From: Katy Barnett <k.barnett@unimelb.edu.au>
Date: Monday, 27 February 2023 at 03:51
To: "obligations@uwo.ca" <obligations@uwo.ca>
Subject: New case from NSWCA on reliance damages

Those who are interested in contract damages may want to read the new NSWCA case, 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21, which concerns an award of reliance damages: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA//2023/21.html

The case arose when Cessnock City Council granted 123 259 932 Pty Ltd (at that point, called Cutty Sark) a lease over a part of Cessnock Airport, upon which Cutty Sark began building an aircraft hangar, from which it intended to operate a business conducting joy flights and advanced acrobatic training for pilots. It was proposed that the land be subdivided, for which council approval was necessary (Cessnock was also the approving authority). 

Cessnock promised to take all reasonable efforts to obtain permission to subdivide by 30 September 2011. In the meantime, it offered Cutty Sark a licence to occupy the land, upon which Cutty Sark constructed a hangar at a cost of over A$3.6mill. Cessnock then said it was not proceeding with the subdivision, and, as provided for by the agreement, purchased the hangar for $1. Cutty Sark was deregistered but revived for the purposes of the action. It claimed the expense of constructing the hangar. At first instance, the trial judge awarded it nominal damages only.

On appeal, the New South Wales Court of Appeal awarded it “reliance damages” for the expenditure wasted in construction of the hangar. Brereton JA delivered the primary judgment, with which McFarlan JA and Mitchelmore. JA agreed. 

The first question in a case like this is whether it is a situation where an award of reliance damages was appropriate. It was held that this was a case where reliance damages were appropriate. At [121]—[124], McFarlan JA said:

Cutty Sark having incurred expenditure in reliance on the Council’s promise to take all reasonable steps to procure registration of the Plan, and the Council having repudiated that obligation so as to render it impossible for Cutty Sark to receive the contractual benefits for which it had bargained, Cutty Sark’s expenditure was wasted in the relevant sense. That sufficed to engage the presumption. 

Moreover, even if Brennan J’s view that the presumption arises only if the defendant’s breach “denies, prevents or precludes the existence of circumstances which would have determined the value of the plaintiff’s contractual benefits” be preferred, that requirement was satisfied here. In Amann Aviation, Brennan J found that although the contract did not include a right of renewal, performance would have resulted in Amann acquiring a substantial commercial advantage in tendering for the next contract, and repudiation by the Commonwealth caused Amann to lose that advantage, the valuation of which was “a speculative exercise” such that it “cannot be quantified with any degree of accuracy”, such that the Commonwealth’s repudiation of the contract thus “preclude[d] the occurrence of the events which would have permitted in due time a true assessment of the value of the commercial advantage lost by reason of the repudiation”, thereby casting on the Commonwealth the onus of showing that had the contract been performed, the plaintiff would not have recouped its wasted expenditure. Because the Commonwealth had “not shown that the advantage was valueless or was of insufficient value when added to the contractual remuneration to provide sufficient net benefits to cover the expenditure incurred by Amann prior to rescission”,[146] that onus was not discharged.

Like Amann Aviation, the present is a case in which the Council’s non-performance of clause 4.2 “precluded the occurrence of the events which would have permitted in due time a true assessment of the value of the commercial advantage lost by reason of repudiation”. Because the Council did not try to procure registration of the Plan, it cannot be known what would have happened had it done so (although there must be a high degree of probability, given that it was also the consent authority, that the Plan would have been registered, and the 30-year lease granted). And it cannot be known whether, if the Plan had been registered, the commercial development would have proceeded, and what impact that would have had on the profitability of Cutty Sark’s businesses. Still less can it be known whether commercial development might have ensued at some later time during the currency of the 30-year lease, and what opportunities that would have presented for Cutty Sark to recoup its expenditure. The Council’s breach rendered impossible a true assessment of the probable outcome of performance of the contract and whether it would have enabled Cutty Sark at least to recoup its expenditure.

On either view of Amann Aviation, therefore, the presumption arose. It was not shown that the licence of the unsubdivided proposed lot had any offsetting value to be brought to account. The Council bore the burden of proving, if it could, that Cutty Sark’s expenditure would not have been recouped had the Council performed its promise. Ground 2 therefore succeeds.

The second question in a case such as this was whether the expenditure was incurred in performance of the contract. It was said that the expenditure was incurred in reliance upon the contract, and it was not necessary to establish that the expenditure was required by the contract. At [68] McFarlan JA said:

In my opinion, the reliance interest is not confined to expenditure required by the contract, or required to enable the plaintiff to perform its contractual obligations, but extends to any reasonable detrimental change of position by the promisee in reliance upon the defendant’s promise. It extends to any expenditure reasonably incurred in reliance on the defendant’s contractual promise. The references in Amann Aviation to expenditure in preparation for or in performance of a contract do not confine the doctrine to such expenditure: while such a description sufficed to capture the relevant expenditure in Amann Aviation, it would not capture that in McRae, where the plaintiff’s only obligation was to pay the purchase price, and the expenditure was incurred to enable the plaintiff to exploit the property it acquired under the contract.

The third question was whether the expense was reasonable. As outlined at [112], the damages were confined to the costs of construction of the hangar (not earlier costs of design and so forth). Most of the cost was incurred after the agreement with the council was executed, but the court followed Anglia Television v Reed at [113] to [115] in saying that pre-contractual expenditure would be recoverable if it was reasonably in the contemplation of the parties as likely to be wasted if the contract was broken.

The fourth question was whether the expenditure would have been recouped, had the contract been performed (according to the presumption outlined in McRae v Commonwealth Disposals Commission and Commonwealth v Amann Aviation Pty Ltd). One of the issues was that Cutty Sark’s business before the breach occurred had not been profitable. Ultimately, however, McFarlan JA decided at [135] that Cessnock could not prove that the business would not be profitable, and the presumption that Cutty Sark would have at least recouped its expenditure was not rebutted:

In those circumstances, it is impossible to be satisfied that by 2041, Cutty Sark would not have recouped its expenditure. No doubt whether it would have done so is speculative, but that is because non-performance by the Council of its obligations under clause 4.2 has rendered it impossible to tell. The fact that such a prospect is speculative, in circumstances where the Council bears the onus of showing that Cutty Sark would not have recovered its expenditure, does not assist the Council. As the presumption is not displaced merely by the circumstance that the benefits which the plaintiff would have obtained from performance by the defendant included the chance of some remote benefit and it is a matter of speculation whether it would have in fact arisen, the speculative nature of the benefit to Cutty Sark renders it impossible for the Commonwealth to rebut the Amann presumption.

I have to say, I was pleased they emphasised the wasted expenditure aspect, as I have always agreed with David McLauchlan that this is a better name than “reliance damages.”

Kind regards,

Katy