May 20, 2024

The High Court of Australia has released an important judgment clarifying when a party can recover wasted expenditure caused by breach of a contractual promise. In Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17, the High Court unanimously upheld an appeal from the NSW Court of Appeal, providing the most significant guidance on the issue since The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64.

 

Background

Cessnock City Council and 123 259 932 Pty Ltd (previously operating as Cutty Sark Holdings Pty Ltd) (Cutty Sark) entered into a 30-year agreement for lease in respect of a lot at Cessnock Airport. The lease agreement required the Council to (among other things) take all reasonable action to register a plan of subdivision by the Sunset Date, with the lease to commence immediately when registration occurred. In the meantime the Council granted Cutty Sark a licence to occupy the proposed lot. Cutty Sark constructed an aircraft hanger at a cost of approximately $3.7 million from which to operate a business.

In breach of the lease agreement, the Council failed to take reasonable action to register the plan of subdivision, meaning the 30-year lease was not granted to Cutty Sark. The lease agreement was terminated. Cutty Sark commenced proceedings against the Council seeking damages for its loss, being the wasted expenditure of $3.7 million incurred in reliance on the Council’s contractual promise.

 

Question on Appeal

The sole question for the High Court on appeal was whether Cutty Sark had established that its expenditure in constructing the aircraft hangar was wasted because of the Council’s breach of contract. This was in circumstances where Cutty Sark bears the legal onus of proving, for the purpose of claiming damages, the position it would have been in had the contract been performed; and where the Council’s breach caused uncertainty about what that position would have been, including whether Cutty Sark would have earned enough from its business to recover the $3.7 million.

The NSW Supreme Court awarded Cutty Sark only nominal damages, finding that in the absence of the usual proof regarding the position Cutty Sark would have been in had the contract been performed, the Court could only allow it to recover damages based on wasted expenditure if the Council’s breach made it impossible to calculate damages on the usual basis.

The NSW Court of Appeal disagreed. It found there was a presumption that Cutty Sark’s wasted expenditure caused by the Council’s breach of contract could be recovered. This is a presumption that could be rebutted by the Council if it demonstrated the wasted expenditure would still have been wasted if there was no breach of contract. For example, proving that Cutty Sark would not have obtained sufficient revenue to recover its investment even if the Council had met the relevant conditions and subdivided the land. The Council did not prove this and the Court of Appeal awarded Cutty Sark $6,154,459.40 (including interest).

 

High Court Decision  

The High Court unanimously dismissed the appeal, and upheld the Court of Appeal’s award.

In the leading judgment, Edelman, Steward, Gleeson and Beech-Jones JJ confirmed the key principles and clarified how a plaintiff might prove the position it would have been in if the contract had been performed, where it has incurred expenditure in reliance on a contractual obligation, and the breach of that obligation means the expenditure is wasted. The judgment acknowledged that the High Court’s earlier decision in The Commonwealth v Amann Aviation Pty Ltd, which related to similar issues, did not contain a clear statement of principle on this point.

The central part of the joint judgment’s clarification is the finding of a ‘facilitation principle’ regarding the legal burden of proof that the plaintiff bears. In doing so the joint judgment confirmed several key principles:

  •    The goal of damages for breach of contract is to put the plaintiff in the same position as if the contract had not been breached, that is, if it had been performed.
  •    A plaintiff seeking to claim damages arising from a breach of contract bears the onus of proving its loss was caused by the defendant’s breach.
  •    However, in some circumstances the common law will assist the plaintiff to discharge this onus. Where the defendant’s breach of contract causes uncertainty and difficulty of proof of loss for the plaintiff, who has incurred expenditure in reliance on the performance of the obligation that was breached, the plaintiff will be assisted by reasonable inferences in its favour. The joint judgment described this as an “evidential ‘benefit of the doubt’” that the plaintiff would have recovered its reasonable expenditure, and referred to it as a facilitation principle.
  •    The facilitation principle acts to give the plaintiff a “fair wind” to establish its expenditure would have been recovered, but not a “free ride”. How strong the “wind” is, that is how far the facilitation principle will assist the plaintiff, will depend on the uncertainty caused by the defendant’s breach and must take into account all the evidence. This will include any evidence from the defendant that the expenditure would have been wasted even if it had not breached the relevant obligation.

The three separate judgments of Gordon J, Gageler CJ and Jagot J reached the same conclusion as Edelman, Steward, Gleeson and Beech-Jones JJ, on the basis of slightly different reasoning in each case.

The joint judgment noted that the Council had not put forward a case in the alternative that Cutty Sark would have recovered only part of its expenditure if the contract had been performed. Accordingly, with the benefit of the facilitation principle, the High Court found the Court of Appeal was correct to conclude Cutty Sark had established its entitlement.

While the High Court’s decision confirms how the facilitation principle will apply in these circumstances, contracting parties will no doubt be looking on closely to see how the “fair wind” assists plaintiffs in future.

The full decision can be found here.

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