A Recent Contract Decision: Cessnock City Council v 123 259 932 Pty Ltd Case Review – Amann Aviation revisited

A recent contract decision: Cessnock City Council v 123 259 932 Pty Ltd Case Review – Amann Aviation revisited.

Robert Quirk, Barrister-at Law 

Introduction 

1. The recent decision of the High Court in Cessnock City Council v 123 259 932 Pty Ltd (Cessnock)[1] revisited the issue of the assessment of damages when there is wasted expenditure and the ability to make a profit has been prevented of sort that was previously considered in The Commonwealth v Amann Aviation Pty Ltd (Amann Aviation),[2] and the principles relating to proving that type of damage.

2. The Chief Justice described the appeal as concerning:[3]

“… the recoverability in damages for breach of contract of expenditure incurred by an innocent party (a plaintiff), in reliance on an expectation of performance of a contract, rendered futile as a result of non-performance of the contract by a defaulting party (a defendant).”

4. There was a majority judgement of the court (Edelman, Steward, Gleeson and Beech-Jones JJ) (majority) (only these reasons will be referred to unless otherwise indicated). Although, all members of the court agreed in the relief.
5. The first sentence of Justice Jagot’s reasons portended what was to come for the Council:[4]

“No good can come from a circumstance in which a local government body takes action to foster the development of its area without also being willing and able to fund the action it has contractually promised to undertake.”

Facts, lower courts and scope of the matter before the High Court

5. The background facts were, in summary:[5]

“The appellant, Cessnock City Council (“the Council”), is the registered proprietor of land on which the Cessnock Airport is located. Against a background where the “Council had hoped to develop the airport and accompanying land, the Council entered an agreement with the respondent corporation to lease a prospective lot at the airport to the respondent. The grant of the lease required subdivision of part of the Council’s land. So, a condition of the agreement for lease was that the Council would take all reasonable action to apply for and obtain registration of the plan of subdivision by 30 September 2011. As events transpired, that action required the Council to spend around $1.3 million. Not wishing to incur that cost, the Council breached the condition and repudiated the agreement for lease. The respondent never obtained a lease.

Prior to the Council’s repudiation, and in anticipation of, or reliance on, the agreement for lease, the respondent spent almost $3.7 million constructing an “iconic” hangar on the land. But the respondent was not successful in conducting businesses on the site of the proposed lease. The respondent’s businesses failed. Following the Council’s repudiation, the agreement for lease was treated as terminated and the Council acquired the hangar for $1. It is common ground that by this time, at the latest, the respondent’s expenditure was wasted, in the sense that the respondent could not recoup any of the expenditure.”  (emphasis added)

6. The respondent had been deregistered but was reinstated prior to the proceeding. The Council had purchased the hangar from ASIC.
7. The respondent faced numerous difficulties in proving consequential loss.[6]

8. Their Honours said of the respondent‘s difficulties in proving its loss:[7]

“Faced with these potentially insurmountable uncertainties, the respondent relied upon the principle described above that facilitated its proof of loss by treating its wasted expenditure as “prima facie” evidence of the amount that it would have recouped or as the “presumed” amount that would have been recouped. …

In this Court, there was dispute about the basis for, and the nature and operation of, the principle that the Court of Appeal applied to facilitate the respondent’s proof of its loss. Consistently with the manner in which the trial and the appeal to the Court of Appeal had been run, the appeal to this Court was brought on an all-or-nothing basis. The Council did not argue that the respondent would have recovered some lesser amount of its wasted expenditure. And the respondent did not argue that it was entitled to a lesser measure of damages representing merely the reasonable cost of the action of obtaining registration of the plan of subdivision to which the respondent was entitled.” (emphasis added)

9. The primary judge considered that the facilitation principle did not apply and awarded nominal damages of $1.[8] The Court of Appeal overturned the primary judge’s decision, applied the principle, and assessed the respondent’s damages at almost $3.7 million.[9]

Discussion

10. At the beginning of the majority’s reasons, their Honours outlined the correct approach:

“It is long-established orthodoxy that damages for consequential loss for a breach of contract are awarded only to place the plaintiff in the same situation as if the contract had been performed. The issue on this appeal is the method of proof for a plaintiff to establish the position that they would have been in if the contract had been performed, where the plaintiff has incurred expenditure in anticipation of, or reliance on, the performance of a defendant’s contractual obligation and the defendant’s breach of that obligation has the effect that the expenditure is wasted.

