Fine Tuning Costs for Breach of Contract

In the recent decision of PKT Technologies Pty Ltd (formerly known as Fairlight.Au Pty Ltd) v Peter Vogel Instruments Pty Ltd [2019] FCAFC 216, the Full Court of the Federal Court of Australia considered (amongst other things):

1. whether it is necessary to elect between reliance damages (costs incurred as a result of the breach of contract) and expectation damages (the benefit you would have received if the other party had not breached the contract); and
2. whether it is possible to recover costs incurred while attempting to mitigate loss or damage before a contract was repudiated.

Mr Vogel designed the world’s first digital music synthesiser in the late 1970s, the Fairlight CMI. In 2009, Mr Vogel established a new company, Fairlight Instruments Pty Ltd, later renamed Peter Vogel Instruments Pty Ltd (PVI), as a vehicle for developing a 30th anniversary commemorative version of his synthesiser. PVI and PKT Technologies Pty Ltd (Fairlight) entered into an agreement (Agreement) pursuant to which PVI agreed to produce new versions of the Fairlight CMI (CMI-30A) and Fairlight agreed to provide software, core components and a licence to use its trademark.

Following execution of the Agreement, PVI began selling phone apps under the Fairlight trade mark. Fairlight contended this breached the trade mark licence issued to PVI which did not include phone apps. Consequently, Fairlight issued PVI a letter purporting to terminate the Agreement and withdraw the trade mark licence.

At trial, the judge found that PVI had breached its trade mark licence by using the Fairlight name to market its phone apps and that Fairlight had validly terminated the Agreement. PVI appealed and the Full Court found that although PVI had breached Fairlight’s trade mark, this did not release Fairlight from all of its contractual obligations. Of note, the Full Court held that Fairlight had not validly terminated the Agreement and accordingly, PVI was entitled to damages.

At the remittal hearing concerning the quantum of damages, the judge rejected PVI’s claim for expectation damages on the basis that PVI was unlikely to have made a profit from the Agreement. Rather, his Honour found that PVI was entitled to reliance damages and costs incurred in mitigating its losses.

Fairlight appealed the judge’s finding in respect of damages on the basis that PVI had not established it had suffered loss and damage in reliance on the contract and that the award of mitigation damages included sums spent prior to Fairlight repudiating the contract. PVI cross-appealed in respect of the judge’s finding that it was unlikely to have made a profit on the Agreement.

Stewart J, citing the High Court decision of TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130, found that a party is not bound to elect between claiming:

1. for expenditure uselessly incurred as a result of a breach of contract; and
2. loss of the profits it would have earned had the contract been performed.

His Honour also rejected PVI’s cross-appeal as he agreed that PVI’s projected profits were undermined by actual performance prior to the repudiation.

In relation to the issue of mitigation damages, Stewart J found that costs incurred in mitigating loss or damage cannot logically be incurred before the contract is repudiated and any costs incurred prior to the repudiation were not recoverable.

The decision illustrates the factors courts will consider when assessing the type and quantum of damages arising from a breach of contract.

The full decision may be found here.