Contract damage principles and wasted expenditure – High Court decision

Authors: Jay Leary, Mikayla Ware

What does litigation between a developer and a council have to do with the mining industry? This High Court case provides an important reminder of the approach to contract damage principles, and clarifies the approach to wasted expenditure claims. From a practice point of view, the decision provides helpful guidance in drafting exclusion and limitation clauses.

Introduction

In the recent decision of Cessnock City Council v 123 259 932 Pty Ltd (Cessnock),¹ the High Court clarifies the uncertainty of how and when a plaintiff can recover damages for wasted expenditure in a breach of contract claim. Specifically, the Court tackled the question of whether ‘reliance losses’ (i.e., the wasted expenditure a plaintiff incurs in reliance of an expectation that the defendant will perform their contractual obligation) is a separate category of damages to ‘expectation losses’ (i.e., the benefit or gain a plaintiff loses due to the defendant’s non-performance).

The Court ultimately held that reliance losses are not a separate category of damages to expectation losses, such that a plaintiff cannot elect between the two.² Whilst expressed in four separate judgments, the majority of the Court considered such a characterisation to ‘represent an appropriately robust and practical approach to the assessment of damages based on considerations of fairness and justice.’³

Background

On 26 July 2007, Cessnock City Council (Council) entered into a contract with Cutty Sark Pty Ltd (Cutty Sark) agreeing to grant a 30-year lease over a part of land at the Cessnock Airport planned for subdivision.⁴ The contract required the Council to take all reasonable action to apply for and obtain registration of its planned subdivision.⁵ In the meantime, Cutty Sark obtained a licence to enter upon the land and proceeded to spend $3.7 million constructing its commercial aircraft hangar.⁶

On 13 September 2011, the Council advised Cutty Sark that it was not prepared to register the subdivision, having been deterred by the high cost of sewage works at the site.⁷ As Cutty Sark’s other businesses had been proving unprofitable, it was ultimately forced to leave its investment stranded shortly after.⁸ Cutty Sark subsequently sued the Council for breach of its contractual obligation to take all reasonable action to register the subdivision and sought recovery of damages for its wasted expenditure.⁹

Together, the joint judgment of Edelman, Steward, Gleeson, and Beech-Jones JJ, and the judgment of Gordon J rejected the Council’s contention that wasted expenditure is a separate head of damage to expectation damages.¹⁰ Chief Justice Gageler dissented, holding that wasted expenditure is, by itself, its own category of damages.¹¹ However, as evidenced by the outcome of Cessnock where Cutty Sark was unanimously awarded $3.7 million in reliance damages, discerning a practical difference between these views is difficult.

The principles regarding damages for wasted expenditure

The ‘ruling’ principle

The Court affirmed that the starting point for any award of damages for common law breaches of contract is the ‘ruling principle’ enumerated under Robinson v Harman:¹²

where a [plaintiff] sustains a loss by reason of a breach of contract, [the plaintiff] is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

Accordingly, a plaintiff is able to recover expenditure reasonably incurred in anticipation of, or in reliance on, the defendant’s performance of the contractual obligation breached that would otherwise have been recovered.¹³

What the court must be satisfied of

An corollary of the ruling principle is a plaintiff is not entitled to be placed in a better position by any award of damages than the position they would have occupied had the contract been performed.¹⁴ As such, plaintiffs bear the onus of proof in establishing that its loss was caused by the defendant’s breach of contract.¹⁵

As identified by Gageler CJ, quantifying wasted expenditure is, generally speaking, easily done and proved.¹⁶ That is, if the plaintiff can adduce receipts as to the quantum of the expenditure it has incurred in performance of or in reliance on its expectation of performance of the contract, then an entitlement to reliance losses is established.

