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Episode 133 Buy Episode

Unpacking Cessnock: The High Court’s Take on Damages for Wasted Expenditure

Law as stated: 11 October 2024 What is this? This episode was published and is accurate as at this date.
Dr. David Winterton, Senior Lecturer at the University of Sydney Law School, joins David to unpack the recent High Court decision in Cessnock City Council v 123 259 932 Pty Ltd and its implications on damages for wasted expenditure. David explores how this ruling builds on the foundations laid by key cases like McRae and Amann, and considers the court’s resulting approach to the presumption of recoupment and the facilitation principle.
Substantive Law Substantive Law
11 October 2024
Dr David Winterton
University of Sydney
1 hour = 1 CPD point
How does it work?
What area(s) of law does this episode consider?Remedies for breach of contract; damages for wasted expenditure.
Why is this topic relevant?Where expenditure is incurred in reliance on a contractual promise being performed, and then is ‘wasted’ as a result of another party’s breach of contract, damages may be awarded as a compensatory remedy with the aim of placing the innocent party in the position they would have been in had the contract been performed. Significantly, the recent High Court ruling, Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17, sought to address the approach for determining when an award of damages to recover these losses is, and is not, appropriate.

The High Court’s decision emphasises the complexities and considerations involved with these assessments, and has shed light on the limits of these damages, the evidentiary standards that must be met for damages to be awarded, and where the burdens of proof lie. This ruling has a profound impact on both public and private contracts, where parties often incur significant costs upfront, relying on the assumption of contractual performance.

What cases are considered in this episode?Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 (‘Cessnock’)

  • Cessnock City Council promised to grant 123 259 932 Pty Limited (formerly Cutty Sark Holdings) a 30-year lease for part of Cessnock Airport, where Cutty Sark spent approximately $3.7 million building an aircraft hangar. The council breached its obligation to take reasonable action to register the subdivision plan, leading to legal proceedings. At trial, Cutty Sark was initially denied recovery for its wasted expenditure, but the NSW Court of Appeal reversed this, shifting the burden to the Council to prove the hangar costs would not have been recouped. The High Court upheld the appeal, ruling that damages for wasted expenditure could be recovered under the “facilitation principle,” placing the burden of evidential uncertainty on the breaching party, but rejected a separate claim for wasted expenditure, treating it as part of expectation damages.

Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54

  • Amann Aviation entered a three-year contract with the Commonwealth for aerial coastal surveillance. Amann invested heavily in aircraft but was unable to have all planes ready on time. The Commonwealth terminated the contract, citing breach. However, the termination was found invalid, constituting wrongful repudiation by the Commonwealth. The issue in relation to damages for wasted expenditure was whether Amann could recover their initial losses based on the presumption that they would have recouped the expenditure if the contract had been renewed, despite the initial contract being a loss-making venture. Amann sought damages for lost future profits and wasted expenditure. The High Court upheld the decision of the Federal Court, ruling that Amann could recover wasted expenditure, applying a presumption of recoupment and placing the burden on the Commonwealth to prove that the expenditure would not have been recovered.

Clark v Macourt [2013] HCA 56

  • Dr. Clark purchased a fertility clinic from Dr. Macourt, including a stock of donor sperm. Upon discovering that much of the sperm was unusable due to regulatory non-compliance, Dr. Clark sued for breach of warranties regarding its quality. At trial, Dr. Clark was awarded $1,246,025.01 in damages based on the number of usable sperm samples. The Court of Appeal overturned this decision, finding no loss since Dr. Clark had recouped replacement costs from patients. However, the High Court reinstated the trial judge’s damages, with the majority affirming Dr. Clark’s entitlement to compensation, while Justice Gageler dissented, raising concerns about the damages assessment.

McRae v Commonwealth Disposals Commission [1951] HCA 79

  • The Commonwealth Disposals Commission sold an oil tanker to the McRaes through a tender process, with the intention of salvaging it and its cargo. The McRaes incurred substantial expenses preparing for the salvage mission, but their vessel sank before reaching Papua, and it was later revealed that the tanker never existed. The key issues were whether the contract was void due to a common mistake and whether the McRaes could claim damages for the non-existent tanker and related expenses. The trial court awarded the McRaes the sale price of the tanker plus £500 for costs incurred in verifying the tanker’s existence. However, the High Court overturned this judgment, granting the McRaes £3,285 in damages for breach of contract. The High Court acknowledged the difficulty in assessing damages but concluded that the McRaes were entitled to recover the price paid and nominal damages for the breach.

Armory v Delamirie [1722] EWHC KB J94

  • A chimney sweep found a valuable jewel and took it to a jeweler, who refused to return it, leading to a legal dispute over the jewel’s value. The issue in this case was the application of the “facilitation principle,” which shifts the burden of proving the value of the item to the party that creates the evidentiary uncertainty, in this case, the jeweler. The court found that because the jeweler created the uncertainty, they had to disprove the chimney sweep’s claim about the jewel’s value, establishing the facilitation principle as a way to address evidentiary difficulties caused by one party.

Robinson v Harman (1848) 1 Ex Rep 850

  • Mr. Harman agreed to grant Mr. Robinson a lease but later refused to complete the lease after it was revealed he did not have full ownership of the property. The issue was whether Mr. Robinson could recover damages for the loss of his bargain, given that Mr. Harman lacked the legal title to grant the lease. The court found that since Mr. Harman had knowingly breached the contract, Mr. Robinson was entitled to damages for the loss of his bargain, putting him in the position he would have been in had the contract been performed.

Hadley v Baxendale [1854] EWHC J70

  • Mr. Hadley contracted with Baxendale to deliver a broken crankshaft for repair, but the delivery was delayed, causing Hadley to lose business profits. The issue was whether Baxendale could be held liable for Hadley’s lost profits, given that Baxendale was not informed that the delay would cause such losses. The court found that damages are limited to those that arise naturally from the breach or were reasonably foreseeable by both parties at the time of contract, and since Baxendale was unaware of the special circumstances, he was not liable for the lost profits.

Blatch v Archer (1774) 98 ER 969

  • This dispute centered on the validity of a will, with the plaintiff, Blatch, asserting that the will was legitimate and that he was entitled to the estate, whilst the defendant, Archer, challenged the will’s validity, alleging it was a forgery. The court ruled in favour of Blatch. Lord Mansfield articulated 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.”