As will be explained in these reasons, that issue should be addressed as follows. The legal onus to prove loss arising from a breach of contract rests on the plaintiff as the party seeking to recover damages. However, where a breach of contract has resulted in (namely, caused or increased) uncertainty about the position that the plaintiff would have been in if the contract had been performed, then the discharge of the plaintiff’s legal burden of proof will be facilitated by assuming (or inferring) in their favour that, had the contract been performed, then the plaintiff would have recovered the expenditure they reasonably incurred in anticipation of, or reliance on, the performance of the contract. The strength of this assumption or inference, and thus the weight of the burden placed on the party in breach to adduce evidence to rebut the inference in whole or in part, will depend on the extent of the uncertainty that results from the breach. Expressed in this way, this facilitation principle is tied to its rationale, namely the uncertainty in proof of loss occasioned to the plaintiff by the defendant’s breach.” (emphasis added)

11. The majority reviewed the Australian and English positions, and then conveniently summarised the principles, as follows:

“… this understanding of consequential loss for breach of contract has the following effects:

1. 1. When calculating the consequential loss suffered by a plaintiff due to a defendant’s breach of contract, the goal, in general terms, is to put the plaintiff in same the position as if the contract had been performed.

1. 1. The calculation of a plaintiff’s consequential loss will permit the plaintiff to recover expenditure reasonably incurred in anticipation of, or reliance on, the performance of the contractual obligation that was breached but only to the extent that the expenditure would have been recovered but cannot now be recovered (“wasted expenditure”). Of course, the plaintiff can also recover any additional profit that would have been obtained from the contract but, in this event, the plaintiff would simply focus on the total profits that would have been made, with the wasted expenditure merely being an expense in the production of those profits.

12. 1. In assessing the loss that can be recovered, that loss which is due to unreasonable or improvident actions of the plaintiff is generally disregarded by application of the rules of mitigation of loss. And that loss which is too remote is disregarded by application of the rules of remoteness of loss.” (emphasis added)
13. The court made it clear is that the legal onus to prove its loss always remains on the plaintiff.[10]
14. The majority referred to the various terms that the facilitation principle was called, and said:[11]

“Whatever the description of the principle, its essence is that it facilitates the discharge of the plaintiff’s legal onus of proof of loss in circumstances where the defendant’s wrongdoing has resulted in uncertainty regarding the quantum of loss. This facilitation principle operates where uncertainty arises from the defendant’s breach and is capable of coexisting with other principles concerning facilitation of proof that might assist either the plaintiff or the defendant, such as the principle in Blatch v Archer that “all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted“.” (emphasis added)

14. As to facilitation of proof, their Honours stated:[12]

“In summary, the facilitation of the plaintiff’s proof arises in cases where the defendant’s breach of an obligation results in uncertainty and difficulty of proof of loss for the plaintiff, who has incurred expenditure in anticipation of, or reliance on, the performance of the obligation that was breached. The facilitation of proof that reasonably incurred expenditure would have been recovered has been described by Leggatt J as an example of courts doing the “best they can not to allow difficulty of estimation to deprive the claimant of a remedy, particularly where that difficulty is itself the result of the defendant’s wrongdoing”. In applying the principle “reasonably … according to the circumstances of each case”, the plaintiff is given an evidential “benefit of any relevant doubt” that expenditure would be recouped to the extent that it was reasonable, with the practical effect of giving the plaintiff “a fair wind” to establish loss. The strength of the wind will depend upon the extent of the uncertainty resulting from the breach by the defendant. And all of the circumstances, including any evidence led by the defendant, must be considered. The plaintiff is given a “fair wind” but not a “free ride””

In summary, the facilitation principle arises in cases where the defendant’s breach  of an obligation results in uncertainty and difficulty of proof of loss for the plaintiff, who has incurred expenditure in anticipation of, or reliance on, the performance of the obligation that was breached. The facilitation of the plaintiff’s proof by an assumption that the plaintiff has suffered loss in the amount of reasonable expenditure is neither a blunt rule nor able to be bluntly dismissed in every case by a slight evidentiary onus. The strength with which the principle applies will depend upon the extent of uncertainty resulting from the defendant’s breach. And the extent to which evidence from a defendant can reduce or eliminate the loss represented by a plaintiff’s wasted expenditure will depend upon the extent to which that evidence establishes a likelihood of non-recoupment.”

