Awarding Reliance (cf expectation) Damages for Breach of Contract

In 123 259 932 Pty Ltd v Cessnock City Council [2023] NSWCA 21 (20 February 2023), the New South Wales Court of Appeal examined the law pertaining to, and applied same resulting in an award of reliance (cf expectation) damages for breach of contract.  Overturning the decision of the trial judge, the court awarded substantial reliance damages, namely $3,697,234.01 plus interest.  In the course of giving treatment to the award it was found that a damage exclusion clause contained in the relevant contract was not invoked by the breach.  The judgment of the court was written by Brereton JA, with whom Macfarlan and Mitchelmore JJ agreed.

[2]  The respondent Cessnock City Council (“the Council”) is the registered proprietor of land near Pokolbin on which is located the Cessnock Airport, also known as Hunter Valley Airport (“the airport”). By an agreement for lease bearing the date 16 January 2008 but made on or about 26 July 2007 (“the Agreement”), the Council promised to grant to the appellant 123 259 932 Pty Limited — formerly, Cutty Sark Holdings Pty Limited (“Cutty Sark”) — a lease (“Proposed Lease”) of a part of the airport, on which Cutty Sark intended to construct an aircraft hangar from which it would operate a business conducting joy flights and advanced flight aerobatic training, which was to become Lot 104 in a proposed 25 lot subdivision, for a term of thirty years from the registration of the plan of subdivision (“the Plan”). The Council — which was not only the applicant but also the relevant consent authority for approval of the subdivision — promised to take all reasonable action to apply for and register the Plan by 30 September 2011 (“Sunset Date”), and in the meantime granted Cutty Sark a licence to occupy proposed Lot 104. Cutty Sark proceeded to construct the hangar, at a cost of in excess of $3 million.

[3]  The Council’s obligation to take all reasonable action to apply for and obtain registration of the Plan required it to take all reasonable action to fulfil the conditions of the development consent, including that the proposed lots be connected to Hunter Water Corporation’s reticulated sewerage system. The Council did not comply with that condition, asserting that it did not have and could not reasonably obtain the $1.3 million required to do so. Consequently, the Plan was not registered by the Sunset Date, or at all, and the Proposed Lease was not granted.

[4]  Prior to the Sunset Date, Cutty Sark had ceased to operate businesses from the hangar, as they were not successful. After the Sunset Date, by mid-2012, Cutty Sark vacated proposed Lot 104 and the hangar on it. Cutty Sark was deregistered by the Australian Securities and Investments Commission (ASIC) on 7 September 2015. The Council terminated the Agreement and, on 11 May 2016, paid ASIC $1 for the acquisition of the hangar, in reliance on a provision of the Proposed Lease which entitled the Council to acquire the hangar for $1 upon termination for any reason. On 6 December 2016, Council granted a lease of the hangar to a new tenant for a term of five years.

[5]  Cutty Sark was reinstated by order of the Supreme Court of South Australia on 5 June 2017. It commenced these proceedings against the Council claiming damages for breach of contract on 29 September 2017. The primary judge held that the Council had breached the Agreement by failing to take all reasonable action to apply for and obtain registration of the Plan by the Sunset Date in accordance with its contractual obligation to do so, but that Cutty Sark was entitled only to nominal damages in the sum of $1. Cutty Sark appeals, contending that it should have been awarded substantial reliance damages, representing the amount that it had expended in constructing the hangar.

…

[22]  Clause 12.3 of the Agreement relevantly provided:

12.3 Release

The Lessee releases the Lessor from, and agrees the Lessor is not liable for, all liability or loss arising from, and costs incurred in connection with:

…

(b) anything the Lessor is permitted or required to do under this Lease;(c) a Service being unavailable, being interrupted or not working properly;(d) the Aerodrome or Aerodrome Infrastructure Facilities not being available for use by the Lessee;(e) loss of the Lessee’s profits; and(f) any liability for damage to the Land or the Lessee’s property or for any other loss (however that loss was caused or arose), including but not limited to:

(1) financial or economic loss to the Lessee or to any other person;(2) loss of goodwill in relation to the business being carried on by the Lessee;(3) indirect or consequential loss;(4) loss resulting from:

…

(C) any change in the flow of members of the public in or around the Land or Aerodrome for any reason.

…

[99]  Clause 12.3 of the Agreement has been set out above; relevantly, it had the effect that Cutty Sark released the Council from, and agreed that the Council was not liable for, all liability or loss arising from the Aerodrome or Aerodrome Infrastructure Facilities not being available for use by Cutty Sark, and for any loss resulting from any change in the flow of members of the public in or around the Land or Aerodrome for any reason.

…

[102]  Although it is undoubtedly correct that the Council was not contractually obliged to implement the commercial development of the airport, the Council is not being sued for breach of any such promise. The claim for reliance damages does not proceed on the basis that it was so bound, and involves no hypothesis that the Council must have developed the airport. Rather, the claim depends on expenditure incurred in reliance on the Council performing the obligation which it indisputably had, of taking all reasonable action to procure registration of the Plan. The fact that the Council did not promise to develop the airport does not mean that Cutty Sark did not incur expenditure on construction of the hangar in reliance on the Council’s promise to take all reasonable steps to procure registration of the Plan.

