High Court holds that 'fair winds' permit recovery of expenditure wasted in constructing iconic aircraft hangar

Important clarification of reliance damages 5 min read

The High Court in Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 has unanimously upheld a NSW Court of Appeal decision awarding a plaintiff $3,697,234.41 for damages and interest for wasted expenditure.

The decision clarifies when a plaintiff can recover 'reliance damages' (wasted expenses incurred in anticipation of the performance of a contract) and is a significant exposition on contractual damages more broadly.

In this Insight, we examine the differences between the various judges' reasoning and lay out what the implications are in practice.

Key takeaways

• Contractual damages aim to put the innocent party into the position it would have been in had the contract been performed.¹
• To recover damages, the plaintiff bears the legal onus of proving its loss was caused by the defendant's breach.
• Where the defendant's breach has made it difficult for the plaintiff to prove its position had the contract been performed, the plaintiff's burden of proof may be facilitated by assuming (or inferring) that, had the contract been performed, the plaintiff would have recovered any reasonable expenditure incurred in anticipation of performance of the contract.²

Background: promises made, actions taken

Cessnock City Council 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 30-year term from registration of the plan of subdivision. The council had promised to take all reasonable action to apply for and register the plan of subdivision by 30 September 2011. Meanwhile, Cutty Sark was granted a licence to occupy the proposed Lot 104, and constructed the hangar at a cost exceeding $3 million.

Trial and NSWCA decisions

The council was found both at first instance and on appeal to have breached its obligation to take all reasonable action to procure registration of the plan of subdivision.

However, at first instance, Justice Adamson held that Cutty Sark could not recover wasted expenditure (ie the costs of constructing the hangar) because, among other things, the breach did not make it impossible to assess Cutty Sark's position had the contract been performed.

This was reversed on appeal, with the NSW Court of Appeal deciding that if the plaintiff claims wasted expenditure, the onus of proof is on the defendant to rebut a presumption that, had the contract been performed, those costs would not have been recouped.

Our earlier Insight contains a more detailed discussion of the trial and NSWCA appeal decisions, while additional observations can be found in our 2023 Contract Law Update.

The High Court

The High Court unanimously dismissed the council's appeal, holding that it does not need to be impossible for the plaintiff to prove expectation loss to claim reliance damages.

There are nuanced differences between the various judges' reasoning in four separate judgments.

Starting with the joint reasons of Justices Edelman, Steward, Gleeson and Beech-Jones (the Joint Judgment), several key principles emerge:

• The foundational principle is that contractual damages aim to put the innocent party into the position it would have been had the contract been performed.
• Claims for 'reliance' or 'expectation' losses are not an alternative to the general rule for assessing damages between which a plaintiff can elect to claim.³
• The party seeking damages bears the legal burden of proving its loss was caused by the defendant's breach.
• Where the defendant's breach has caused or increased uncertainty about the position the plaintiff would have been in had the contract been performed, the plaintiff's legal burden of proof will be facilitated by assuming or inferring that the plaintiff would have recovered any expenditure reasonably incurred in anticipation of, or reliance on, the contract's performance.⁴ The Joint Judgment explained that this gives the plaintiff a 'fair wind' to establish that its expenditure would have been recouped, but not a 'free ride'.⁵
• The more difficult the defendant's breach has made it for the plaintiff to prove its position had the contract been performed, the stronger the assumption or inference will be that the plaintiff would have recovered its wasted expenditure. That is, the weight of the defendant's burden of proof in rebutting the inference will depend upon the extent of the uncertainty resulting from its breach.

The Joint Judgment and Justice Gordon⁶ rejected the idea that wasted expenditure is a separate head of damage.⁷ However, Chief Justice Gageler said wasted expenditure is itself a category of damage.⁸ There may not be much practical difference between these two positions.

The Joint Judgment did not explicitly endorse the remoteness principles set out in Hadley v Baxendale as a limit on recovery of wasted expenditure. They said remoteness may be better analysed by reference to potential revenue rather than foreseeability of wasted expenditure, on the basis that loss of potential future revenue of at least the amount of the wasted expenditure would have been in the knowledge of the parties at the time of entering into the contract.⁹ The other judges each held that remoteness principles apply.¹⁰  

All the judges rejected the distinction between 'essential reliance' (partial contractual performance or necessary preparatory work for performance) and 'incidental reliance' (any other reliance that follows naturally and foreseeably from the contract)¹¹ as wasted expenditure.

In practice

• The plaintiff bears the legal onus of proving its loss arising from a breach of contract.
• Where the plaintiff has incurred reasonable expenditure in reliance on performance of the contract, and the defendant's breach has caused or increased uncertainty about the position the plaintiff would have been in had the contract been performed, the plaintiff may seek to recover this wasted expenditure, facilitating the discharge of the plaintiff's legal burden of proof to establish its loss.
• The onus is then on the defendant to prove the expenditure would not have been recouped had the contract been performed.
• The weight of the evidence required to rebut the assumption will depend on the extent of the uncertainty resulting from the breach.¹² If possible, a plaintiff should not rely solely on evidence of its wasted expenditure, but should consider also trying to prove its actual position had the contract been performed.