Damages for ‘loss of profit’ or ‘expectation’ damages

The case of 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21 (123 v Cessnock) serves as a timely reminder that expectation damages can be awarded for non-performance by a Principal. 123 v Cessnock also deals with the important presumptions of McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 and Commonwealth v Amann Aviation.

Background

The Respondent (Cessnock City Council (Council)) entered into an agreement with the Appellant (123 259 932 Pty Limited, formerly Cutty Sark Holdings Pty Limited (Cutty Sark) for Council to grant Cutty Sark a 30-year lease for a lot as part of a proposed subdivision at Cessnock Airport (Agreement).

Under the Agreement, Council agreed to take all reasonable action to apply for and register the plan of subdivision (Plan) by the sunset date. It should be noted that Council was the consent authority for this Plan. The Agreement stipulated that the lease would be subject to the registration of the Plan and was intended to commence from the date of registration of the Plan. In the interim, Council granted Cutty Sark a licence to commence construction of the hangar at a cost in excess of $3 million.

Part of Council’s obligation to take all reasonable action to apply for and obtain registration of the Plan required Council to take all reasonable action to fulfil the conditions of the development consent, including that the proposed lots be connected to Hunter Water Corporation’s reticulated sewerage system. Council determined that it would not obtain the $1.3 million required to do so. Consequently, the Plan was not registered and the proposed lease under the Agreement was never granted.

Decision at first instance

The judge at first instance held that Council breached the Agreement as it did not take all reasonable action to apply for and obtain registration of the Plan and Cutty Sark was entitled to nominal damages of $1.

However, it was also held that the presumption referred to in the High Court decisions McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (McRae) and Commonwealth v Amann Aviation (Amann) did not apply and therefore Cutty Sark was not entitled to reliance damages it incurred constructing the hangar.

Cutty Sark appealed this decision, arguing that it should have been awarded reliance damages that more accurately represented the cost it incurred constructing the hangar.

Summary of decision of New South Wales Court of Appeal

The New South Wales Court of Appeal set aside the judgment in first instance and awarded Cutty Sark damages for the amount of $3,697,234.41 plus interest. The Court also ordered Council to pay all Cutty sark’s costs of the proceeding at first instance and on appeal.

The Court made the following determinations on the following grounds of appeal.

1. Did the presumption referred to in McRae and Amann Aviation arise (Grounds 1, 2 and 3);
   • The presumption that that the plaintiff would recover their expenditure had the contract been fully performed (referred to in McRae and Amman Aviation) did arise. Ground 1 succeeded.
   • Council had the burden of proving that Cutty Sark’s expenditure would not have been recouped had Council performed its promise. Ground 2 succeeded.
   • The fact that Council did not promise to develop the airport is not relevant. Cutty Sark was entitled to rely on Council to perform its contractual obligations to take all reasonable action to apply for and obtain registration of the Plan. Therefore, ground 3 succeeded.
2. If so, was it rebutted (Ground 5);
   • Even though the outcome of what would have transpired if Council had performed its obligations under the Agreement was merely speculative, it was highly likely that the Plan would have been registered, given that Council was the consent authority. Further, there was a prospect of the airport being further developed, which would have produced a more conducive commercial environment for Cutty Sark’s business operations. As such, it is likely that Cutty Sark would have recouped its expenditure at some point over the 30 year lease. Ground 5 succeeded.
3. Was recovery precluded in any event by the rule in Hadley v Baxendale (Ground 4); and
   • It was clearly contemplated by both parties that Cutty Sark would incur substantial expenditure in constructing the hangar and that non-performance by Council of its obligations under the Agreement would result in that expenditure being wasted.
   • The fact that the Council did not promise to develop the airport does not mean that Cutty Sark did not incur expenditure on construction of the hangar in reliance on the Council’s promise to take all reasonable steps to procure registration of the Plan. Ground 4 succeeded.
4. What was the quantum of Cutty Sark’s expenditure (Ground 6).
   • Cutty Sark incurred expenditure of $3,697,234.41 on construction of the hangar. Ground 6 succeeded.

Key takeaways

1. Where a contractor has incurred costs relying on a contractual promise made by a principal and those costs are wasted because of the principal’s non-performance, the contractor may recover reliance damages, even where no loss of profits has been claimed or established. This is not defeated by demonstrating that the benefits that the contractor would have obtained from performance are remote or speculative. This presumption applies to the extent that the contractor shows that the principal would not have recouped its expenditure had the contract been performed.
2. In contrast to obiter dicta in Amman Aviation, a contractor is not required to establish that the nature of the principal’s breach made it impossible to prove expectation damages before it can be awarded reliance damages.
3. Recoverable expenditure is not restricted to expenditure incurred under or required by the contract. It extends to circumstances where a contractor’s position has changed detrimentally due to the contractor acting in reliance on the principal’s promise. It can also include pre-contractual expenditure if it was reasonably contemplated by the parties that it would be wasted if the contract was not performed.

This article was written by Paul Graham, Partner, Chris Kipouridis, Associate, and Sophie Pinkus, Solicitor.