Damages for breach of contract
It is an elementary proposition that damages for breach of contract are usually awarded to put the 'innocent' party in the same position as if the contract been performed.
However, in some cases, a plaintiff might not want to prove (or might not be able to prove) what its financial position would have been if the contract had been performed. In those situations, a plaintiff might instead seek to recover 'reliance damages': that is, damages for expenses that were incurred in the expectation that the other party would perform its obligations under the contract.
An issue considered by the New South Wales Court of Appeal in 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 211 was whether (and when) a plaintiff may seek to recover reliance damages rather than expectation damages. The trial judge had held that a plaintiff could only recover reliance damages if the defendant's breach made it impossible for the plaintiff to calculate its expectation damages. However, the New South Wales Court of Appeal held that a plaintiff can always seek to claim reliance damages and that, if it does so, it will have the benefit of a rebuttable presumption that it would at least have recovered that expenditure had the promise been performed [at 96]. The burden is then on the defendant to rebut that presumption.
The court further held that a plaintiff seeking reliance damages was not limited to expenses that it was obliged to incur under the contract, but was entitled to recover expenses 'reasonably incurred in reliance on the defendant's contractual promise'.
The judgment of the New South Wales Court of Appeal arguably expanded the circumstances in which reliance damages can be sought, and the High Court has granted special leave to appeal against this decision. In the meantime, plaintiffs bringing breach of contract claims should consider whether reliance damages might result in a higher award than expectation damages.
123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21
Reliance damages
At first instance, the Supreme Court found that:
- Cessnock City Council (the council) was in breach of an obligation to take reasonable action to apply for and register a development plan for Cessnock Airport; but
- 123 259 932 Pty Ltd (Cutty Sark) was not entitled to substantive damages because it could not prove that it would have suffered loss if the contract had not been breached.
The New South Wales Court of Appeal allowed an appeal and awarded Cutty Sark substantive damages of over $3.6 million, on the basis that it was entitled to recover reliance damages even though it could not prove that it would have suffered any loss had the council complied with the contract.
This case is significant for two main reasons. First, it was held that if a party elects to claim 'reliance damages', it has a rebuttable presumption that it would have at least recovered that expenditure if the contract had been performed. The defendant therefore has the burden of proving that the party would not have recovered those expenses. Second, in calculating reliance damages, the court held that a plaintiff is not limited to expenses required by the contract to be incurred, but any expenses reasonably incurred in reliance on the defendant's contractual promise can be considered. In making this assessment, the court looks beyond the terms of the agreement and into what is reasonably contemplated by the parties. The High Court has granted leave to appeal against this decision.
The council entered into a contract with Cutty Sark for a 30-year lease of a part of Cessnock Airport. The council was the applicant and relevant consent authority for approving the subdivision. Under the contract, it promised to 'take reasonable action' to apply for and register a development plan for Cessnock Airport, by the sunset date in late September 2011.
Cutty Sark proceeded to construct an aircraft hangar – for its business conducting advanced flight aerobic training and joy rides – at a cost exceeding $3 million.
The council did not fulfil its obligation to apply for and register the plans by the sunset date, and the airport remained undeveloped. By then, Cutty Sark no longer operated its business on the hangar, as it struggled to attract business while the airport remained undeveloped. The company vacated the hangar and was subsequently deregistered. As a result, the council terminated the contract and, under its terms, paid ASIC $1 to acquire the hangar.
The court considered two important questions.
- Can a plaintiff claim reliance damages (ie expenses incurred in reliance on the defendant's broken promise):
- only if it is impossible to prove damages in the usual manner (ie damages that put the plaintiff in the same position as if the contract had been performed); or
- at the plaintiff's election (whether or not it is possible to prove damages in the usual manner)?
The court held that a plaintiff can elect to claim reliance damages. If it does so, it will have the benefit of a rebuttable presumption that it would at least have recovered that expenditure had the promise been performed [at 96]. The burden is then on the defendant to rebut that presumption.
The council argued that it had, in any case, rebutted the presumption because Cutty Sark's business on the hangar was unsuccessful. The court rejected this argument. It considered Cutty Sark's early losses in light of a 30-year lease, which, if the promise were kept, would have made it possible for Cutty Sark to restart its business, recover its losses and benefit from a better commercial environment with surrounding commercial developments.
- Are reliance damages limited to expenses that a plaintiff is obliged to incur under the contract?
The court held that a plaintiff was not limited to such expenses, and instead could recover expenses 'reasonably incurred in reliance on the defendant's contractual promise'. It considered this to be an extension of the rule in Hedley v Baxendale, and that the right to recover expenses 'turns on whether it was the type of expenditure as might naturally be incurred in preparing for, performing or exploiting the benefit of the contract, or is or ought to have been contemplated by the defendant' [at 70]. An allowance would, however, need to be made for any offsetting benefit received under the contract.
The council argued that Cutty Sark was not entitled to recover the costs of building a hangar because there was no contractual obligation to incur these costs. The court rejected this argument and held that the costs of developing the hangar were reasonably contemplated by the parties. It emphasised that preliminary works on the hangar had started during contract negotiations and that it would have been obvious these expenses would be wasted if the council did not fulfil its promise to take reasonable action to register the plan.
Footnotes
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[2023] NSWCA 21.