15. In reviewing Amann Aviation, the court observed:[13]

“The leading decision on the application of these principles is the decision of this Court in The Commonwealth v Amann Aviation Pty Ltd. It is not easy to identify a ratio decidendi at any level of specificity from the six different sets of reasons in that case. Nevertheless, as explained below, the decision broadly conformed with the principles discussed above.

Amann Aviation entered a contract with the Commonwealth to conduct aerial coastal surveillance of Australia’s northern coastline. The contract term was three years. There was a strong prospect that the Commonwealth would renew the contract at the expiry of the three years because, by that time, Amann Aviation “would be fully equipped with the cost of its aircraft written down. It would be very difficult for a competitor to match this advantage.” At trial in the Federal Court, and on appeal to the Full Court of the Federal Court, it was held that the Commonwealth repudiated the contract six months after entry. One basis upon which Amann Aviation put its claim was to recover its wasted expenditure. In anticipation of, or reliance on, the performance of the Commonwealth’s contractual obligations, Amann Aviation had spent considerable sums in reasonable pre-operational expenditure, in acquiring and fitting out aircraft (which had a resale value of far less than the amount spent), in termination payments and on a security deposit.

The primary judge held that Amann Aviation would have made a profit on the contract, without renewal, of $820,000 but that, since there was a 50 per cent chance that the Commonwealth would lawfully have terminated the contract, the damages were limited to $410,000. The Full Court of the Federal Court, however, held that Amann Aviation was entitled to have its damages assessed on the basis of its wasted expenditure, which the Commonwealth failed to prove was expenditure that would not have been recouped. A majority of the Full Court refused to discount the damages for what it assessed to be a 20 per cent chance that the contract would have been lawfully terminated before conclusion. The total awarded, before interest, was $5,475,184.

In this Court, the appeal by the Commonwealth was dismissed by a majority of Mason CJ and Dawson J, Brennan J, and Gaudron J. …

In the majority, although the detail of reasoning was not common to all judges, there were certain strands of commonality. Each member of the majority accepted that the general rule at common law was that damages for breach of contract aim to put the innocent party in the same position as if the contract had been performed. Each member of the majority rejected the notion that “reliance damages” were an alternative to the general rule, or a measure which the plaintiff could elect to claim. Hence, as Mason CJ and Dawson J observed, the decisions in the United States concerning “reliance damages” needed to be treated with “some reserve”.

Each member of the majority relied upon the uncertainty resulting from the acts of a wrongdoer as a reason in favour of the facilitation of the discharge of the plaintiff’s legal onus of proving loss. That facilitation took the form of treating the loss as equivalent to the amount of wasted expenditure incurred in anticipation of, or reliance on, the performance of the obligation that was breached. Consistently with the principles described above, their Honours described this facilitation of proof of recovery of expenditure reasonably incurred as a “just result” or “just and fair” or proper.

Each member of the majority justified their approach by reference to the reasoning in L Albert & Son v Armstrong Rubber Co, with Mason CJ and Dawson J, and Brennan J, quoting from Chief Judge Learned Hand to the effect that in situations of uncertainty resulting from wrongful acts “it is a common expedient, and a just one … to put the peril of the answer upon that party who by [their] wrong has made the issue relevant to the rights of the other”. And each member of the majority refused to discount the damages award to account for the possibility of a lawful termination because that possibility was “unlikely to occur” or because even the 20 per cent possibility of termination did not preclude a conclusion that Amann Aviation could have recouped its expenditure.

Beyond these matters, there were differences in the reasoning of the majority judges.” (emphasis added)

16. The Council made a number of challenges to the facilitation principle and its scope. The majority addressed those matters under the following headings, which are worthy of further reading, if those types of issues may arise in the matter you are considering.

• The facilitation principle is consistent with legal rules concerning loss of a chance.
• The facilitation principle can apply to speculative contracts.
• The facilitation principle is not confined to “essential” reliance.
• The facilitation principle can apply despite evidence of a prospect of non-recoupment.