 Ti Leaf Productions Ltd v Baikie [2001] NZCA 303

  • Ti Leaf, a company that leased a farm from the Baikies to film a martial arts movie, spent over $1 million on the project. The issue arose when the Baikies breached the contract by making a negative public comment, which led to investors pulling out, causing Ti Leaf to seek damages for the wasted expenditure. The court found that Ti Leaf failed to prove causation, concluding the film would never have been completed, and rejected the argument that the onus was on the defendants to prove the expenditure wouldn’t have been recouped.

Anglia Television v Reed [1972] 1 QB 60

  • Anglia Television hired Reed for a film, and when Reed breached the contract, they sought damages for both pre- and post-contract expenses related to the project. The issue was whether reliance damages could include expenditure incurred before the contract was made. The court found that such pre-contractual expenses could be recovered if they were within the contemplation of the parties, and Reed was held liable for the full £2750, including costs incurred both before and after the contract.

Soteria Insurance Ltd (formerly CIS General Insurance Ltd) v IBM United Kingdom Ltd [2022] EWCA Civ 440

  • Soteria, a sophisticated commercial party, claimed damages against IBM for breaching their contract by failing to provide the promised performance regarding the installation of software or computers, despite an express exclusion clause that barred recovery for certain types of consequential loss. The issue was whether the exclusion clause also implicitly excluded claims for wasted expenditure, which Soteria sought to recover. The Court of Appeal found that wasted expenditure claims are fundamentally different from consequential loss claims, and thus the exclusion clause did not bar Soteria’s claim for wasted expenditure.
What are the main points?
  • Damages for wasted expenditure refers to awards for breach of contract, where the aim is to put the innocent party in the position they would have been in if the contract had been performed.
  • These damages are often referred to as “reliance damages”, however this term may cause confusion for those less familiar with the complexities of contract damages.
  • The case of Cessnock provided the courts with the opportunity to clarify the principles governing damages for wasted expenditure, in light of various interpretations in previous authorities such as Amann and McRae.
  • When a defendant’s breach increases uncertainty about the plaintiff’s position, there is a presumption of recoupment that the plaintiff would have recouped any reasonable expenditure made in anticipation of the contract’s performance.
  • In a claim for damages, the burden of proof generally lies with the party seeking damages to demonstrate that their loss was caused by the defendant’s breach; however, this burden can be facilitated by the presumption of recoupment. The High Court in Cessnock reiterated that the party creating uncertainty should bear the burden of proof.
  • The concept of reasonably incurred expenditure is related to the Hadley v Baxendale remoteness rule, which determines the limits of recovery of damages for consequential loss in breach of contract cases, emphasising reasonableness and foreseeability by both parties at the time of the contract.
Show notesWinterton, D. (2024), ‘Reassessing “Reliance Damages”: The High Court Appeal in Cessnock CityCouncil v 123 259 932 Pty Ltd’, Sydney Law Review, vol. 46, no. 1 pp. 87-102.

McLauchlan, D. (2019), ‘The Limitations on ‘Reliance’ Damages for Breach of Contract’, Campbell, D and Halson, R (eds), Research Handbook on Remedies in Private Law, Edward Elgar Publishing.

Judgement of Chief Justice Gageler in Cessnock.

Stone, J. (1907), Legal System and Lawyers’ Reasoning, Stanford University Press, Stanford.

 

DT = David Turner; DW = David Winterton

00:00:00DT:Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on-the-go and at a time that suits them. I’m your host, David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services, and here’s how the legal podcast is how we’re improving the experience of CPD.

Where expenditure is incurred in reliance on a contractual promise being performed, then it’s wasted as a result of another party’s breach of contract, damages can be awarded as a compensatory remedy with the aim of placing the innocent party in the position that they would have been in had the contract been performed – that essential compensatory principle. A recent High Court ruling, Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17, what used to be called Cutty Sark Holdings Pty Ltd, sought to address the approach for determining when an award of damages to recover these losses is, and is not, appropriate.

The High Court’s decision emphasises the complexities and considerations involved with these assessments of wasted expenditure and has shed some light on the limits of these kinds of damage. The evidentiary standards that have to be met for damages to be awarded by both the plaintiff and the defendant, and where the burdens of proof lie.

Now to unpack this decision and explore its implications, we’re joined today by Dr. David Winterden, a senior lecturer at the University of Sydney Law School. David has a particular focus on contract law, restitution and contractual remedies, making him our perfect guide to navigate us through this pivotal ruling and its implications.

Dr. David Winterton, thank you so much for joining me on Hearsay.

