Is a Contractor Required to Mitigate Damages Before a Breach Even Occurs?

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The contractor alleged the agency breached a software license by making too many copies of the software. The agency alleged the contractor had failed to mitigate damages because it had decided to remove an online registration requirement for the software. The board did not find the agency’s argument compelling. The agency was essentially arguing that the contractor should have known there was going to be a breach before performance even began and thus should have mitigated by keeping the online registration. But the duty to mitigate only arises upon the occurrence of a breach. The contractor was not required to mitigate a breach before the breach occurred.

Appeal of CiyaSoft Corporation, ASBCA No. 59913-QUAN

Background

The Army awarded a contract to CiyaSoft Corporation for 20 software licenses. Typically CiyaSoft required users of its software to register the software online before it could be sued. The online registration prevents the software from being used on another computer. But to facilitate installation of the software on secured computers, CiyaSolft decided to delete the online registration requirement for the licenses it provided the Army.

Ultimately, more than 20 copies of CiyaSoft’s software ended up government computes. CiyaSoft appealed to the ASBCA alleging breach. CiyaSoft moved for summary judgment on two issues: (1) whether the contract for 20 licenses was limited to 20 unique single users, and (2) the government’s failure to mitigate damages defense.

Analysis

Number of Users

CiyaSoft argued that the contract only permitted the government to install the software on one computer for one individual user. The government contended that more than one individual could use the license on a single computer, and that the contract allowed the government to remove the software from one computer and install it on another. The board found that issues of fact concerning the meaning of a “single-user” precluded summary judgment on this issue.

Failure to Mitigate

The Army asserted that CiyaSoft was obligated to take action to mitigate damages prior to any breach, and that it failed to do so when it deleted the online registration requirement for the software. The board was not persuaded, noting that it was not aware of any authority that requires a party to foresee the possibility of breach and mitigate before the breach even occurs. Indeed, the Restatement of Contracts states that the duty to mitigate arises only upon occurrence of the breach. Removal of the registration did not somehow constitute a failure to mitigate.

CiyaSoft is represented by W. Jay DeVecchio and R. Locke Bell of Morrison & Foerster. The government is represented by Scott N. Flesch, Major Weston E. Borkenhagen, Captain Timothy M. McLister, and Lieutenant Colonel Gregory T. O’Malley of the Army.

ASBCA - CiyaSoft Corporation