In Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 (8 May 2024), the High Court was required to determine the evidence required to establish reliance-based damages for a breach of contract.
For contract law enthusiasts, like the writer, this High Court decision is a special treat. The facts read like a contract law exam question.
The appellant (Council) owns land on which the Cessnock Airport is located. The Council intended to develop the land and extend the airport’s operations. The Council and Mr Johnson, who later became the principal of the respondent company (Company), met and discussed building an aircraft hangar on the land that would incorporate an aviation museum and an entertainment venue for corporate events.
The Council and the Company subsequently entered into an agreement for a lease of a proposed Lot 104 on the land (Agreement). The proposed 30-year lease to the Company was subject to the registration of a plan of subdivision. The Agreement contained a clause, cl 4.2(a)(2), pursuant to which the Council promised to take all reasonable action to apply for and obtain registration of the plan of subdivision by a “Sunset Date”. If no plan of subdivision was registered by the Sunset Date then each party was entitled to terminate the Agreement.
The Company was given a licence to the area to build the hangar. The Company went on to build an “iconic” hangar designed by a renowned architect at a cost of about $3.7 million. The Company, in addition to the museum and entertainment venue, carried on an adventure flight business out of the hangar. The businesses were not profitable.
In the meantime, the Council sought quotes for the work required to be done before the plan of subdivision could be registered. When the Council discovered that it would cost about $1 million to connect the proposed lots to the sewerage system it decided not to proceed with the subdivision of the land. The Agreement was treated as terminated and the Council acquired the hangar for $1. The Company sued for damages.
The primary judge (Adamson J) held that the Council breached the Agreement but only awarded the Company nominal damages. Adamson J considered that the Company could only recover damages based on wasted expenditure, without proof that the expenditure would have been recouped, if the nature of the contractual breach made it “impossible” to assess damages. Adamson J concluded, however, that even if it could be presumed that the Company could have recouped its expenditure, the Council had rebutted this presumption. Here Adamson J pointed to the low demand for lots at the airport and the unprofitable nature of the Company’s businesses. Adamson J also considered that the Company’s loss was too remote to be recovered as damages given the uncertainty of registration of the plan of subdivision (among other things).
The Court of Appeal of the Supreme Court of New South Wales (Brereton JA, Macfarlan and Mitchelmore JJA agreeing) took a different view. The Council did not contest the primary judge’s finding that it breached the Agreement. The Court of Appeal held that there was a “presumption”, not confined to cases of “impossibility”, that the Company’s wasted expenditure, reasonably incurred in reliance on the Agreement, could be recovered. The Court of Appeal held that the presumption was not rebutted. Indeed, evidence adduced by the Company indicated that there was a demand for hangarage. The Court of Appeal also held that the loss was not too remote, noting that it ought to have been plain to both parties at the time the Agreement was made that breach of cl 4.2(a)(2) by the Council would result in the Company wasting expenditure on the hangar’s construction.
The Council appealed unsuccessfully to the High Court. The High Court unanimously dismissed the Council’s appeal. The joint judgment of Edelman, Steward, Gleeson and Beech-Jones JJ offers a masterful exposition on the law on reliance based damages in the United Kingdom, United States of America and Australia. But Jagot J sets out the relevant principles applying in Australian law most succinctly (at [190]-[193]) where Her Honour remarks “no greater complexity than this should be sown into or permitted to invade this field”.
As a starting point, all their Honours observed that the ruling principle of contract law damages is that the contracting party not in breach is to be put in the same position (so far as money can do it) as if the contract had been performed (expectation damages) (Gageler CJ (at [6]), Gordon J (at [48]), Edelman J et al (at [117]) and Jagot J (at [190])).
Several of their Honours recognised that sometimes it is difficult to establish the value of the promised performance to determine the quantum of expectation damages that should be awarded (Gageler CJ (at [13]), Gordon J (at [50]) and Edelman J et al (at [127])).
In these circumstances, a party may seek recovery of expenditure reasonably incurred in reliance of the contract that was wasted as a consequence of, and not remote from, the wrongdoer’s breach of the contract (Gageler CJ (at [13]), Gordon J (at [50]), Edelman J et al (at [120]) and Jagot J (at [191])).
Their Honours (except Gageler J) held that damages for wasted expenditure are not a separate measure or category of expectation damages but simply a method of calculating damages consistent with the ruling principle of contract law damages (Gordon J (at [51]), Edelman J et al (at [119]) and Jagot J (at [190])).
Gageler CJ (at [9]) declared wasted expenditure itself to be a category of damage. Gageler CJ (at [15]) and Gordon J (at [58]) considered that establishing damages for wasted expenditure is simple; a trial judge determines the quantum of damages based on findings as to the amounts actually spent in reliance of the contract (that are reasonable and not too remote) less any benefit or credit received.
But Edelman J et al (at [129]) and Jagot J (at [190]) considered that a presumption arises, or a “facilitation principle” applies, to assist the wronged party to establish that the expenditure is wasted expenditure. Edelman J et al (at [129] and [139]) explained that the facilitation principle arises in cases where the wrongdoer’s breach results in difficulty of proof of loss for the wronged party. Edelman J et al (at [168]) and Jagot J (at [191]) observed that, once the presumption is engaged, it can be rebutted by proving that the expenditure would have been equally wasted if the contract had been performed.
All their Honours concluded that the Company was entitled to receive damages in the amount of the expenditure wasted on constructing the hangar.
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