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Published on June 13, 2024
Fair winds favour plaintiffs in wasted expenditure cases

A recent judgment of the High Court of Australia has clarified aspects of contract law and the availability of damages for wasted expenditure in Australia, which is steadfastly aligned with England and Wales and in contrast with the United States.

In Cessnock City Council v One Pty Ltd [2024] HCA 17, the defendant Council broke its promise to take steps to apply for and register a plan of subdivision and to grant the plaintiff Company a 30-year lease over part of Cessnock airport. The Company claimed damages calculated as $3.7m in expenditure on constructing an aircraft hangar on the land, which was wasted when the Council breached the contract and the lease failed to materialise.

Wasted expenditure is not a separate head of damages for breach of contract

The Court unanimously concluded that the Company was entitled to its claimed damages, but exactly how each of the seven judges got there was recorded in four separate judgments over 91 pages. The first divergence between the judges was why the plaintiff was entitled to its damages.

Traditionally, in Australia as in England and Wales, the only basis for awarding compensatory damages was to give effect to a plaintiff’s expectation that the defendant would hold up their end of the bargain (Robinson v Harman (1848) 1 Ex 850). However, there has been ongoing international debate about whether a plaintiff is entitled to compensation for expenditure it has made in reliance on the contract, in addition to or separately from its entitlement to “expectation damages”. That debate gave way to a fissure between United States law on the one hand, and Australian and English law on the other, when in 1981, the United States Restatement (Second) of Contracts recognised distinct “expectation interests” and “reliance interests”.

  1. A majority of the Court (Edelman, Steward, Gleeson and Beech-Jones JJ) clarified any doubt about the position in Australia when they wrote, “there is only one measure of consequential losses for breach of contract”: at [117].  Whether the order for damages is intended to compensate “lost profits” or “wasted expenditure”, the underlying justification is the same.
  2. Gordon J agreed with the majority: “Damages for wasted expenditure are not a separate measure or category of expectation damages”: at [51].
  3. Jagot J did not explicitly decide the point one way or the other, maintaining that the Australian authorities are clear enough, and that ”no greater complexity than this should be sown into or permitted to invade this field”: at [193].
  4. However, Gageler CJ backed the United States’s approach when his Honour recognised and distinguished wasted expenditure as a separate type of loss which is recoverable for breach of contract. His Honour wrote, “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”: at [12].

The judges all agreed that expenditure on an aircraft hangar in anticipation of a lease over part of an airport was not too remote, because it could ”reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it” (Hadley v Baxendale (1848) 1 Ex 850 at 855 (cited by Jagot J in Cessnock City Council at [191])).

Method of proof

Having dealt with the jurisprudential issues underlying the case, the judges turned to the more practical question of how damages ought to be calculated in this kind of ”wasted expenditure” case.

The majority restated the principle ”beyond doubt” that the plaintiff bears the onus of proving loss, but helpfully went further to explain why ”in some circumstances the common law facilitates its discharge”: at [127]. In the second paragraph of their judgment, their Honours set out clearly:

”… 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 majority described this ”facilitation principle” as equivalent to the English ”fair winds” principle, stated clearly in Omak Maritime Ltd v Mamola Challenger Shipping Co [2011] 1 Lloyd’s Rep 47, and again in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] 1 Lloyd’s Rep 526, but somewhat confused by Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] 2 All ER (Comm) 1082.

Having recognised that the ”determinative question” is always the same for a breach of contract case, Gordon J said she would not create any rules for the assessment of loss which depend on findings of fact. Instead, her Honour simply (but less helpfully than the majority) stated that, in a case like this where predicting the outcome of the performance of the contract is impossible, the necessary conclusion is that the plaintiff’s wasted expenditure may be recovered.

Jagot J preferred the application of ”a presumption of fact… that the expenditure is ’wasted’ by reason of the other party’s breach or repudiation”. Her Honour explained that there are no preconditions to the engagement of the presumption, and that the strength of the presumption does not depend on the nature of the particular contract or the allocation of risks under it, but that the evidence necessary to rebut the presumption will vary in different circumstances.

Gageler CJ’s approach to proving damage flowed from his position that wasted expenditure could be distinguished from loss of profits: breach being established and the plaintiff’s wasted expenditure being easily quantified, the remaining question was whether the defendant could prove that the plaintiff’s wasted costs were ”in fact incapable of yielding it any benefit or gain… even if the contract had been performed”: at [16].

Conclusion

Thankfully, the majority’s analysis of the right to damages, and their explanation of the method for calculating them, is the most robust and helpful of all the judges’. Going forward, the Australian courts will more readily apply the ”facilitation principle” in wasted expenditure cases, to the ultimate benefit of plaintiffs. Given the alignment in this area of law, we expect the English courts to also take heed of the decision.

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Fair winds favour plaintiffs in wasted expenditure cases
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