Contract Law Update 2022: Damages

Contract law update 2022

A party in breach of contract is obliged to pay damages so as to put the 'innocent' party in the same position as if the contract had been performed. This test is simple to state but can be complex to apply where it is not factually possible to put a party in exactly the same position. In Renown Corporation Pty Ltd v SEMF Pty Ltd¹, SEMF had to replace a defective software package that it purchased from the appellant. The issues considered by the court included:

the date at which damages should be assessed;
whether an allowance should be made for 'betterment', in so far as the replacement software package was superior to the promised software package; and
whether the cost of employees' time could be recovered.

The first issue arose because the courts have often stated that there is a 'usual principle' that damages are assessed as at the date of breach. In this case, SEMF sought to recover its actual costs of purchasing replacement software (some time after the breach), and put on no evidence as to the loss at the date of breach.

As noted in our 2019 Contract Law Update, the rule that damages should be assessed as at the date of breach has so many exceptions that it is doubtful whether it should be called a rule at all. In the present case, the court drew an analogy with construction contracts, where it is well accepted that the quantum of damages can be measured by the actual (or anticipated) rectification costs, rather than eg the difference, at the date of breach, between the value of the work actually performed and the work that should have been performed. Applying that analogy, the court upheld the right of SEMF to recover costs of purchasing a replacement software system as the most reliable means for rectifying the defects.

The second issue considered by the court was whether an allowance should be made for 'betterment' in so far as the replacement software system was superior to that contractually promised.

The court applied earlier decisions, to note that an allowance for betterment should be made where:

a plaintiff chooses to acquire a 'better' product to replace that contractually promised; or
if there is no alternative but to acquire a better replacement, an allowance should still be made if the benefit is not too remote and is able to be quantified.

On the facts, neither applied in this case.

The third issue considered by the court – and, again, one that commonly arises – was whether the plaintiff could recover the costs of employees' time that resulted from the breach of contract. Although generally the costs of employees' time is not recoverable, the court upheld an allowance for the costs of a casual employee whose work solely related to the problems caused by the breach of contract.

Another common issue considered by the NSW Court of Appeal during 2022 was the circumstances in which a plaintiff can recover mitigation costs. In Edwin Davey Pty Ltd v Boulos Holdings Pty Ltd², the court followed a recent decision of the High Court³ to the effect that:

mitigation costs can be recovered in accordance with the usual principles of causation; and
the defendant bears the onus of proving that steps taken to reduce a loss were incurred unreasonably (and therefore not caused by the defendant's breach).

In this case, the court held, applying the test in March v Stramare⁴, that the mitigation costs (paying out the vendor's mortgagee) were 'as a matter of ordinary common sense and experience' caused by the (cross-)defendant's breach. As they were also incurred reasonably, they were recoverable as mitigation costs.

If a party to a contract fails to pay a fixed sum of money, does the intended recipient have an action in debt, for breach of contract, or both? This issue was considered by the Victorian Court of Appeal in Tran v Hoang⁵, which involved the added complications of the payment being a gift in a deed (although the court confirmed that the same principles of interpretation apply to contracts and deeds). Somewhat encouragingly, the court stated that, due to the ability to bring a contractual claim: the question whether the promise to pay the money amounted to a debt is largely of academic interest only.⁶ Nevertheless, the safer course will often be to plead both causes of action.

Availability of mitigation damages – relationship between causation and mitigation of loss.

In this case, the NSW Court of Appeal considered whether the appellant could recover damages for the cost of action taken to mitigate loss. The court held that it was reasonable for a purchaser of property to mitigate its potential losses by incurring a fixed contingent liability to the outgoing mortgagee, in exchange for the discharge of a mortgage over the property. It also held that it was reasonable to incur that contingent liability to mitigate potentially greater losses.