00:01:48DW:Thanks very much for having me.
00:01:50DT:Now, before we get into the case, Cessnock City Council v 123259932, tell us a little bit about how you came to specialise in this area.
00:02:00DW:So I did my undergrad, combined law and science degree at UNSW, and then I was very fortunate to get a scholarship to go study overseas in the UK, where I did a master’s and then stayed on to do a PhD, what they call a DPhil at Oxford, which is where I did it. And I got very interested when I was doing my Master’s in the question of why, for breach of contract, damages is the default remedy rather than specific performance. So I started my further research thinking about that question, which is quite a philosophical question. And in the course of the first year of the DPhil, which was called the MPhil the way I did it, I realised I probably didn’t have anything that profound to say about that topic, which is a topic that a lot of people have written about in the past but I realised that there was this very interesting question about how you actually measure damages for breach of contract. Specifically, what it means to put the party in the position as if the contract had been performed, which, as I think you know, and hopefully most of the listeners will know, is the ruling principle for the assessment of damages for breach of contract. So to cut a long story short, I got very interested in this question and argued for a specific view in my DPhil doctoral thesis as to what might be called a ‘performance-oriented view’, which isn’t just concerned with the assessment of damages by reference to the party’s factual position they would have been if the country had been performed, but takes account of the fact that they have an interest in performance, which is quantifiable in monetary terms, and I might, in the course of our discussion, give some examples of cases where there’s a difference between those two things. So, anyway, as I said, to cut a long story short, got very interested in that question, argued for a particular view, very briefly tried practice after I finished the doctoral dissertation, but realised I was really more interested in these philosophical or conceptual issues that exist right throughout the law of obligations and so decided to pursue academia. I really enjoy teaching and I really like researching and writing – don’t like marking so much, but I haven’t yet met an academic who does – so very happy doing that. I suppose the simple way to describe why it is that I prefer that is, as I think you’ll know, David, when you’re acting as a lawyer, you’re fundamentally concerned with the interest of the particular party that you’re representing in the dispute and the particular facts of that dispute and it’s not always the case that you get to explore these interesting legal conceptual questions that underpin the law, whereas as an academic, you get much more license to do that and you can, I suppose, write more systemically, comparing different kinds of cases rather than just being focused on the narrow dispute at hand.
00:04:40DT:Absolutely. You’re often encouraged or enforced to leave the philosophical questions to one side in favour of more pragmatic ones, but every now and then some lucky practitioner gets to talk about the big questions in a case like Cessnock City Council. I’m excited to have this chat with you today. The assessment of damages for breach of contracts, it’s a bit of an interest-area of mine. I’ve written about it in the past. I think a lot of lawyers spend a great deal of time thinking about the causes of action they intend to bring, but spend far less time thinking about the way that damages will be assessed or proven in respect of those causes of action and often how the assessment of those damages may differ between causes of action. Now, as I said at the top of the episode, we’re talking about this case, Cessnock City Council and the company that used to be called Cutty Sark Holdings. It’s a High Court decision on appeal from the New South Wales Court of Appeal. Before we get into the facts of the case, there’s an interesting terminology question here, right? I’ve read a few articles about this decision, talking about it as a case about reliance damages and your article also calls it a case about reliance damages, but the term ‘reliance damages’ is in quotation marks. So, is this a case about reliance damages or not?
00:05:45DW:Good question as well. Well, ‘reliance damages’ is the term that is often used to describe these kinds of damages awards, right? So, I think to answer that question fully I need to say a few things. So, the first point is, as I said, the governing principle when awarding damages for breach of contract is to put the party in the position as if the contract had been performed. Now, as I’ll go on to explain in the course of our discussion today, sometimes the law allows the innocent party to instead recoup what’s referred to as their ‘wasted expenditure’ in circumstances where it will be difficult for them to show what position they would have been in if the contract had been performed, and that can arise for various different reasons as we’ll discuss. And so given that, and given that what one is always claiming when one claims one’s ‘wasted expenditure’, which is the term I would prefer to use, one is always claiming for expenditure one has incurred in reliance upon a contractual promise that has now been breached. It’s common to refer to these damages as ‘reliance damages’, and as you said, I refer to that in my article, but that’s the common term that people generally use. I think the reason I don’t prefer it as the label, and my preference would be for the law to not use that label, but to use something like ‘damages for wasted expenditure,’ is that it gives the impression that what one is doing is compensating a reliance interest, which is really, at least on the view that’s been upheld by the High Court in the most recent Cessnock decision, but also what the High Court said in the earlier Amann decision which we’ll discuss, is not the aim when you’re awarding damages for wasted expenditure. The aim is instead to give effect to what’s referred to as the ‘expectation interest’, which is the position the party expected to be in if the contract had been performed and it’s just that sometimes, for various reasons, that’s impossible or difficult and so we give the innocent party the option to instead claim their wasted expenditure, which is the expenditure they incurred in reliance. But also, it has to be said that it’s not just the expenditure they incurred in reliance, because it’s always possible that they wouldn’t have recouped some of that expenditure if the contract had been performed, and so what they actually recover as their wasted expenditure may be a lot less than their actual reliance expenditure. So the simple answer is that using the term ‘reliance damages’, I think, may give the misleading impression to people who aren’t as familiar with the cases or the relevant legal rules, as to what’s going on. But, for people who understand what’s going on, it’s probably not such a big deal that that term is used. But as with anything in the law, terminology can matter because when terms are used that aren’t accurate representations of what’s going on, people tend to get confused and I’ll give one example, which is a very different sort of case – well, it’s still a case about contractual damages – but is a fun case, and I know that you have some familiarity with this case, David. It’s a case called Clark v Macourt, which is one of my favourite cases to teach and it has very relatable facts and some of the listeners may have heard of this case, but even if they haven’t, I hope that they’ll find it interesting because what happened there effectively is it’s a contract for the sale of a business – and just to clarify, the reason I bring it up is to show there’s an ambiguity or an indeterminacy in the word ‘loss’. So people understand that damages are awarded for loss of expectation or loss measured by reference to the position the innocent party would have been in if the contract had been performed, but there’s an ambiguity, or I probably would prefer to say an indeterminacy as to what the word loss means there, right? So in that case, it was a contract for the sale of a fertility clinic by, to simplify the facts, a doctor by the name of Dr. Macourt to a Dr. Clark, and they were both assisted reproductive technology practitioners, so they both specialised in in vitro fertilisation, it was the sale of, effectively, an in vitro fertilisation clinic by Dr. Marcourt to Dr. Clark. Now, the essence of the case was that when, as is often the case when you’re selling a business, you also sell the inventory of the business at that time, and so part of what was promised as part of the transfer under the contract of sale – it was actually a deed, was a certain number of straws of donor sperm, I think 3000 approximately, okay?
00:09:57DT:Unorthodox inventory.
