The High Court of Australia's recent judgment in Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 is a helpful clarification from Australia's highest court about the circumstances in which a plaintiff can recover damages for wasted expenditure following a breach of contract. In this update, we summarise the key features of the decision and highlight the main takeaways for New Zealand practitioners. The case will also be of interest to those in the property development space, as well as to those advising parties on their compliance with contractual conditions similar to those at issue in the case.
What was the case about?
The appellant (Council) owned land on which the Cessnock Airport is located. The Council hoped to develop the airport and subdivide the accompanying land and, as part of those plans, the respondent (Cutty Sark) entered into an agreement with the Council to lease a prospective lot in the subdivision under which the Council promised to take all reasonable action to apply for and register a plan of subdivision. A 30-year lease to Cutty Sark would operate from the day after the plan was registered and, in the interim, a licence to occupy was granted to Cutty Sark while the subdivision was carried out.
In anticipation of the 30-year lease, Cutty Sark built an architecturally designed aircraft hangar, at a cost of over AU$3.6 million, from which it intended to eventually operate a business conducting joy flights and pilot training. However, the Council did not wish to incur the $1.3 million cost of connecting services associated with the plan registration and communicated to Cutty Sark that it had been "unable to achieve" the plan registration within the timeframe anticipated in the agreement. Negotiations with Cutty Sark about alternative arrangements failed, and Cutty Sark was eventually deregistered due to non-payment of ASIC fees. Pursuant to a term of the agreement with Cutty Sark, the Council paid $1 to acquire the hangar and leased the hangar to a new tenant.
The Council continued its development plans for the airport land for several years, recognising significant apparent interest in the airport from businesses seeking to operate there.
Cutty Sark was reinstated by court order and commenced proceedings against the Council in 2017 for breach of the lease agreement, seeking damages based on its wasted expenditure in construction of the hangar. Interestingly, the Council's position throughout the litigation was that Cutty Sark ought not to recover any damages, rather than arguing an alternative case that Cutty Sark would only ever have recouped part of its total expenditure had the contract been performed.
The first instance judge held that the Council had breached its obligation to take all reasonable action to apply for and obtain registration of the plan, but that Cutty Sark was only entitled to nominal damages of $1 because (among other things) the breach did not make it impossible to assess Cutty Sark's position if the contract had been performed.
The finding of breach was not contested on appeal, but the New South Wales Court of Appeal held that Cutty Sark's expenditure had been wasted in reliance on the Council's performance of its promise to take all reasonable action, and that the onus of proof is on the defendant (here, the Council) to rebut the presumption that the costs would not have been recouped if the contract had been performed. Here, the Council had not rebutted this presumption and as a result it was liable for the full cost of constructing the hangar.
The High Court's decision
The issue in the High Court was in one sense a narrow one – namely, whether the Court of Appeal erred in concluding that "a presumption arose that the respondent would at least have recouped its wasted expenditure if the contract between the [Council] and the respondent had been performed" – and the Court found that "the presumption was not rebutted in the circumstances of this case".
The High Court unanimously upheld the Court of Appeal's decision and in doing so provided useful clarification in this area following its 1991 judgment in Amann Aviation,1 which has proved difficult to apply. The Court unanimously held that Cutty Sark was entitled to recover the full costs of constructing the hangar as wasted expenditure caused by the Council's breach.
The High Court's decision comprises four separate judgments, but we highlight the key common features among them below:
- The key principle for assessing damages for breach of contract is (and remains) the Robinson v Harman rule: that damages should, so far as money can do it, put the innocent party in the position they would have been in had the contract been performed.
- Claims for wasted expenditure (often called 'reliance' losses) are not an alternative to the more orthodox 'expectation' measure of loss.
- A party seeking reliance damages does not have to first prove that they cannot quantify expectation damages before doing so.
- However, if the other party's breach has caused, or increased, uncertainty about the position the plaintiff would have been in had the contract been performed, the plaintiff will be given a 'fair wind' in proving their loss by an assumption or inference that the plaintiff would have recovered any expenditure reasonably incurred in anticipation of or reliance on performance. The defendant must then rebut this presumption.
Impact of the decision in New Zealand
New Zealand breach of contract cases considering damages for wasted expenditure follow the Amann Aviation approach of requiring the defendant to demonstrate that the contract would not have been profitable if performed (ie that the expenditure would not have been recovered).2 Therefore, the High Court of Australia's clarification of how the onus is intended to operate, and simplification of the Amann Aviation judgment, may provide new lines of argument to New Zealand practitioners dealing with clients' damages claims for wasted expenditure. It will be interesting to see if the New Zealand courts pick up the High Court of Australia's approach given they have previously followed Amann Aviation.
More generally, the High Court's decision indicates a desire to simplify the principles relating to damages for breach of contract, including moving away from terminology that can confuse and obscure the issues. In particular, the High Court has de-emphasised the classic Fuller and Perdue "expectation, reliance and restitution interests" and previous distinctions drawn between 'essential reliance', being part-performance or necessary preparatory work for performance, and 'incidental reliance', being any other reliance following naturally and foreseeably from the contract.
The facts of this case are also a reminder of the risk of liability for contractual counterparties' wasted expenditure in reliance on the contract being performed. The result reflects the courts' generally dim view of doctrinal or technical arguments that a counterparty has suffered no recoverable loss in the face of a clear breach of contract.
For developers or property owners with similar obligations to take reasonable steps or make reasonable endeavours in relation to contractual conditions, the case also illustrates that a party is not entitled to rely on non-fulfilment of a condition due to the party's change of heart, rather than based on impediments outside the party's control, and the risk of liability for wasted expenditure in such cases.