17. The majority concluded that section as follows:[14]

In summary, the facilitation principle arises in cases where the defendant’s breach of an obligation results in uncertainty and difficulty of proof of loss for the plaintiff, who has incurred expenditure in anticipation of, or reliance on, the performance of the obligation that was breached. The facilitation of the plaintiff’s proof by an assumption that the plaintiff has suffered loss in the amount of reasonable expenditure is neither a blunt rule nor able to be bluntly dismissed in every case by a slight evidentiary onus. The strength with which the principle applies will depend upon the extent of uncertainty resulting from the defendant’s breach. And the extent to which evidence from a defendant can reduce or eliminate the loss represented by a plaintiff’s wasted expenditure will depend upon the extent to which that evidence establishes a likelihood of non-recoupment.” (emphasis added)

18. In applying the principle to the instant case, the majority stated:[15]

“The uncertainties that arose from the Council’s breach of contract made proof of the respondent’s loss very difficult. Without any facilitation of the respondent’s legal onus of proof to establish that its expenditure on construction of the hangar would have been recouped, the respondent would have been required to lead evidence as to the prospect that, having spent $1.3 million to fulfil the sewerage and water infrastructure requirement in condition 23, the Council would have obtained or used funds to develop the airport, in a manner that would have resulted in a sufficient increase in demand, and within a period of time during which the respondent’s businesses could be sustained. Large uncertainties and speculation would be involved.

In the absence of further evidence concerning these uncertainties, the facilitation principle treats the respondent as having established its loss in the amount of its reasonable expenditure on the hangar, incurred in anticipation of, or reliance on, the performance of the Council’s obligation that was breached. The extent of the uncertainty that resulted from the Council’s breach was such as to require the Council to lead substantial evidence as to these matters of uncertainty to establish that some or all of the respondent’s wasted expenditure would not have been recouped.

It is a notable feature of this litigation that the Council ran no alternative case that the respondent would have recouped part, but not all, of its expenditure. As senior counsel for the Council expressed the point in oral submissions, the Council’s argument was that “no recoupment is more likely than any recoupment”. The Council did not lead any evidence to dispute the inference from its own documents that, with the subdivision and the connection of the proposed lots to Hunter Water Corporation’s reticulated sewerage system, the development of the airport was seen as highly desirable. Nor, apart from evidence as to its finances, did the Council lead any evidence to establish that funding for development from a loan would have been prohibitively expensive or that equity investment was unlikely to be attracted, especially in the event that the Council had incurred the expenditure necessary to have the subdivision registered. The Council led no evidence concerning how demand for products or services at the airport might have been affected by development, including any time lags in increased demand. The Council did not even call any witness who worked for the Council at the time when the agreement for lease was negotiated and executed or at any time until very shortly before the Sunset Date.

It may be that the limited evidence upon which the Council relied could have assisted to establish a likelihood that the respondent would not have recouped part of its expenditure. But the case, as developed, concerned only the binary question of whether or not it was more likely that the respondent would not recoup any of its expenditure at all. With the benefit of the application of the facilitation principle, the Court of Appeal was correct to conclude that the respondent established that it would have recouped its expenditure.” (emphasis added)

Conclusion and takeaways

19. This case is one where the defendant’s actions were such that it made the proof of loss near on impossible.
20. The majority’s reasons make it clear that the facilitation principle is one that increases with the extent of the uncertainty that has been caused by the defendant’s breach in relation to the position the plaintiff would have been in, if the contract had been performed. It is an adjustable standard.

21. Such changeable standards and test are not unknown to the law. The Briginshaw standard/ principle and the scope of the defence power under the Constitution, are two that come to mind.

22. The facilitation principle assists the plaintiff in discharging the onus of proof by assuming, or inferring, in its favour that, had the contract been performed, then it would have recovered the expenditure they reasonably incurred in anticipation of, or reliance on, the performance of the contract. The damages assessed are not reliance damages.

23. As the trial judge’s rejection of the principle’s application shows, convincing a trial court of its application is not always easy, so there remains a requirement on the plaintiff to do its best to attempt to establish its loss.

24. The loss that is covered by facilitation principle is that reasonably incurred.

25. The rules of mitigation of loss for unreasonable or improvident actions still apply. As do the rules relating to the remoteness of loss.

26. The majority stated that Amann Aviation was broadly in conformity with the principles they identified in their Honours’ reasons, so the decision should be considered a development and clarification of the law in regard to the facilitation principle.

Robert A. Quirk, Barrister-at-Law, May 2024

[1] Cessnock [2024] HCA 17.

[2] [1991] HCA 54; (1991) 174 CLR 64.

[3] Cessnock, [1].

[4] Cessnock, [188].

[5] Cessnock, [62]-[63].

[6] Cessnock, [64].

[7] Cessnock, [65]-[66].

[8] Cessnock, [65].

[9] Cessnock, [65].

[10] Cessnock, [127].

[11] Cessnock, [129].

[12] Cessnock, [139], [168].

[13] Cessnock, [141]-[148].

[14] Cessnock, [139], [168].

[15] Cessnock, [183]-[186].