00:09:58DW:Yes. Unorthodox industry. Now, as I usually get a smirk when I say, well, the donor sperm was defective. Now, what does that mean? Well, what it really meant was that proper records hadn’t been kept and so you couldn’t identify all the donors. Now, clearly that’s a problem for potentially multiple reasons. One reason is presumably the person wanting to use the sperm wants to know who the donor is, but there’s another regulatory reason, which is that there’s a regulation in place in New South Wales that limits the amount that one particular donor can father children, for obvious reasons, you don’t want half the population of the city running around being fathered by the same man. So to cut a long story short, some of this sperm, in fact I think most of it from memory, couldn’t be used and the cost of replacing it or purchasing replacement sperm was on the evidence found to be much more than the actual cost of the sale of the clinic itself. So you had a situation where basically, I’m simplifying but, the price for the sale of the fertility clinic was about $380,000, something like that, but the cost of replacing this donor sperm, which was just one asset under the contract of sale, was about a million dollars. Now, the default rule for assessing damages for breach of warranty in relation to goods that are promised is the value of the goods in the market, which is the same as the cost of replacing them in the market. And so the default rule would say you get a million dollars damages there but it turns out, A) that was a lot more than the price of the business overall and secondly, it turned out that Dr. Clark, who was the purchaser had actually in a sense, managed to offset some of her costs by purchasing replacement sperm and charging her patients more than she otherwise would have been able to charge them because of certain other regulations that were in place, which limited the amount that an assisted reproductive technology practitioner could charge for donor sperm. So to cut a long story short – and as I said, I’m oversimplifying – effectively, the argument was, well, a lot of the prima facie loss that would be the cost of replacing the sperm had been offset or mitigated by Dr. Clark because of the way she conducted her business, so she hadn’t really suffered this loss. And so now, hopefully we see the ambiguity or indeterminacy that arises in regard to the meaning of loss here. Are we concerned with the eventual factual or financial position that Dr. Clark ends up with after events have run its course, or are we just interested in measuring the value of the performance that was promised under the contract? And the High Court, by majority with a notable dissent by the now Chief Justice Gageler, who was Justice Gageler at the time, allowed the claim for the value of the lost performance even though this put Clark in a significantly, at least arguably, better financial position than she would have otherwise have been in. And so I cite this case as an example of A) the indeterminacy or ambiguity as to what ‘loss’ means; are we concerned with factual financial position or performance in and of itself having a value? And secondly, it’s an illuminating example of how strong, arguably, the protection of the performance or expectation interest is. And this is why, to come back to the original point, terminology can really matter because if you tell a student that damages are compensating for loss, they generally tend to assume that means just financial factual position but one way I explain the case to the students is even though damages are the default remedy for breach of contract, if Dr. Clark had sued for specific performance of that contract, which wouldn’t have been awarded for reasons I won’t go into, but if she had, then Dr. Marcourt would have had to go out into the market and purchase replacement sperm to provide it to Dr. Clark, which would have cost him a million dollars on the evidence available. So one way to understand the case is it’s awarding the monetised value of specific performance.
00:13:43DT:That’s a great way to think about it, actually. That’s a very elegant explanation of the principle in the case and it is a fun case, but as you say, a great one to illustrate that terminology matters and to illustrate how complex, the apparently simple compensatory principle can be, just like our case today, Cessnock City Council. And I agree, reliance damages to the passing observer sounds a little restitution-y, sounds a little equitable. Damages for wasted expenditure? Nice and clear. So let’s talk about Cessnock City Council now. Maybe we’ll start with the facts of that case. This is a case where the respondent in the appeal, that ACN, formerly called Cutty Sark, entered into an agreement for lease with the Cessnock City Council for some land, on which they were going to construct an iconic airport hangar. The lease could really only be granted when the Cessnock City Council had subdivided the land into parcels that could then be leased to the respondent. Cessnock City Council never did that. There was really no dispute in the appeal or the subsequent High Court appeal that there was a finding that the council had breached that agreement for lease by failing to subdivide the land, but the question was, what damages was Cutty Sark or ACN 123259932 entitled to receive in respect of that breach? At first instance, only nominal damages, on appeal material ones, and that appeal to the High Court was dismissed.
00:15:07DW:Exactly. So as you said, David, essentially Cessnock City Council had come up with the idea to develop Cessnock Airport and in the process of doing that, they put out calls for tender for parties that were interested in leasing certain lots on the soon to be developed, apparently, Cessnock Airport. And there was a process of negotiations, discussions between the parties, and again, to cut a long story short – the facts are very important, but we have to focus on what’s I suppose particularly relevant to the dispute as it turns out when it gets to the High Court – the council contractually promised to take all reasonable action to apply for and register a plan of subdivision by a particular date, referred to in the contract between the parties as the ‘sunset date’, and also notably, to grant the plaintiff a 30 year lease, right? So there’s two promises; a promise to grant them a 30 year lease, but also, importantly, a promise to take all reasonable action to apply for and register a plan of subdivision by the sunset date. Now, what happened in the interim is, as you mentioned, Cutty Sark – which I’m just going to refer to them as, for ease of reference – entered onto the land, was given a license, which, different rights attach to it, and they proceeded with informal council consent to spend approximately $3.7 million constructing this iconic aircraft hangar, from which they proposed to house previously acquired aircraft and to run various businesses. Okay. Now, a really important part of this case is that the council was wearing two hats in this dispute. One was, it was a contractual counterparty with Cutty Sark but it was also the relevant planning authority with the authority to decide whether the development went ahead or not, or received planning permission. Now I’m no planning lawyer, so I’m not going to get too bogged down in that, but it’s an important part of the case and an important factual complexity there, which might influence people’s sense of justice about the case and we can come back to that but, relevantly, in its planning authority capacity, the council required certain sewage works to be done before this particular subdivision could proceed, right? And then so back wearing its other hat as the contractual counterparty, it decided, “oh, actually this is going to cost too much. It’s going to cost over $1 million. So, we don’t want to proceed anymore.” And so effectively they breached their obligation to take all reasonable action to apply for and register the plan of subdivision by the sunset date and that was the relevant breach of contract and that’s the breach that Cutty Sark was claiming damages in respect of. Now, the one other very important factual aspect of the case, at least for the trial judge, Justice Adamson, she refused the claim on a number of different grounds, but relevantly, she said that the expenditure would have been wasted anyway, was that, as I said, Cutty Sark had moved in and were occupying the premises with a license and they ran various businesses from the lot, but none of them were successful and they’d abandoned all of these businesses before the sunset day, which of course led the council to say, “look, the venture wasn’t going to be successful, so the expenditure would have been wasted anyway.” And of course, Cutty Sark in response said, “well, how do we know? Because the development never went ahead. And if it had gone ahead, there would have been other tenants. There would have been a lot more potential customers. The business might eventually have been very successful.” So, and this is the effective essence of the dispute is, we just don’t know what would have happened.
00:18:44DT:Yeah and Justice Adamson at first instance said, well, it really just needs to be impossible to know what the position of the plaintiff would have been had the contract been performed before we can even think about assessing damages on a wasted expenditure basis. Unless it’s impossible, we’ve just got to proceed on the basis of identifying what position they would have been in had the contract been performed, which on the counsel’s case was, having operated a failed business from an iconic hangar and otherwise that wasted expenditure approach to damages was unavailable. I think she also said that, notwithstanding the obligation to subdivide the land, the council had no other obligation to develop the land.