This case demonstrates that mitigation cannot be analysed separately from causation in breach of contract cases, and that the reasonableness of action taken in mitigation will depend on a close analysis of the potential outcomes of a breach, assessed at the time of breach

The plaintiff, Boulos Holdings Pty Ltd, sold a property in Pyrmont to Edwin Davey Pty Ltd for $10.8 million. The contract of sale provided for Edwin Davey to pay a deposit of $2.8 million to Boulos by 31 December 2010. On 6 January 2011, the completion date was extended to 23 August 2012. On 7 January 2011, Edwin Davey paid an additional $1 million of the purchase price. Boulos failed to complete by the fixed date and had not obtained a discharge of mortgage from Perpetual. Receivers were appointed to Boulos in June 2012, triggering an event of default on the mortgage. In August 2012, Boulos failed to repay the Perpetual loan, triggering a further event of default.

On 18 September 2012, Edwin Davey entered a payment deed to pay $500,000 to Perpetual to discharge the mortgage over the purchase property, if there were a shortfall on the sale of the two properties. The sale completed on 18 September 2012. After the sale, and the sale of the second secured property, it eventuated that there was a total shortfall of $1,536,630.79 on Boulos's debt to Perpetual.

Boulos brought proceedings against Edwin Davey in the NSW Supreme Court under a special condition of the contract and was awarded $954,864.11, which was not appealed. Edwin Davey cross-claimed for damages for breach of contract and, in the alternative, unjust enrichment based on the payment of $500,000 to discharge the Perpetual mortgage. The NSW Supreme Court dismissed Edwin Davey's cross-claim, holding that its steps to mitigate were not reasonable, as it had not exhausted other avenues to recover debts under the loan facility. The primary judge also found that Edwin Davey's voluntary payment to Perpetual to discharge the mortgage did not naturally flow from Boulos's failure to complete. The Court of Appeal overturned the primary judgment and awarded Edwin Davey $500,000.

The two contested issues for the court to determine were whether:

damages were limited to compensation for Boulos's delay in completion; and
in the alternative that Boulos's breach was a persisting failure and inability to convey clear title of the property, Edwin Davey's payment of the contingent liability to Perpetual was reasonable in mitigation.

Causation and mitigation

Justice Gleeson delivered the court's judgment. His Honour found at [53] that a 'loss occasioned by a breach which is attributable to a failure to mitigate can be regarded as an aspect of causation'. The court overturned the primary judge's finding that a voluntary payment broke the chain of causation between Boulos's breach and Edwin Davey's loss. Justice Gleeson noted that, because it is in the nature of mitigating action that costs are incurred voluntarily, voluntary payment could not break the chain of causation.

Edwin Davey adduced evidence that if it had not incurred the contingent liability of $500,000 to Perpetual, the greater loss it would have suffered was the loss of the property and the $3.8 million deposit it had paid to Boulos.

On appeal, Boulos argued that this loss was uncertain at the time Edwin Davey took steps in mitigation and that it should have taken a 'wait and see' approach before making arrangements with Perpetual to discharge the mortgage. Justice Gleeson rejected this argument for four reasons:

Boulos had failed to obtain Perpetual's consent to the contract of sale and failed to pass on Edwin Davey's $3.8 million deposit to Perpetual as required by its mortgage;
Boulos was in receivership from August 2012 and could not pay Perpetual more than the balance of the purchase price under the contract, which fell significantly below the total sum secured by the property;
Perpetual informed Edwin Davey it would not discharge the mortgage without an undertaking that it would pay up to $500,000 for the shortfall; and
without the payment of $500,000, Perpetual would not have allowed the settlement to go ahead.

Justice Gleeson found that Boulos's failure to complete the contract gave rise to the prospect that Edwin Davey would lose both the property and the total of $3.8 million paid as a deposit, which his Honour found to constitute a clear causative link. Because of the alternative loss to Edwin Davey that would have eventuated but for its payment in in mitigation of $500,000, the chain of causation between Boulos's delay and Edwin Davey's loss was not broken.

