A plaintiff can choose whether to seek reliance damages 6 min read
A plaintiff claiming damages for breach of contract will usually seek to prove their 'expectation' damages (ie damages that would place them in the same position as if the contract had been performed). A recent NSW Court of Appeal decision has held, however, that a party can choose to recover 'reliance damages' (ie damages to recover costs incurred in reliance on a broken promise) without having to show that the defendant's breach made it impossible to calculate expectation damages.
Key takeaways
- The New South Wales Court of Appeal (the NSWCA) has delivered a significant judgment concerning claims for 'wasted expenditure' or 'reliance damages', clarifying when a plaintiff can recover these damages and what it must prove to do so.
- Once a plaintiff has established that it has incurred expenditure in reliance on a broken contractual promise, such wasted expenditure will be recoverable, subject to principles of remoteness, unless the defendant can prove that the plaintiff would not have recouped such expenditure had the contract been performed.
- The decision is of particular interest to parties deciding how to frame claims for breach of contract, especially where there may be uncertainty in proving loss had the contract been performed.
Who in your organisation needs to know about this?
General Counsel and those involved in the conduct of contractual disputes.
Introduction
In 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21, the NSWCA awarded the appellant $3,697,234.41 and interest for wasted expenditure, reversing the decision at trial. In doing so, it clarified precisely what a party seeking to recover wasted expenditure must prove and, conversely, what a party must prove to defend against such claims.
Background
Cessnock City Council had promised to grant to 123 259 932 Pty Limited (formerly Cutty Sark Holdings Pty Limited) (Cutty Sark) a lease of part of the Cessnock Airport on which Cutty Sark intended to construct an aircraft hangar from which it would conduct business. The proposed lease would be for a term of 30 years from registration of the plan of subdivision. The council was the relevant consent authority for approval of the subdivision, and had promised to take all reasonable action to apply for and register the plan of subdivision by 30 September 2011 (the sunset date). Meanwhile, Cutty Sark was granted a licence to occupy the proposed Lot 104, and proceeded to construct the hangar at a cost exceeding $3 million.
Trial decision
The council was found both at first instance and on appeal to be in breach of its obligation to take all reasonable action to procure registration of the plan of subdivision. However, at trial, Justice Adamson held that:
- Cutty Sark could not recover 'reliance damages' (ie the costs of constructing the hangar) because the council's breach did not make it impossible to calculate expectation damages (ie damages to put the plaintiff in the same position as if the contract had been performed);
- even if the council had prevented Cutty Sark from being able to calculate its expectation damages, it had discharged its onus by showing that Cutty Sark would not have recouped the costs spent on constructing the hangar if the council had performed the contract; and
- the claimed reliance damages were, in any case, too remote, as it was within the parties' reasonable contemplation that no lease would be granted, and that the agreement would be terminated on or after the sunset date without breach.
The appeal
Justice Brereton, with whom Justices Macfarlan and Mitchelmore agreed, took a different approach and held that Cutty Sark did not have to prove that the council's breach made it impossible to calculate expectation damages. Critically, Justice Brereton held that:
- a plaintiff could choose whether to seek expectation damages or reliance damages;
- if the plaintiff chose to seek reliance damages, the defendant had the burden of proving that, if the contract had been performed, those reliance damages would not have been recovered; and
- on the facts, and disagreeing with the primary judge, the council had not discharged this burden.
Justice Brereton also held that Cutty Sark's losses were not too remote, since it was within the parties' reasonable contemplation at the time the contract was made that the relevant expenditure would be incurred and wasted if the contract was breached. Cutty Sark was therefore entitled to damages for wasted expenditure and interest for the costs incurred in constructing the hangar. Justice Brereton further held that:
- a plaintiff seeking reliance damages is entitled to recover costs that were wasted due to the breach of contract (less any offsetting benefit);
- such costs are not limited to costs incurred in performing contractual obligations;
- such costs may be recovered whether or not the contract is terminated; and
- such costs can include costs incurred before the contract was entered into.
In his judgment, Justice Brereton considered Justice Brennan's judgment in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, and observed that Justice Brennan held that 'the reversal of the onus [is] conditional upon it being established that the defendant’s breach denied, prevented or precluded the existence of circumstances which would have determined the value of the plaintiff’s contractual benefits'. Justice Brereton held that this aspect of Justice Brennan's judgment was inconsistent with the judgment of Chief Justice Mason and Justice Dawson in that case (as well as a later decision of the NSWCA), and declined to follow Justice Brennan's approach.
How does this affect you?
The aim of contractual damages is to put the innocent party in the position it would have occupied had the contract been performed.
A plaintiff normally does this by seeking 'loss of bargain' or 'expectation' damages: ie damages to recover the contractual benefits it would have received had the contract been performed.
However, in some cases a plaintiff may choose not to prove what position it would have been in had the contract been performed. This is particularly so in cases involving long-term contracts where the damages assessment will involve a considerable degree of speculation. A plaintiff may therefore seek only to recoup its wasted expenditure: ie damages to recover the money 'wasted' in performing its contractual obligation(s). The law considers this to be consistent with the principle that 'damages put the party in the same position as if the contract had been performed' because it presumes (subject to the defendant proving otherwise) that the plaintiff would have recovered the wasted expenditure had the contract been performed.
Whereas the primary judge held that a plaintiff could only seek reliance damages if the defendant's breach prevented the plaintiff from calculating expectation damages, the NSWCA's decision allows such damages to be sought at the plaintiff's choosing. Plaintiffs bringing breach of contract claims should therefore keep this possibility in mind when deciding whether and how to seek damages for a breach of contract.