However, in circumstances where the defendant’s breach results in uncertainty for the plaintiff in quantifying their loss having relied on the defendant’s promise, then the common law assists with the discharge of the plaintiff’s burden of proof via the ‘facilitation principle’.¹⁷ In doing so, the plaintiff is provided with ‘fair wind’ to establish loss.¹⁸ As explained by the joint judgment, the strength of the ‘wind’ depends upon the extent of the uncertainty resulting from the breach by the defendant, and all of the circumstances including, for example, where speculations as to the future are involved.¹⁹ Put simply:²⁰

1. the ‘wasted expenditure’ claimed by the plaintiff must have been incurred in reliance on the contract;
2. the ‘wasted expenditure’ must not be too remote (i.e., the loss must be considered to have fairly and reasonably arisen naturally from the breach of contract as per the rule in Hadley v Baxendale);²¹
3. the ‘wasted expenditure’ must not exceed the amount of the expenditure in performance of, or reliance on the contract; and
4. the defendant is entitled to an opportunity to rebut the plaintiff’s prima facie entitlement to recoup its wasted expenditure (achieved by operation of the facilitation principle) by proving that the ‘wasted expenditure’ claimed is not ‘wasted’ as the expenditure would equally have been incurred and wasted even if the defendant had performed its contractual promise.²²

It follows that the plaintiff is given the practical effect of ‘fair wind’ but not a ‘free ride’.²³

Application to facts of Cessnock

As wasted expenditure can be claimed in performance of or in reliance on the contract, the Court was able to award Cutty Sark reliance damages for constructing the hangar notwithstanding how the contract was an agreement for lease including an obligation upon the Council to take all reasonable action to register the subdivision, and not a contract for the development of a business on the subdivided land.

The Court’s flexible approach in this respect may permit plaintiffs to recoup wasted expenditure incurred prior to a contract having been entered into where it is within reasonable contemplation of the parties at the time when they enter into the contract that such expenditure would be recouped in its performance.

The effect of exclusion clauses

The joint judgment noted the Court of Appeal of England and Wales’ judgment in Soteria Insurance Ltd v IBM United Kingdom Ltd (Soteria),²⁴ concerning the interpretation of an exclusion clause and the characterisation of a claim for wasted expenditure.²⁵ Regarding the characterisation of a claim for wasted expenditure, the question was whether it was a claim for ‘consequential losses’ and accordingly irrecoverable under the exclusion clause, or whether it was a claim for ‘direct losses’ and recoverable.²⁶ In characterising wasted expenditure as ‘easily ascertainable’ (as opposed to ‘speculative and uncertain’), such a claim was held to be a ‘direct loss’.²⁷

In the Australian context, the Soteria suggests that contractual consequential loss exclusions may not be enough for parties to prevent against claims for wasted expenditure.

Comment

Cessnock demonstrates the flexible approach adopted when deciding whether to award reliance damages for a plaintiff’s wasted expenditure, particularly in speculative and contingent circumstances.

Parties should be alive to the power of the facilitation principle and any contractually drafted exclusion clauses. When drafting exclusion clauses in commercial contracts, it is important to consider the allocation of risk and limits to the recovery of reliance damages by, for example, defining the particular types of losses contemplated by the exclusion clause’s operation and setting limits on how much a party can spend in reliance of the other party’s subsequent contractual performance.

References

1. Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 (‘Cessnock’).
2. Ibid [117]-[119].
3. See, for example, Jagot J’s comments at [194].
4. Ibid [41], [83].
5. Ibid [41], [85].
6. Ibid [41], [84].
7. Ibid [91].
8. Ibid [41], [94].
9. Ibid [103].
10. Ibid [51] (Gordon J), [139] (Edelman, Steward, Gleeson, Beech-Jones JJ).
11. Ibid [9].
12. Robinson v Harman (1848) 1 Exch 850, 855; Cessnock (n 1) [6] (Gageler CJ); [48] (Gordon J); [117] (Edelman, Steward, Gleeson, Beech-Jones JJ); [190] (Jagot J).
13. Cessnock (n 1) [120].
14. Ibid [30].
15. Ibid [127].
16. Ibid [15].
17. Ibid [139]; [127]-[129]. See also L Albert & Son v Armstrong Rubber Co (1949) 178 F 2d 182, 189; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, 414.
18. Ibid [139].
19. Ibid [139].
20. Ibid [191].
21. Hadley v Baxendale (1854) 9 Ex 341, 354. Cessnock (n 1) [2]–[3] (Gageler CJ), [53] (Gordon J), [191] (Jagot J).
22. Cessnock (n 1) [3] (Gageler CJ), [192] (Jagot J).
23. Ibid [139].
24. Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] 2 All ER (Comm) 1082 (‘Soteria’).
25. Cessnock (n 1) [153].
26. Soteria (n 24) 1090 [24], 1091 [26].
27. Ibid 1103 [70]

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