Availability of mitigation loss – reasonableness of action in mitigation

Relying on the recent decision of the High Court in Arsalan v Rixon (2021) 395 ALR 390, Justice Gleeson considered that the applicable principles of mitigation of loss in Australia are:

where a plaintiff acts to attempt to reduce a loss, the onus of proof shifts to the defendant to show that steps in mitigation were unreasonable; and
unless shown to be unreasonable, costs incurred in mitigation caused by the defendant's wrongdoing are recoverable as a head of damage.

Justice Gleeson found at [89] that the reasonableness of Edwin Davey's actions was 'to be assessed in the light of the circumstances at the time the mitigating action was taken'. Boulos argued that it was unreasonable for Edwin Davey not to take title of the property subject to the Perpetual mortgage. However, Justice Gleeson identified that this course of action could have resulted in a greater liability for Edwin Davey than the $500,000 it paid and that this was in the contemplation of the parties at the time action in mitigation was taken.

His Honour further considered that two factors in Edwin Davey's payment deed to Perpetual indicated reasonableness:

the liability was contingent, in that Edwin Davey would not need to pay anything to Perpetual if Perpetual successfully recovered Boulos's debt from the sale of the two properties; and
the liability was capped at $500,000, substantially below Edwin Davey's potential total liability.

Justice Gleeson found that Boulos failed to discharge its onus to show that the payment deed was not a reasonable step in mitigation, and that Edwin Davey's loss was not so remote that it could not be recovered.

As a result, the court awarded Edwin Davey $500,000 and pre-judgment interest.

Damages for contract for supply and installation of a software system – whether damages are assessed at the date of trial or date of breach – whether there was betterment arising from the replacement of the software system – whether damages includes the calculation of a staff engaged substantially to resolve the issues arising from the software system.

In this case, the NSW Court of Appeal considered:

whether damages should be assessed at the date of breach or at the date of trial, with regard to the breach of a contract for the supply and installation of a software system;
whether replacement of the software system was the 'efficient and cost-effective' way to remedy the injured party, and damages should be awarded for the cost;
when betterment should be considered in the assessment of damages; and
whether employee costs form a component of damages.

The court held that the time for which damages is payable is dependent on the facts of the case. In this case, it awarded damages that were actually incurred by the respondent at the date of the trial. The appellant had been granted an extended period of time by the respondent to rectify the issue and concluded that it could not rectify the issue. The court found that the most practical, cost-effective and efficient solution was for the appellant to replace the relevant software. It did not take into account betterment, as the respondent did not seek a more valuable asset than the one being replaced and would have received the same newer system if the appellant fulfilled the original contract. In addition, the appellant was required to pay the cost of the staff member engaged to fix the defective software system, as the employee was hired on a casual basis solely to fix the issue.

The decision is important in taking the same approach in awarding damages for defective software as taken when awarding damages for defective building work, which is to allow damages to be determined as at the date of the trial (often after rectification work has been performed), rather than the date of the breach. Additionally, this case reinforces that damages may be recovered if employees are specifically engaged to respond to a contractual breach.

SEMF Pty Ltd (SEMF) (an engineering and project management consultancy) contracted with Renown Corporation Pty Ltd (Renown) to supply and install a software package (the Renown system). Once installed, the Renown system was defective, as it did not provide the functionality promised.

SEMF sued for damages, claiming:

costs of replacing the Renown System;
costs incurred in endeavouring to remediate the effects; and
costs for time wasted by employees in dealing with the effects.

At first instance, Justice Ball awarded damages to SEMF in the sum of $662,344, which comprised :

$631,894 for the cost of installing the new system (minus the $52,218 for maintenance payable to Microsoft);
$84,744 paid to SEMF for a staff member engaged on working on the problems with the Renown system;
$49,239 for additional licences and services that are no longer in dispute
less $51,315 in favour of Renown for unpaid invoices.

On appeal, the appellant, Renown, argued that its first ground of appeal with regard to point 1 above was that:

damages should be assessed at the date of the breach;
there was no evidence adducing the cost of rectifying the system at the date of the breach; and
SEMF had failed to prove that it had suffered loss so as to be entitled to recover any damages;
alternatively, a substantial discount should be provided for the betterment of the current system.