00:19:21DW:Yes, exactly right. Yeah. So they didn’t promise to develop. This is an important point. They promised to take all reasonable steps to apply for and register the plan of subdivision. So it’s possible hypothetically that the development wouldn’t have gone ahead for some other reason. So perhaps funding for the development couldn’t have been obtained, no financial institution would’ve backed it or something, even if they’d conformed to their promise. So there are various contingencies here. We don’t know what would eventually have happened. And so, the essence of these kinds of cases is often who should bear the brunt of this evidential uncertainty.
00:19:52DT:Okay, so that’s the facts. We’ve had our decision at first instance. Cutty Sark has been, in substance, unsuccessful. They’ve established a breach, but no real damages awarded. Before we go on to the decision of the Court of Appeal and really the decision of the High Court in upholding it, what was the position so far as this kind of damage, I won’t say head of damage, but this sort of category of damages before this decision?
00:20:16DW:Okay, yep, an important question. So, the two most important cases preceding this, there are some other cases which are particularly referred to by Chief Justice Gageler in his judgment in the Cessnock decision where wasted expenditure, or ‘reliance damages’ in inverted commas, are awarded but the two most important are a decision called McRae and decision called Amann. Now mentioning Amann tends to send shivers down the spines of former law students – complicated case with seven judges, six different judgments, and a very complex discussion of legal principles. So just before I get to that, we’ll start with McRae, which is a simpler case to understand. So McRae is an important case about the existence, or perhaps non-existence, of the doctrine of common mistake in Australian law, and it was a case of the sale of a non-existent tanker. So, without getting, again, too bogged down in the facts, effectively, the Commonwealth Disposals Commission put out tenders for people to salvage this tanker…
00:21:17DW:I remember this one.
00:21:19DT:Yeah, yeah, that was said to be located off a reef – I think it was somewhere off the Northern Territory from memory, someone may correct me on that, but it doesn’t matter where it was. Essentially, there was some rumor that this tanker existed, and they put out a call for tenders, and McRae answered and purchased the information and equipped most relevantly an expedition to go find the tanker. Now this tanker never existed.
00:21:43DT:There was nothing to salvage.
00:21:44DW:There was nothing to salvage. And so it’s a very unusual case. And so, the first point about the case is one might say, “well, the parties are just contracted about a non-existent thing, so there’s no contract. You can’t contract for a non-existent thing.” And that might be true in some cases, but what the High Court said in McRae is actually in this circumstance, effectively, there was an implied warranty by the commission, basically the Commonwealth, that the tanker existed, which makes sense when you think about it. They were the one best place to know whether or not it was and McRae was assuming that it existed on the basis of their representations. So this was a case where even though they were contracting about something that never existed, effectively, there was a promise or more accurately, a warranty by the Commonwealth that the tanker existed at this particular location, which meant that there was a promise that was breached and therefore a claim for damages could follow. The difficulty, of course, is how do you value those damages when the tanker doesn’t exist? And as is said either in that case or in subsequent commentary, it’s impossible to value a non-existent thing.
00:22:49DT:Hard to know what sort of profit McRae would have earned from salvaging the non existent tanker.
00:22:54DW:Certainly hard to know what profit, but also just hard to know what the value of the tanker was in and of itself, right? So again, basically what the High Court said there. Now, much discussion in both Amann and in CessnockAmann I’ll talk about in a minute – was as to precisely what the ratio of McRae is. It was a unanimous decision – very learned judgment from Justices Dixon and Fullagar with an agreement concurrence from Justice McTiernan, where basically they said, look, in these circumstances “where it’s impossible,” to use a quote from the judgment, “as a matter of theory to value the promise performance, you can get the benefit of a presumption of some kind.” And then the question is, is there a shifting of the legal or the evidential onus – which we’ll come back to talk about – that you would have at least recouped your expenditure? And this is completely understandable if you think about it. If you say that, you know, the Commonwealth made this promise, we have no idea what the tanker would have been worth, or how much profit would eventually be recouped, at the very least, we should allow the innocent party to recoup their expenditure, subject to the breaching party showing that they never would have been able to recoup it.
00:23:58DT:Yeah. And this is, just to return to our earlier point about our distinction between reliance damages and the compensatory principle, but this being effectively a shortcut to get there, this is the assumption that had the contract been performed. Well, we don’t know exactly what position the plaintiff would have been in, but we’re entitled to assume or, there’s a great bit of language in the Cessnock case – which we’ll come to about getting them some fair wins – that at the very least, they would have recovered what they spent.
00:24:27DW:Yeah, and that’s a good point to segue to Amann. So in Amann, as I said, – I’ll outline the facts in a second, which at least before Cessnock was the leading case on wasted expenditure claims in Australia, and probably in the common law world, one would say – is precisely what the justification for the rule in McRae is. So, in Amann, it appears as though a majority of the court accepted that the justification for it – or at least three of the seven judges – said that the justification is that there’s a presumption that any person entering into a commercial contract only incurs expenditure if they think they’re going to recoup it. Now that’s true, I think, probably, in the long run. Although sometimes people might enter into losing contracts for particular reasons, but generally speaking, that’s true but the fact that they think they’re going to recoup it doesn’t actually necessarily mean they would of course, right, but the justification seems to be, well, given that you’re the innocent party in these circumstances, it seems fair to give you the benefit of a presumption or an assumption that you would have recouped your expenditure, remembering that it’s always open to the other party to demonstrate that you wouldn’t have but we put the risk of uncertainty or the risk of incorrectly assessing the damages on the breaching party rather than the innocent party. Now, just very quickly, Amann was a case where essentially the Commonwealth, again, put out tenders for expressions of interest in relation to the aerial surveillance of Australia’s northern coastline, Amann was the company that won the tender and they entered into a contract with the Commonwealth to do this work for three years. Now the important part of this case, I think, is that Amann had to incur significant expenditure upfront to be able to perform this contract. So they had to buy and equip planes specially, in order for those planes to be contractually compliant and to perform their obligations under the contract. And so, effectively, the first three year contract, which is all that the Commonwealth promised, was a losing contract. So I think one of the things about Amann that scares some students off is the maths of it. It’s quite complicated, but the simple point is really that it was just a losing contract and that they were going to be, I think from memory, about $3.9 million in the red on the first three year deal. And you might think, “why the hell would anyone enter into a contract where the receipts they’re going to obtain under the contract are that much less than their costs?” And one possibility is there might be some tax benefits to it, I suppose, but what seems to be in the case here is that it was part of a business plan where they thought, “well, we’ll be best placed to get the renewal contract and at that point we’ll start making profits and we can write off our losses under the original deal.” I think that seems to be the thinking behind it.
00:27:09DT:Yep, there’s some capital expenditure to incur up front, but there’s an expectation beyond the term of the initial contract that there will eventually be a profit to earn, and yeah, maybe along the way some CapEx to write off on the next tax return. So I suppose by the end of Amann, we have some clarity, we understand how mechanically an assessment of damages for wasted expenditure works.
00:27:31DW:In theory we do, but there’s six different judgments and they all take slightly different approaches. Personally, I think Justice McHugh decided the case correctly, but I think that’s probably something for another day, given particularly what’s said in Cessnock.
00:27:46DT:Yeah, well I guess that means if you have to pick your favourite High Court judge, you probably don’t have a lot of clarity about it. And so, I suppose Cessnock City Council both gives us some clarity, we have a majority judgment there but it also elucidates for us in what circumstances damages for wasted expenditure are available, at which point then we start to apply them mechanically.