[103]  It cannot be said that Cutty Sark was not entitled to rely on the Council performing its contractual obligations. The fact that the Council did not promise to develop the airport is beside the point. The one risk that matters is that which eventuated — that the Council repudiated its obligations to take all reasonable action to procure registration of the Plan — and that risk was one which Cutty Sark did not accept. The reliance damages claim does not ask the Council to bear the risk either of future development occurring or not occurring, or of any events that might affect the extent to which members of the public might visit the airport. The risk which it is being asked to bear is that resulting from its own failure to take all reasonable action to procure registration of the Plan, in breach of its contractual obligation to do so. …

…

[161]  A plaintiff who is unable or does not undertake to demonstrate whether or to what extent the performance of a contract would have resulted in a profit may claim to recoup its wasted expenditure. In such a case, expenditure incurred by a plaintiff in reliance on a contractual promise made by the defendant and “wasted” because of non-performance by the defendant is recoverable, except to the extent that the defendant shows that the plaintiff would not have recouped its expenditure had the contract been performed. Relevant expenditure is not confined to expenditure under or required by the contract, but extends (subject to the rule in Hadley v Baxendale) to any detrimental change of position by the promisee in reliance upon the defendant’s promise. Such expenditure is regarded as “wasted” if the promise in reliance on which it was made is not performed, except to the extent that it is shown that the plaintiff has received some offsetting benefit, whether under or dehors the contract. The value of the reliance interest is the quantum of the net detriment, after allowing for any offsetting benefit accruing to the plaintiff from the expenditure. It suffices to enliven the presumption that expenditure has been incurred in reliance on a defendant’s contractual promise which the defendant has failed to perform.

[162]   Amann Aviation and McRae do not constitute a category of case which depends on the nature of the breach rendering assessment of damages on the usual basis “impossible”; they apply when the plaintiff does not claim or the evidence does not establish any loss of profits. It is not a precondition to that presumption arising that the plaintiff first establish that it is “impossible” to prove expectation damages. Ground 1 succeeds.

[163]  The facts that the Council did not promise to develop the airport, and that the contract allocated significant risks to Cutty Sark, are beside the point. The one risk that matters is that which eventuated — that Council repudiated its obligations to take all reasonable action to procure registration of the Plan — and that risk was one which Cutty Sark did not accept. Cutty Sark was entitled to rely on the Council performing its contractual obligations. Insofar as the primary judge held that the presumption did not arise because the contractual allocation of risk meant that Cutty Sark did not or could not reasonably rely on the Council’s promise to take all reasonable steps to procure registration of the plan, Ground 3 succeeds.

[164]  Termination of the contract by the innocent party is not invariably a precondition to recovery of reliance damages. In any event, clause 13.3 of the Agreement had the effect that Cutty Sark’s rights in respect of a breach by the Council before termination were not affected by termination, and Cutty Sark’s right to claim to recover its expenditure incurred in reliance on the Council’s promise to take all reasonable steps to procure registration of the Plan, which the Council had repudiated, was thus preserved.

[165]  Cutty Sark incurred substantial expenditure in constructing the hangar on proposed Lot 104 in reliance upon the Council’s promise to take all reasonable action to procure registration of the Plan. Even if some of the construction expenditure was incurred before the Agreement was made, it is recoverable as it was plain when the contract was made that it would be wasted if the promise was not performed.

[166]  The presumption arose. Cutty Sark, although it did not prove (nor endeavour to prove) that it had incurred any expectation loss, did prove that it had incurred expenditure in reliance on the Council’s performance of its obligation to take all reasonable steps to procure registration of the Plan. Council’s repudiation of that obligation rendered certain that Cutty Sark would not receive the benefits for which it had contracted, and that its expenditure would be wasted in the relevant sense. That sufficed to engage the presumption, so as to cast on the Council the onus of showing the value of any offsetting benefit received by Cutty Sark, and/or that its expenditure would not have been recouped had the contract been performed. Moreover, even if 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”, that requirement was satisfied here: the Council’s breach rendered impossible a true assessment of the probable outcome of performance of the contract and whether it would have enabled Cutty Sark at least to recoup its expenditure. Ground 2 succeeds.

[167]  The presumption was not rebutted. In circumstances where what would have transpired had the Council performed its obligations was speculative, but there was a high degree of likelihood (given that the Council was also the consent authority) that the Plan would be registered, and there was at least a prospect of further development of the airport producing a more conducive commercial environment for Cutty Sark’s business operations, if not immediately then sometime over the ensuing thirty years of the lease to which Cutty Sark would have been entitled, the Council could not and did not show that Cutty Sark would not over a 30-year lease have recouped its expenditure. The primary judge erred in concluding otherwise….

[168]  It was plainly in the contemplation of the parties when the Agreement was made that Cutty Sark would incur substantial expenditure in erecting the hangar; and it was, or ought to have been, plain to both parties, had they turned their minds to the question when the contract was made, that non-performance by the Council of its relevant obligation would result in Cutty Sark wasting the expenditure it had incurred and was going to incur in constructing the hangar. The loss incurred in the nature of wasted expenditure is therefore reasonably to be supposed to have been in the contemplation of both parties when the contract was made, within the second limb of Hadley v Baxendale , and the primary judge erred in holding otherwise. …

[169]  In the light of Mr Johnson’s broad-brush but unchallenged evidence on the question, and the conduct of the trial, the proper finding is that Cutty Sark incurred expenditure of $3,697,234.41 on construction of the hangar. …

[170]  The appeal should be allowed. The judgment below should be set aside and in lieu thereof there should be judgment for Cutty Sark for $3,697,234.41 and interest. The Council must pay Cutty Sark’s costs of the proceedings at first instance and on appeal. …

The full decision can be found at  https://www.caselaw.nsw.gov.au/decision/1865dcfaa9ebfb5d9e06af19