On its second ground of appeal, the appellant argued in response to point 2 above, the relevant staff member was not specifically engaged to work on solutions for the Renown system's defect.

The court unanimously dismissed the appeal, with Justice Brereton delivering the reasons for the judgment.

On the first ground of appeal, the court provided that the relevant principle to calculate damages is the 'reasonable cost of rectification'. The relevant calculation according to the court is:

if costs have been incurred by the date of the trial, then the reasonable cost of rectification is when costs were actually incurred, so long as they are not unreasonable; or
if costs have not been incurred, then the reasonable cost of rectification is what is proved at trial, unless it is established that by not conducting rectification works earlier, the plaintiff (or, in this case, the respondent) failed to mitigate its loss.

Justice Brereton asserted that SEMF did not unreasonably fail to mitigate its damages. In fact, it was Renown that ultimately concluded it could not fix the problems, despite being granted an extended period of time by SEMF to fix the Renown System's issues.

Since there was no unreasonable delay on the part of SEMF to rectify the issues associated with the Renown system, his Honour asserted that the reasonable cost of rectification was at the time of the trial. In addition, his Honour agreed with Justice Ball and stated that the only practical solution to rectify the issue was to replace the Renown system. Evidence was provided by experts that it would be more efficient to replace the existing system.

In the alternative submission to its first ground of appeal, his Honour agreed with Justice Ball that no betterment occurred. The Court of Appeal held that the primary judge correctly applied the principle from Tyco Australia Pty Ltd v Optus Networks Pty Ltd & Ors [2004] NSWCA 333, which identifies that there are two circumstances where an allowance for betterment would be made:

when a plaintiff chooses to acquire a more valuable asset than the one being replaced; or
where there is no alternative available to the plaintiff other than to acquire a more valuable asset, there is a benefit to the plaintiff that is not remote in time or speculative, and can be quantified.

However, in this case, his Honour provided that the above categories did not apply. SEMF did not choose a more valuable asset, and, subject to the payment of maintenance fees prescribed under the original contract, SEMF would have been entitled to the new system upgrade

On the second ground of appeal, the court found that, although the employee was initially hired for other projects, he was subsequently engaged on a casual basis to resolve the Renown system's issues. During the time of his casual employment, the employee solely focused on rectifying the Renown system's issues. In addition, his Honour stated that, as a casual employee, he did not fall in the same category as others who may have merely diverted their work and were not specifically engaged to work on solutions relating to the Renown system.

Whether claim to recover money can be brought in debt, for breach of contract or both.

In this case, the Victorian Court of Appeal considered a deed that contained a term stating that a father 'shall expressly and irrevocably gift' $300,000 to his son. The father did not make any payment to his son under the deed and subsequently died. The son brought an action for recovery of the money. The question for the court was whether the deed created an actionable debt, a promise to make a gift at a future time, or a promise to pay money that was immediately binding and therefore recoverable under a claim for breach of contract.

The court unanimously held that the deed imposed an immediately binding obligation on the father to pay his son the specified $300,0000, subject only to the allowance within the deed for the payment to be made by 28 July 2017. Therefore, the sum was recovered as damages for breach of contract.

This case is important commentary on the fact that claims to recover certain sums of money that would have historically been brought as an action in debt are also recoverable as claims for breach of contract.

This case deals with a son's claim for recovery of $300,000 against the executor of his late father's estate. Kheim Tran (the father) had three sons: Tony, Anthony and John. The father had been ill with leukaemia from 2007, and was in and out of hospital from 2016. Tony provided emotional and financial support to his younger brothers. Tony and Anthony appeared to be on good terms, though both were under the impression that they were 'owed' by the father.

In January 2017, Tony and his father had a significant falling-out, purportedly in relation to what Tony understood to be his interest in a house owned by the father, which Anthony was living in (the property). Separately, the father failed in a proceeding in the Victorian Civil and Administrative Tribunal to have Anthony vacate the property. Anthony had also demanded payment from the father to have him vacate the property. Tony and his father made peace after their disagreement, resulting in the father offering to give him $300,000.