00:28:08DW:Yeah, sure. So, Amann is a complicated case. The most important things to understand about it are that arguably there’s no clear ratio. Six different judgments and so lots of different reasoning, very hard to pull out a ratio. Secondly, it extends the range of circumstances in which the presumption of recoupment apply from mere theoretical impossibility, which is very rare, exemplified by McRae, to circumstances of sufficient practical difficulty. And the astute amongst us would realise, well, that opens the door up a long way because it’s often very hard to know precisely what position the party would have been in. So, it potentially extends the range. And then, the other very important point is it says that in determining what position the party would eventually been in, had the country been formed, regard maybe had to consequential benefits flowing from performance that are within the scope of Hadley v Baxendale, which we’ll talk about later on, I think, rather than just benefits you would have received under the main contract. So now, without getting bogged down, that point’s been criticised and maybe we can talk about that further but that’s what they said, because in order to take account of this prospect of renewal, which the High Court said, given that there was this valuable prospect of renewal, it was on the Commonwealth to show that either there would have been no renewal or they wouldn’t have recouped their expenditure under renewal, they’re taking into account consequential benefits. And then the one other very important point, and this will become I think important later in our discussion is, Amann was a case where the expenditure was what we might describe as necessary preparatory expenditure. So the expenditure Amann incurred was buying and equipping the planes in order to perform the contract and they would have, if the contract had run its course, obtained receipts from their contractual counterparty. So that’s what one might describe as essential expenditure, whereas in McRae and importantly in Cessnock, the expenditure was not essential. It was inessential expenditure. It was expenditure incurred to reap the benefit of the contractual performance. So in McRae, the relevant expenditure that was controversial anyway, was the expenditure to equip the expedition in order to go obtain the tanker and in Cessnock, it was the expenditure on the hangar in order to take advantage of the lease.
00:30:24DT:Cutty Sark is entitled to construct the hangar, but there is no obligation on them in the lease to do so.
00:30:28DW:Exactly. Whereas in Amann, Amann had an obligation to equip the planes and to perform the contract in a particular way. Now, one of the grounds of appeal that the appellant ran was that this is an important distinction. And so even if it was correct in Amann, which they challenged to extend the range of situations where the presumption rises from theoretical impossibility to practical difficulty, that should be limited to cases of essential expenditure and so one way to think about why arguably the Cessnock claim is controversial is McRae is a case where you have theoretical impossibility and non-essential expenditure, Amann is a case where you have mere practical difficulty and essential expenditure, and you’re taking the two of them and melding them together to say, “now you can recover wasted expenditure when there’s practical difficulty in relation to non-essential expenditure,” which potentially increases the range of situations when you can recover this quite drastically.
00:31:25DT:Yeah, absolutely. So I guess we’ve laid the groundwork now and we can start talking about the ratio in Cessnock City Council and as you said, happily, we’ve got a majority judgment there from Justices Edelman, Steward, Gleeson, and Beech-Jones. So some more clarity for the business world. What is the ratio? What’s the takeaway?
00:31:42DW:I think the first thing to say about Cessnock is that the most important thing about it is that there’s a majority judgment, which at least purports to establish a clear rule as to when wasted expenditure is recoverable. So future law students, and potentially practitioners, will be happy to know that they no longer have to spend hours of time wrestling with the nuances of the different judgments in Amann and they can now go straight to Cessnock, at least if the case is relevantly analogous.
00:32:10DT:They can read the grey box extract bit of Amann rather than the whole thing, yeah.
00:32:15DW:So what does it say? Now, I suppose there’s a few important takeaways. The first is a terminological point, which is that they described the principle that assists an innocent party to recover their wasted expenditure by reference to the label; ‘the facilitation principle’, which is a new label as far as I’m aware, and they said that it was most famously associated with this famous case Armory v Delamirie, which I think some of our listeners may vaguely remember from their law student days. Essentially, again, I don’t want to get bogged down in the facts, but it’s a case where a chimney sweep found – I think it was a ring from memory, but there was a very valuable jewel, at least arguably, in the ring. He took it to a jeweler to get it valued or to find out how much it was worth and then it seems, although this is one point of contention in the case, that the jeweler refused to give it back to him and then when he brought a claim for conversion against the jeweler, the jeweler said, “well, prove that the ring exists or prove the value of the ring.” I can’t remember which one it was. It might’ve been both. And again, to cut a long story short, the court said, well, in those circumstances, the innocent party, the chimney sweep, who it’s hard not to have some sympathy for in a case like this.
00:33:24DT:I love how Dickensian some of these classic contract cases are but anyway…
00:33:28DW:It’s a great case, this one, and very clearly pulls on the heartstrings a little bit. They said, well, we’re going to give a benefit of a presumption that the jewel was as valuable as the chimney sweep says it was. Essentially, it’s on the breaching party to demonstrate that the jewel or the value of the thing that’s being claimed is not what is being alleged. Now, I think it makes sense in that circumstance. I don’t think many people would argue with the decision and this principle is sometimes referred to as the Armory v Delamirie principle and the High Court referred to this in Cessnock as the facilitation principle and said that, well, see clearly there it’s got nothing to do with presuming a party would recoup their expenditure, it’s well, the person who creates the uncertainty should bear the risk of incorrect assessment.
00:34:14DT:There’s a causative link between the defendant’s behaviour and the availability of the facilitation.
00:34:22DW:Exactly, yeah. So the evidential difficulty there is clearly created by the defendant because they’re alleging that the plaintiff needs to show what the value of the jewel was when they’re the one who at least on one view of the fact has the jewel. Okay. So importantly, they described that principle as the justification for allowing contracting parties to recover their reasonable wasted expenditure. Now I use the word ‘reasonable’ there, we’ll come back to talk about what that means. And then it’s not about presuming that parties will recoup their expenditure, which, as was pointed out by Justice McHugh and his judgment in Amann, is not really a safe assumption because there can be many contractual scenarios where a party is not justified in assuming that the party will in fact recoup their expenditure. At least, maybe not many, but it’s not that uncommon. So they both relabeled the principle as ‘the facilitation principle’ and explained that the justification is about dealing with evidential uncertainty created by the defendant rather than a presumption that the innocent party would have recouped their expenditure. So that’s the first important takeaway. The second is that they assimilated the rules in relation to expenditure incurred in reliance on a contractual promise and expenditure incurred in anticipation of a contractual promise. Now, it doesn’t really matter in Cessnock itself because it was clear that all the expenditure there was incurred in reliance, but I think that is a point that maybe have to be revisited in future cases because I would say I’m very sceptical that the principles governing when you can recover a reliance expenditure should be the same as when you can recover anticipatory expenditure, and just to explain what I mean by that, I mean expenditure that a party incurs prior to the contract being formed, in anticipation that it will be formed. Now, two other important points. One is the High Court confirmed that the recovery of wasted expenditure is an application of the expectation principle. It’s not that there’s a separate claim available as has been suggested in America and in some older English authorities, although that’s now been overruled in England, that there’s this separate reliance expenditure type claim that a party can elect between, but that awarding damages to wasted expenditure is just a proxy for, or a different way of assessing, the value of the contractual benefits that the party was promised. An important point to note here is that Chief Justice Gageler was the one judge who didn’t take that view. He said that in fact, it’s a separate kind of claim. And so, perhaps the simplest way to explain what he means is that he’s adopting something like a historical conception of loss rather than a counterfactual conception of loss and I note that you had a podcast recently about counterfactual type reasoning and so on. So it’s, I suppose, relevant to mention that.

