Signing a Contract: Risky Business? | Lavan (2024)

Early this month, the High Court of Australia published a decision which considers the legal principles relevant to damages for breach of contract, and more specifically, the recoverability of wasted expenditure incurred in reliance on an expectation that the other party would comply with their obligations pursuant to the contract.

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Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 (Cessnock)

In 2007, the parties entered into an agreement (Agreement) by which Cessnock City Council was obliged to “take all reasonable action to apply for and register a plan of subdivision and to grant the respondent a 30-year lease of land”.¹

While waiting for the grant of the lease, 123 259 932 Pty Ltd, formerly Cutty Sark Holdings Pty Ltd (Cutty Sark), was granted a licence to occupy the land the subject of the Agreement. While in occupation of the land, Cutty Sark spent almost $3.7 million constructing an aircraft hangar on the land, with the intention of operating a business conducting joy flights and advanced acrobatic training for pilots.

Subsequently, Cessnock City Council breached the Agreement by failing to take reasonable action to register a plan of subdivision over the land, leaving Cutty Sark’s investment in the aircraft hangar stranded. Specifically, Cessnock City Council failed to commit funds to connect the proposed lots to sewerage by the date required pursuant to the Agreement, which was deemed to be the effective cause of the proposed lease failing to come into effect.

Procedural history

In 2017, Cutty Sark commenced proceedings in the Supreme Court of New South Wales, claiming damages based upon wasted expenditure as a result of Cessnock City Council’s breach of the Agreement. In these proceedings, the primary judge held that the Council had breached the Agreement, and that this was the effective cause of the failure of the lease to come into effect. The primary judge considered, however, that Cutty Sark’s wasted expenditure was not eligible to be recovered as reliance damages for a number of reasons, including that the Council and Cutty Sark had contemplated that no lease might be granted, and that the hangar would eventually be transferred to the Council. Ultimately, the primary judge made orders for Cessnock City Council to pay Cutty Sark damages in the amount of $1 for the Council’s breach of the Agreement.²

Cutty Sark successfully appealed this decision to the Court of Appeal of the Supreme Court of New South Wales. The Court of Appeal held that there was a presumption that wasted expenditure caused by a defendant’s breach of contract could be recovered, including all wasted expenditure reasonably incurred in anticipation of, or reliance on, the performance of the defendant’s contractual promise, not merely expenditure that was incurred pursuant to a contractual obligation, or required to perform the contract.³The Court of Appeal overturned the primary judge’s decision, and awarded Cutty Sark damages (including interest) in the amount of $6,154,459.40.⁴

Cessnock City Council appealed this decision to the High Court of Australia, however, the High Court unanimously upheld the Court of Appeal’s decision and dismissed Cessnock City Council’s appeal.

Reliance damages for breach of contract

The overarching principle for the recovery of compensatory damages, or reliance damages, for breach of contract is “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 … as if the contract had been performed”.⁵

Chief Justice Gageler provides helpful observations regarding compensatory damages in his judgment, as follows:⁶

“Critical to the operation of the principle is to distinguish between the "damages" ultimately to be assessed and the "loss" or "damage" which the plaintiff has sustained by reason of a breach of contract: "damage" being "the phenomenon in respect of which an assessment of damages is made". For there to be compensatory damages, there must first be damage. The damage in respect of which a plaintiff is entitled to be compensated by damages does not lie in mere non-performance of a contract but in the legally cognisable respect or respects in which the position of the plaintiff has been made worse by non-performance of the contract in comparison to the position which the plaintiff would have been in had the contract been performed.

...

Compensable damage lies in the simple fact that the plaintiff has incurred expenditure which, because of non-performance, is incapable of yielding any benefit or gain to the plaintiff.”

Further, Chief Justice Gageler expressed his regard for wasted expenditure as its own, distinct category of loss or damage,⁷ which is usually easily evidenced and quantified as the quantum of the plaintiff’s expenditure incurred in reliance on an expectation of performance of the contract, less any benefit or gain it has obtained from the expenditure despite non-performance of the contract.⁸

In essence, a prima facie entitlement to recover damages for breach of contract will be established if and to the extent that a party can establish that the expenditure it has incurred in reliance on an expectation of performance of a contract has in fact been wasted upon breach of the contract by the other party. This prima facie entitlement prevails, unless and except to the extent that the other party is able to establish that the expenditure would have still been wasted even if the contract had been performed, or where other standard limiting principles such as remoteness and mitigation apply.⁹

Lavan Comment

Cessnock provides Australians with helpful clarity regarding reliance damages, and more specifically, how the law will apply to matters where expenditure has been wasted by a party in reliance on an unfulfilled expectation that another party will satisfy its obligations pursuant to a contract.

This decision has the potential to apply to all contracts, from those involving individuals and small businesses, to large-scale projects and operations. It highlights the importance of considering all aspects of a contract prior to agreeing to its contents, which means ensuring that an in-depth analysis of the contract is conducted, and that a party considers its practical ability to fulfil all of its obligations under the contract, prior to accepting its terms.

If you are considering entering into a contract, you are concerned about your ability to perform your obligations pursuant to an existing contract, or you have suffered a loss as a result of another party’s breach of a contractual promise, please do not hesitate to contact Iain Freeman, Partner in Lavan’s Litigation and Dispute Resolution team.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.

¹Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 at [41] (Cessnock).

²Ibid [65].

⁷Ibid [12].