On 6 June 2017, the father entered into a tripartite deed with Tony and Anthony. The deed imposed the following obligations:

the father was to pay his son Tony $300,000;
Anthony was to vacate the property once Tony received the $300,000; and
Tony was to repay the $300,000 to the father if Anthony did not vacate the property.

Anthony vacated the house, but the father died about a year after making the deed, without paying Tony the $300,000. Tony brought an action against the father's executor for recovery of the money, which failed at first instance, and he was ordered to pay costs 'on a trustee basis'.

Deed

1. Transfer of Monies

(a) The [father] shall expressly and irrevocably gift [Tony] ... an amount of $300,000 (Payment) by Wednesday, 26 [Friday 28] July 2017.

(b) Tony must immediately provide a written receipt to the [father] and [Anthony] once the Payment has been received and cleared in his bank account.

(c) [Anthony], upon notification of receipt of Payment from Tony must do all acts and things necessary to vacate the [Property] by Monday, 31 [Friday 28] July 2017.

(d) The [father] agrees [Anthony] may reside at the [Property] indefinitely if the Payment is not received by Tony by Wednesday, 26 July 2017.

(e) Tony must return the Payment to the [father] should [Anthony] not vacate the [Property] by Monday, 31 July 2017.

(f) The [father] and [Anthony] agree the Payment is an irrevocable gift to Tony for use at his discretion.

(g) The [father] and [Anthony] agree to [sic] that Tony shall not be liable for any costs or damages arising from non-performance of obligations by the [father] or [Anthony] under this Deed.

The court unanimously upheld Tony's appeal, finding that the deed created a promise to pay money that was immediately binding on the father, making the $300,000 recoverable as damages for breach of contract. The court awarded $300,000 with interest and costs.

Before addressing the case on appeal, it is useful to understand the trial judge's reasons for rejecting Tony's application to recover the $300,000 at first instance. The trial judge characterised the purpose of the deed as resolving two issues: first, the father's dispute with Tony, by providing a gift for him; and, second, addressing Anthony's occupation of the property.

The trial judge held:

there was no implied term that Tony should use reasonable endeavours to cause Anthony to vacate the property as consideration for the father's payment of $300,000. Her Honour considered the characterisation of clause 1(a) of the deed as a covenant for the father to gift Tony $300,000 to be more in line with the contextual purpose of the deed;
that because the father didn't immediately attempt to gift the $300,000 to Tony, his promise to gift was not immediately dispositive but, rather, a promise of future action. Therefore, the gift could not be specifically enforced at equity unless supported by consideration. Rejecting Tony's argument that he had provided consideration through Anthony's vacating of the property, the judge held that '[Tony] is considered a volunteer at equity';
that Tony's 'common law rights' remained, as the deed did not contain any clear words excluding those rights to pursue damages for breach of contract. However, as Tony had made no submissions as to how damages should be assessed, the judge declined to award any damages;
that Tony did not detrimentally rely on an assumption that the gift would be binding, and was therefore unable to access promissory estoppel;
the trial judge accepted that Tony had not taken unconscientious advantage of his father's ill health in procuring the deed; and
took the view that the text of the deed precluded any finding that Tony was to hold any money paid by his father on trust for Anthony.

Appeal

Tony's substantive grounds of appeal can be summarised as:

first, that the trial judge erred by implicitly treating the deed as effecting an incomplete gift at common law and that Tony required the intervention of equity; and
second, that the trial judge failed to analyse and determine the claim as a common law claim for a debt.

Tony submitted that his father's promise to pay $300,000 with the deed created an enforceable debt for $300,000; or alternatively a binding contractual promise to pay that amount, the breach of which would result in damages for the sum of $300,000. The respondent accepted that Tony did not require the equitable remedy of specific performance of the contract, but denied that the deed created a debt or contained a promise to pay money. Instead, the respondent argued, the deed contained a covenant to make a gift of money at a future date, breach of which could be remedied by damages at common law; however, no damages were sought, proven or assessed.

