Recent Ruling by the Swedish Supreme Court on Compensation for Settlement Payments to Third Parties – "Flyttstädningen"

The ruling demonstrates how basic principles of tort law can be applied to assess the compensability of payments resulting from third-party claims.

A (the claimant) had transferred a house to B (the third party) and had, in connection with this, hired a cleaning company, C (the tortfeasor), which caused water damage near a bathroom in the house. B made a claim against A for the cost of renovating the bathroom – approximately SEK 200,000. The parties settled for an amount of SEK 70,000. A then made a claim for the same amount against C.

The lower courts both found that C was liable for the water damage but encountered problems when it came to the damages amount, which, in their view, had to be assessed based on the water damage and the associated decrease in the value of the house.

The District Court found that A had not presented sufficient evidence in this regard and therefore dismissed the claim in its entirety. The Court of Appeal, on the other hand, noted that according to Chapter 35, Section 5 of the Code of Judicial Procedure, courts are allowed to estimate damages to a reasonable amount in cases where evidence of the damages amount cannot be provided or would be associated with excessive difficulties. The court noted that A, who no longer had control over what measures should be taken concerning the water damage, had limited ability to present evidence regarding the damages amount and that the mentioned provision was applicable to the case. The court then noted that the settlement amount was reasonable and therefore granted the claim in its entirety.

The judgment was appealed, and the Supreme Court granted leave to appeal on the basis that C was liable for the water damage per se. The question was whether (and to what extent) A was entitled to compensation from C for the settlement amount.

The Supreme Court began its reasoning by stating the general principles for damage to be compensable (paragraphs 12–13), with an emphasis on the requirements that (i) the damage was sufficiently foreseeable (the requirement of proximate cause) and (ii) the injured party took reasonable measures to mitigate their damage (the duty to mitigate damages).

Proximate Cause

The requirement of proximate cause requires not only actual causality between a negligent action and damage but also that there is proximate causality (Sw. adekvat kausalitet) between the action and the damage. Accordingly, the requirement of proximate cause consists of two parts:

• Actual causality (conditio sine qua non): This examines whether the damage would have occurred without the particular action. If the damage would not have occurred without the action, actual causality exists.
• Proximate causality: In addition to actual causality, the damage must be a foreseeable and typical consequence of the action. This means that the damage must not be an overly remote or improbable consequence of the action.

As stated in the preparatory works of the Tort Liability Act, the damage must have appeared as a foreseeable and somewhat typical consequence of the harmful action. Effects that are so unusual or improbable that the liable party could not have foreseen them are thus excluded from tort liability.

The Aggrieved Party's Duty to Mitigate Loss

The duty to mitigate loss can be derived from the Swedish Sales of Goods Act, which expressly stipulates that an aggrieved party must take reasonable steps to mitigate its losses. If the party fails to do so, it must bear the portion of the loss that could reasonably have been avoided. This duty is recognized as a general principle in both Swedish contract law, making it applicable to various types of contracts beyond the sale of goods, as well as in Swedish tort law.

In an earlier ruling, NJA 2017 p. 9, the Supreme Court provided a detailed precedent on the duty to mitigate loss by outlining, inter alia, the following key aspects regarding the scope of this general principle:

• The injured party should act in an economically sensible or rational fashion and in the same manner as the party would have acted if it could not expect to receive compensation for the loss.
• The duty to mitigate loss arises as soon as the aggrieved party becomes aware of the damaging event. However, the aggrieved party is not required to take immediate action upon learning of the breach; it is often reasonable to allow the aggrieved party some time to consider its options.
• In case the breach gives rise to long-term damaging effects, the aggrieved party may need to reevaluate the situation and reconsider its options according to what is known at any given time.
• As long as the measures taken by the aggrieved party can be regarded as reasonable, they are taken at the risk of the party causing the damage. In the reasonability assessment, consideration must be given to the expected effect of the measures, how easily they could be taken, what risks and possible inconveniences they would entail for the aggrieved party, and the extent to which these effects and risks could be anticipated.

In "Flyttstädningen", the Supreme Court applied these principles to determine if, and to what extent, the aggrieved party's settlement payment to a third party is compensable. By adhering to these fundamental principles, the Supreme Court could focus on the compensability of the settlement payment rather than the underlying water damage. This approach might seem obvious, but bear in mind that both lower courts failed to recognize this solution.

The Supreme Court noted that it is essentially required that the settlement payment is based on the tortfeasor's obligation to compensate the third party and that any settlement was prompted by the specific damage in question. Otherwise, the requirement of proximate causality is not fulfilled (paragraphs 14–15).

It is also required that the settlement terms appear reasonable given the financial risk the injured party would have faced if the settlement had not been reached. Otherwise, the aggrieved party has not fulfilled their duty to mitigate damages (paragraph 18). The assessment should be made mainly objectively based on the circumstances at the time of the settlement.

The Supreme Court briefly noted that it is not required for the injured party to prove that they would have been obliged to pay a certain amount to the third party if the settlement had not been reached (paragraph 25). The emphasis should probably be placed on "certain amount", as the right to compensation is often excluded if payment is made without an obligation to pay (paragraphs 15 and 17).

Before settling a third-party claim, it's important to remember that for a settlement payment to be compensable by the tortfeasor, the settlement must meet the following criteria:

• It must be based on an obligation to compensate the third party for the damage in question. Accordingly, it is wise to exclude aspects unrelated to the damage in the settlement.
• It must appear reasonable from an objective standpoint in relation to the financial risk of non-settlement. A useful test is to ask whether the settlement would have been concluded even if there were no possibility of forwarding the cost to the tortfeasor.

Lastly, communicating with the tortfeasor at an earlier stage to get its opinion on how to handle a third-party claim, may effectively prevent later objections regarding non-fulfillment of the duty to mitigate damages.