Dentons successfully defended a developer and aviation enthusiast, 123 259 932 Pty Ltd (formerly Cutty Sark), in an appeal brought by Cessnock City Council (Council) before the full bench of the High Court of Australia.

The verdict was unanimous and clarifies the position regarding the presumption of recoupment in reliance damages for contracts in Australia for the foreseeable future.

The Hanger that started it all

In 1998, Council sought expressions of interest for the development and management of a proposed airport in Cessnock (Cessnock Airport). The airport precinct was meant to invigorate the area.

In 2004, Cutty Sark submitted a tender to Council to use one of the potential lots of the subdivision to build an “iconic” award winning hangar, which would house exotic aircrafts forming part of an aviation museum and used as part of a ‘joyride’ business.

In 2007, Council and Cutty Sark entered into an agreement for lease with Council (AFL). The AFL would have provided Cutty Sark with a 30-year lease subject to Council using its reasonable endeavours to ensure the plan of subdivision was registered by the specified sunset date. At the same time, Cutty Sark was granted an interim licence so that it could commence construction of the hangar.

How did the dispute arise?

Council failed to register the plan of subdivision by the sunset date as it was not able to obtain its internal approval for AU$1.3 million of funds which was to be used to build the sewerage system connecting to Cessnock Airport. Despite this, Council failed to terminate the AFL and did nothing to prevent Cutty Sark from continuing to expend millions on the hangar and other significant sums of money relating to the purchase of the exotic aircrafts by its related companies.

Cutty Sark vacated the hangar sometime after construction was complete with the knowledge that it was not going to receive the 30-year lease from the Council. Council relied on a contractual provision within the AFL which arguably allowed it to purchase the vacant hangar from ASIC in the amount of AU$1.

Dentons was instructed by Cutty Sark to commence proceedings in the Supreme Court of NSW against Council seeking Cutty Sark's damages in the form of “wasted expenditure”.

Supreme Court of NSW

Cutty Sark relied on the principle established in McRae v Commonwealth¹ and Commonwealth v Amann Aviation Pty Ltd², which based their decisions on the old UK decision of Robinson v Harman³: authority for the proposition that a contract-breaker must place an aggrieved party in the position that it would have been in had the contract-breaker performed its contractual obligations.

The Court at first instance found that while Council breached its contractual obligations pursuant to the AFL to take all reasonable steps to ensure that the plan was registered before the sunset date, Cutty Sark did not establish that it would have been able to recover its expenditure had Council performed its contractual obligations, being the argument advanced by the Council.

This finding seemed to reverse the evidentiary burden established in McRae and Amman. Cutty Sark was awarded nominal damages in the sum of AU$1.

Cutty Sark appealed to the NSW Court of Appeal.

NSW Court of Appeal

On appeal, the Court of Appeal found that the Supreme Court had erred in finding that the burden of proof rested with Cutty Sark, and held that:

1. Cutty Sark was entitled to rely on the well-established presumption that a plaintiff is entitled to recoup its wasted expenditure in circumstances where a defendant breaches its obligations under a contract.
2. In order for that presumption to be rebutted, Council would have to prove that Cutty Sark would not have been able to recoup its expenditure throughout the course of a 30-year lease.

The Court of Appeal ultimately found that Council failed to meet the evidentiary burden and awarded judgment in the favour of Cutty Sark in the sum of AU$3.7 million plus interest and costs, ebing the amount sought by Cutty Sark in the Supreme Court, and which was not disputed or tested.

Council then sought and was granted special leave to appeal to the High Court of Australia.

High Court of Australia

The full bench of the High Court unanimously upheld the Court of Appeal’s decision and the majority judgment held that:

1. The legal onus to prove loss arising from a breach of contract rests on the plaintiff. However, where a breach of contract has resulted in uncertainty making it difficult for the plaintiff to prove its loss, the discharge of the plaintiff’s onus will be facilitated by assuming in their favour that, had the contract been performed, then the plaintiff would have recovered the expenditure they reasonably incurred in anticipation of, or in reliance of the performance of the contract. The strength of the “facilitation principle” (and the weight of the burden placed on the defendant to rebut the principle) will depend up on the extent of uncertainty resulting from the defendant’s breach.
2. In this case, there was considerable uncertainty as a result of the Council’s breach. The principle was correctly applied by the Court of Appeal. In order to rebut the principle, Council was required 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.

In handing down its decision, the High Court did not interfere with the established principles but provided clarification on reliance damages in contract - in circumstances where the established principles in this area have been tinkered with and been the subject of varying decisions across Australia.

Key Takeaways – Why is this case so important?

• An aggrieved party may be entitled to recover their wasted expenditure that was spent in reliance of the contract-breaker performing their contractual obligations.
• When a contractual breach involves uncertainty about what position the aggrieved party had been in had it not been but for the performance of the contract by the contract-breaker, the aggrieved party may rely on the facilitation principle to recover its wasted expenditure reasonably incurred in anticipation of, or reliance on, the performance of the contract.
• The contract-breaker bears the evidentiary onus of proving that the aggrieved party would not have recouped their initial expenditure regardless of whether the contract-breaker would have performed their contractual obligations or not.
   

1. McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (‘McRae'), which famously recognised the commercial difficulty in an aggrieved party being able to provide that they would have reasonably recovered at least its expenditure had the contract-breaker performed its contractual obligations. The High Court held that in these circumstances, the onus shifts to the contract-breaker to prove that irrespective of their breach, the aggravated party would not have been able to recoup its expenditure regardless.
2. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (‘Amann’), which expanded the McRae principle to cater for circumstances where, after the evidentiary onus has shifted onto the contract-breaker as seen in McRae, it would be extremely difficult if not impossible for the contract-breaker to prove whether or not the aggrieved party would have at least reasonably been able to recover their expenditure had it performed its contractual obligations.
3. Robinson v Harman (1848) 1 Ex 850 (‘Harman’).