TIP: So David just mentioned our recent episode on counterfactuals. If you’d like to check it out, and I’d recommend it, it’s a fantastic listen – that’s episode 129 with Hans Weemaes, entitled “Grasping Causation: A Data Science Explanation of Causal Inference and the Role of Counterfactuals.” Fascinating episode for anyone who deals with expert evidence regularly.

So for Chief Justice Gageler, what these kinds of claims are about is quantifying the expenditure that’s been wasted because of the breach and this is a different kind of claim as opposed to for the rest of the court in particular, the majority, but also the other two judges, Justice Jago and Justice Gordon, they say the justification for it is that it’s just an alternative way of attempting to value the contractual benefits, which therefore means it has to yield to what’s referred to as the Robinson v Harman principle, which is the principle that put the party in position that would have been in had the contract being performed. Now, importantly, on Chief Justice Gageler’s approach, he also says it has to yield to that principle, but that’s because if the breaching party can show that some or all of the expenditure would not in fact have been recouped, they’re effectively showing that the expenditure was not in fact wasted because of the breach but it was wasted because of the poor commercial decision of the innocent party or something like that.

00:38:21DT:Yeah. And I suppose that brings us to who bears the burden of proof or what is, you know, formally speaking, the burden of proof in a case like this. The majority says that this is not really shifting the burden of proof to the defendant, it’s that the plaintiff is assisted in establishing their own burden of proof by an assumption or an inference that they would have recovered. It’s not a presumption for the defendant to rebut, but It weighs on the scales of whether the plaintiff has established their burden of proof on the balance of probabilities.
00:38:54DW:Yeah. So a couple of points to note about that. So the first is that the majority says, and this is, I think, a controversial point that Chief Justice Gordon didn’t agree with, and it’s probably, seems to be the main reason why Her Honour chose to write a separate judgment, is that the majority said the weight of the burden that is placed upon the breaching party varies depending on the degree of uncertainty resulting from the breach. Now they use the word ‘resulting’ deliberately, because then in brackets, they say ‘caused or increased by’ because one of the points of conjecture that arose in Amann and afterwards in discussions about it is, well, is there a distinction between cases where the breach itself or the failure to perform is what creates the uncertainty, or situations where there’s just uncertainty inherent in the contract itself, which then, because of the breach, means we never know what would have happened. So that’s quite abstract. So just to explain what I mean; in McRae, it was the breach itself that created the difficulty or the impossibility. If there’d been a tanker, it wouldn’t have been impossible to value it, but because they promised there was a tanker or warranted, I should say, and then the tanker didn’t exist, the breach itself creates the uncertainty. Whereas in Amann, you might say, well, the uncertainty or the difficulty in knowing what would have happened sort of inherent, at least to some extent in the circumstances itself, that this was a loss-making contract with a hope that it would be renewed and so on and the appellant in the appeal to the High Court in Cessnock said that, well, Cessnock‘s much more like Amann in that regard, which I think is clearly correct, in that the difficulty is inherent in the fact that there was 30 years left to run on this contract.
00:40:39DT:Yeah. We’re not talking about a five year retail lease here.
00:40:42DW:Well, yeah, even a five year retail lease would be some uncertainty, but this is a whole other exponential level of uncertainty as to would the development have gone ahead? If it had, how successful would it have been? Depends on decisions by third parties, how successful their businesses would be, depends on how much development occurs in the area. There’s all kinds of uncertainties. And so the appellant argued, I think with some force, that it was inherent in the contractual adventure itself that there was all this uncertainty. And effectively what the majority said is, noting that the degree of the burden placed on the breaching party may vary depending on the degree of uncertainty, at least to some extent that should all be shifted to the breaching party. The other important point is, I think it would be too strong to say they collapsed the distinction between a shifting of the evidential onus and a legal onus, but one point of difference in Amann was some of the judges spoke about a shifting of the legal onus, some spoke about a shifting of the evidential onus. Essentially the High Court in Cessnock, partly by using the term ‘facilitation principle,’ avoided getting into that debate. And my sense from listening to the appeal itself was that at least some of the Justices thought that the distinction between those two different kinds of onus-shifting is not as great as people sometimes make out – probably have to speak to more experienced practicing lawyers than me but I do think there is some distinction there.
00:42:01DT:Yeah, a distinction, but maybe one that weighed less heavily on the minds of the High Court than some of the others. Now, as you say, Cessnock represents a pretty notable widening of the availability of damages for wasted expenditure. We’ve both got the Amann style availability of the approach in circumstances where the defendant’s conduct has simply made it more difficult and how difficult is a question of fact and degree, and that will have a consequence for the strength of the assumption and simultaneously, there’s this doing away with the need for a distinction between an essential reliance damage and an incidental reliance damage. So both, the category of damages capable of being awarded and the circumstances in which they can be awarded, or even circumstances in which they can be assessed in this way, are wider. I suppose that naturally leads us to think about what limits the decision might place on the availability of the remedy. The majority also explicitly did away with one possible way of thinking about that limit, which is the notion of remoteness, the reasonable foreseeability of some of this wasted expenditure in the manner that is described in Hadley v Baxendale, and specifically the second limb of Hadley v Baxendale, that kind of damage, which is reasonably foreseeable having regard to the information available to the defendant about the specific circumstances of the plaintiff. So tell us a little bit about remoteness in Cessnock City Council and what limits on damages for wasted expenditure it places, or doesn’t place, I guess.
