by the defendant or its associates to the claimant have been renegotiated in years following the overcharge.

The Court of Appeal's view

NTN argued that its pleading met the test in Sainsbury's, stating that the UKSC expressly contemplated that a mitigation by off-setting defence could simply be "raised" without further factual evidence. 

The Court of Appeal disagreed with NTN's assessment of the UKSC's judgment, stating that the UKSC was not addressing the standard which a pleading had to reach in order to be allowed to proceed. Instead, the UKSC was dealing with the general concept of a "broad axe" assessment of mitigation. 

Whilst the UKSC had commented that there would be a heavy burden on the claimant to provide evidence of its actions in response to the overcharge, the Court affirmed the CAT's first instance decision (following its approach in Royal Mail) that this did not mean that there was no requirement at all on the defendant to provide some evidence of causation at the pleadings stage. 

Turning to the question of whether a 'reasonable' inference could be made that the claimant would have off-set its costs, the Court of Appeal described NTN's defence as "hypothetical and conditional", based on inferences which could not be properly drawn from the facts. The fact that the claimants operated a cost control system in the ordinary course of their business did not reasonably lead to the conclusion that they would have in fact mitigated their losses effectively, or at all. 

In respect of the evidential standard to be applied, therefore, the Court held that the burden of proof when pleading causation is on the defendant to demonstrate:

a) that there is a legal and proximate, causal connection between the overcharge and the act of mitigation; and

b) that this connection is “realistic”, “plausible” or carries some “degree of conviction” (which terms the Court considered interchangeable); and

c) that the evidence is more than merely “arguable”. This will depend on the specific facts of the case.

Implications for parties

In its judgment, the Court stressed that pleadings of mitigation by off-setting are not always incapable of being advanced. However, it has clarified that there must be some reasonable evidence that a claimant has or would have engaged in mitigation in order for such a defence to proceed to trial, pointing to the list of potential factual examples outlined by the CAT in Royal Mail. 

Defendants will therefore need to consider the facts and evidence available to them carefully before raising a mitigation defence. Claimants are unlikely to be required to provide extensive disclosure where the defence has simply been "raised" on the basis of general and unparticularised economic arguments. 

With thanks to Imogen Chitty of Ashurst for her contribution.