Clause 1(a) – immediate and binding obligation, or promise to make a future gift?

The court rejected the trial judge's construction of clause 1(a) as a statement of intention or promise to make a future gift of $300,000, finding it at odds with the text, context, purpose and object of the deed. The court held that, viewed objectively, the text of the deed created an immediate and binding obligation on the father to give Tony $300,000 by 28 July 2017. The court found this interpretation was consistent with the contextual facts known to the parties, and the objects and purposes of the deed. Noting the deed's tripartite nature, the court found that although payment of the $300,000 was not consideration for Anthony to leave the house, it was intended to operate as an incentive or motivation to do so, as one of the purposes of the deed was procuring that departure.

The respondent conceded that if the proper construction of clause 1(a) was as a simple promise to pay Tony $300,000, the sum would be recoverable by an action for debt. The court's finding on the construction of clause 1(a), together with the trial judge's finding that Tony's common law rights remained, effectively resolved the appeal in favour of the applicant, as there was no impediment to giving judgment in favour of Tony for the $300,000.

Debt?

The court left open the question of whether a promise to pay money (by deed) without executed consideration creates a 'debt' or only a simple contract to pay a fixed sum of money. The court noted that, in this case, the outcome was the same if the covenant for the father to pay Tony $300,000 was construed as creating a debt enforceable independently of breach of contract, or as creating only an executory promise enforceable by an award of damages for breach of contract.

Citing Young v Queensland Trustees Ltd (1956) 99 CLR 560, the court acknowledged that indebtedness in a sum for an executed consideration was never conceived as breach of contract but, rather, as an action for debt. Nonetheless, the court noted that the development of the law appeared to have moved from the recovery of stipulated amounts by action of debt (whether simple or contained in a covenant) through to action for damages for breach of simple contract (neither debt or covenant) to pay a sum certain. In this case, the court elected to assume, for the sake of argument, that the deed did not create a debt but instead formed a contractual promise to pay Tony $300,000 by 28 July 2017.

Damages for breach of contract?

Tony had an available claim for damages for breach of contract, because the court construed clause 1(a) as creating an immediately binding promise on the father to pay him $300,000 by 28 July 2017. The father's failure to pay the sum on or before that date was in breach of that promise, and as Anthony vacated the property, no countervailing obligation arose on Tony to return the $300,000. Tony was entitled to damages for the father's breach of contract by not performing the promise.

The court held that the trial judge erred in finding that Tony's lack of pleadings or submissions in regard to damages for breach were an obstacle to awarding damages. Instead, having found that Tony's common law rights were engaged, the judge implicitly accepted there had been a breach of a simple contract, raising the question of nominal damages. Once a consideration of nominal damages had arisen, the court found it incumbent on the judge to consider whether, on the evidence, there was a loss for which assessable damages should have been awarded. For the purpose of assessing damages, in this case, where there was a simple promise to pay a fixed sum by a due date, the court held there could not have been any additional facts necessary to establish the loss. Proof of loss required nothing more than proof that a promise had been made to pay a fixed, ascertainable sum of money by a stipulated date, the date had passed, and the payment had not been made. Therefore, the damages required to place Tony in the position he would have been in had the promise been performed was $300,000.

Costs

The court found there was no occasion to award costs against Tony on a trustee basis, because his claim was against the estate for a personal liability incurred by the father while alive.

Footnotes

[2022] NSWCA 233.
[2022] NSWCA 65.
Arsalan v Rixon [2021] HCA 40.
(1991) 171 CLR 506 at 522; [1991] HCA 12 at [406].
[2022] VSCA 194.
At [74].

Contract law update 2022: damages

The 'usual principle' in which damages are assessed

Edwin Davey Pty Ltd v Boulos Holdings Pty Ltd [2022] NSWCA 65

Renown Corporation Pty Ltd v SEMF Pty Ltd [2022] NSWCA 233

Tran v Hoang [2022] VSCA 194

Footnotes