When reliance damages can be recovered for breach of contract

123 259 932 Pty Limited v Cessnock City Council [2023] NSWCA 21

*Since this article was published, Cessnock City Council has been granted special leave to appeal to the High Court of Australia. It is expected that the appeal will be heard and determined in 2024.

Summary

A plaintiff seeking damages for breach of contract will usually claim ‘loss of profit’ or ‘expectation’ damages (i.e. to recover the contractual benefits it would have received had the contract been performed). However, in 123 259 932 Pty Limited v Cessnock City Council [2023] NSWCA 21, the New South Wales Court of Appeal (NSWCA) confirmed that:

• a plaintiff may recover ‘reliance’ damages (i.e. costs incurred in reliance on a contractual promise made by a defendant and wasted because of the defendant’s non-performance) even where no loss of profits has been claimed or established;
• contrary to earlier obiter dicta (see, eg: Commonwealth v Amann Aviation (1991) 174 CLR 64 at 106-107 (Brennan J)), a plaintiff is not required to establish that the nature of the defendant’s breach made it impossible to prove expectation damages before it can be awarded reliance damages;
• recoverable expenditure is not limited to expenditure under or required by the contract. It extends (subject to the rule in Hadley v Baxendale (1854) 9 Exch 341) to any detrimental change of position by the plaintiff in reliance upon the defendant’s promise and can include pre-contractual expenditure if it was reasonably in the contemplation of the parties as likely to be wasted if the contract was broken; and
• the presumption that reliance damages are recoverable is not displaced by merely demonstrating that, due to the nature of the defendant’s breach, the benefits that the plaintiff would have obtained from performance are remote or speculative.

Background

The respondent (Cessnock City Council) promised to grant the appellant (123 259 932 Pty Limited, formerly Cutty Sark Holdings Pty Limited, (Cutty Sark)) a lease of part of Cessnock Airport, which was to become a lot in a proposed subdivision (the Agreement). The lease would be for a thirty-year term from registration of the subdivision plan (the Plan). Cutty Sark intended to construct an aircraft hangar on the lot from which it would operate a flying business.

The obligation to grant the lease was subject to registration of the Plan. However, under the Agreement, the Council promised to take all reasonable action to apply for and register the Plan by the sunset date, and in the meantime, granted Cutty Sark a licence to occupy the proposed lot. Consequently, Cutty Sark constructed the hangar at a cost in excess of $3 million.

Decision at first instance

The Council was found to have breached the Agreement by failing to take all reasonable action to apply for and obtain registration of the Plan, with the consequence that the proposed lease was never granted. However, the primary judge held that Cutty Sark was not entitled to reliance damages for the cost of constructing the hangar. This was primarily because her Honour found 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) (i.e. that the plaintiff would at least have recovered their expenditure had the contract been fully performed) did not apply.

Decision of the NSWCA

On appeal, the key issues were:

1. whether the presumption referred to in McRae and Amann arose;
2. if the presumption arose, whether it was rebutted by the Council; and
3. whether the reliance damages sought were too remote.

Justice Brereton (with whom Macfarlan and Mitchelmore JJA agreed) allowed the appeal and awarded Cutty Sark its costs of constructing the hangar and interest.

Did the presumption referred to in McRae and Amann arise?

Following close review of the decisions McRae and Amann and more recent authorities^,[1] Brereton JA held that where a plaintiff does not prove (nor endeavour to prove) expectation damages, but claims reliance damages for wasted expenditure, it will have the benefit of a rebuttable presumption that it would have at least recovered that expenditure had the promise been performed, provided it can prove the expenditure was incurred in reliance on the defendant’s contractual promise: [96], [161]-[162].

Brereton JA observed that in Amman, Brennan J held 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” (i.e., expectation loss).^[2] However, Brereton JA found that the predominant view in Amann^[3] and a subsequent NSWCA decision^[4] did not support this aspect of Brennan J’s reasoning and declined to follow that approach:^[5] [52]-[56], [87]-[93].

In the present case, Brereton JA found the presumption arose. Although Cutty Sark did not seek to prove it had suffered any expectation loss, it did prove that it had incurred expenditure in reliance on the Council’s promise to take all reasonable action to procure registration of the Plan. This expenditure was regarded as wasted in the relevant sense when the Council failed to perform its obligation. Cutty Sark was not required to prove any further causative requirement. Further, construction costs incurred pre-contract were presumed to be recoverable because it was plain when the contract was made that the expenditure would be wasted if the Council’s promise was not performed: [72], [113]-[115], [161], [165].

If the presumption arose, was it rebutted?

Brereton JA found the Council did not rebut the presumption because it was impossible to be satisfied that Cutty Sark would not have recouped its expenditure over the thirty-year lease term had the Agreement been performed: [135]-[140], [167]. His Honour observed that:

• the nature of the Council’s breach (i.e. its non-performance) made Cutty Sark’s prospect of recoupment speculative, but this did not assist the Council to rebut the presumption; and
• the Court was permitted to consider non-contractual benefits that may have accrued to Cutty Sark had the Agreement been performed which were reasonably in the contemplation of the parties when the Agreement was made.

Were the reliance damages claimed too remote?

Brereton JA found that Cutty Sark’s expenditure fell within the second limb of Hadley v Baxendale because the parties ought to have recognised, when the Agreement was formed, that expenditure had been and/or would be incurred in reliance on the Council’s promise, which would be wasted if the Council did not perform: [144], [148]-[149], [168].

[1] Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234.

[2] Amann at 106-107 (Brennan J). Further, the dissenting judgment of McHugh J (at 166-167) also supported the proposition that reliance damages are recoverable only if the plaintiff first proves that the defendant’s breach has made it impossible to prove the outcome of the contract at 166-167.

[3] Amman at 81-89 (Mason CJ and Dawson J), 126-127 (Deane J), 142-143 (Toohey J) and 155-157 (Gaurdon J). However, the judgments of Toohey J and Gaudron J found that the presumption cast an evidentiary rather than legal onus on the defendant.

[4] Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234 at [29]-[31].

[5] However, his Honour did find (at [122]) that Brennan J’s requirement would in any event be satisfied in the present case.