00:43:37DW:Yeah, so this is a very important point and this was one aspect of the case that I was hoping the High Court might say a bit more about but, you know, they can’t solve all problems in one case and it didn’t seem to really be a point in dispute between the parties as to whether the expenditure was reasonably incurred. So, just to take a step back for the benefit of people less familiar with all of this, the expenditure had to be recoverable, must be reasonably incurred, and again, of course, the defendant can show it wouldn’t have been recouped. So, it has to be the case that it would have been wasted, with the burden of proof being on the defendant to show that it would have been wasted, and it also has to be reasonably incurred. And so then, of course, the question arises, well, what does reasonably incurred mean? And in McRae, the judges there said, well, expenditure is reasonably incurred when it falls within the Hadley v Baxendale remoteness rule. Now, I, in something I wrote about this, said that’s quite a remarkable proposition that definitely needs to be tested because without wanting to segue into a long discussion about Hadley v Baxendale, that was a very different sort of case. That’s a case concerned about the limits of recovery of damages for consequential loss. So if you and I have a contract, David, and you breach your promise to me, and certain adverse consequences flow from that, to what extent can I recover damages for all those adverse consequences? And of course, famously in Hadley v Baxendale, the court held, and I’ll just read the quote for the benefit of everyone, “the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either rising naturally,” i. e. according to the usual course of things from the breach of contract itself, which is generally referred to as the first limb of Hadley v Baxendale, “or,” and this is the second limb, “those damages such as may 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.” Now, there’s a lot of normative language there, multiple references to the need for reasonableness, reference to the need to be in the contemplation of both parties, and that it must be the probable result. And so, you know, there’s obviously been a number of cases that have discussed what this means, and we don’t need to get into those cases here because they’re not really relevant. What is relevant is that the rule is highly indeterminate, that rule. And a cynical person might say, which I sometimes say to my students, “this is a rule that’s framed at such a high level of generality that it’s saying something like that a court can award damages for consequential loss that are reasonable.”
00:46:04DT:Yeah. It can award it when it can and not when it can’t.
00:46:07DW:Yeah. I mean, it’s doing a bit more than that but a cynic might say that it’s saying something like that and if you look at the results in the cases, you could make an argument that that’s what’s going on. And I have a lot of sympathy for judges because it’s extremely difficult to construct a rule that would cover every case where we think parties should be able to recover consequential losses. So it’s understandable that it’s indeterminate. It’s what professor Julius Stone famously referred to as, when he was talking about reasonable foreseeability, the category of illusory reference but anyway, the relevance for us here is reasonable minds will differ as to where the particular consequences of the breach – or particular expenditure, if you’re going to apply the rule to expenditure, which as I reiterate was not really what the rule was designed for – reasonable minds will differ on that and the point is exemplified very well by the fact, if you go back to McRae, the trial judge, Justice Webb, who ultimately ended up as a High Court judge himself, thought that it wasn’t within the reasonable contemplation of the parties that they would incur this expenditure without doing some checking into the existence of the tanker, whereas the High Court said it was and in Cessnock, the trial judge said, ‘well, it was in the party’s reasonable contemplation that the development wouldn’t go ahead and so the expenditure’s not recoverable under Hadley v Baxendale,’ whereas the Court of Appeal and implicitly the High Court said, ‘no, well, it was within the rule in Hadley v Baxendale because it was reasonably contemplated that they would incur the expenditure on the hangar.’ And it clearly was reasonably contemplated that they would incur the expenditure on the hangar. I think that has to be right but I think the trial judge’s point, which I have some sympathy for, is – and without necessarily endorsing that view – but her view was that, well, the allocation of risks under the contract was that if the development didn’t go ahead, that was at the risk of Cutty Sark. Now, whether that’s true or not depends upon a nuanced examination of the terms of the contract and the context in which it was made and so on, which we shouldn’t get into, but the main point for us is that the rule in Hadley v Baxendale, which is a rule about limiting recovery of damages for consequential losses, is very indeterminate, first of all. Secondly, it’s not really clear that it actually is the true rule of remoteness, which is a point of academic debate, which we can put aside. And thirdly, it’s very unclear that it should apply in the context of wasted expenditure, because the more relevant question in regard to whether expenditure that is claimed is reasonable, I think is, was it commercially justifiable to incur the expenditure?
00:48:23DT:Yeah. Well, in Cessnock City Council, the other three judges say that Hadley v Baxendale applies, the majority say, well, look at what potential future revenue the parties would have earned and would that have been sufficient to recoup the wasted expenditure?
00:48:38DW:And I think it’s an astute point, David. So I think in making that point, the majority is implicitly, if not explicitly, pointing out that that simple application of Hadley v Baxendale to the wasted expenditure context to determine when expenditures reasonably incurred, may need to be revisited. And it’s not so much about whether it was reasonably contemplated that the expenditure would be incurred, but whether it was reasonably contemplated that the expenditure would’ve been recouped, either from the other contracting party or from third parties. And they also importantly note that there’s a mitigation question here as well, which of course there must be. So, in determining whether the expenditure that’s been incurred was reasonably incurred, you’re asking that question at the time that it was incurred but then there’s a requirement on the innocent party to mitigate their losses post-breach if they can. Now in Cutty Sark itself, there was a contractual provision that allowed the council to purchase the hangar for $1, which, it gives one some sympathy for Cutty Sark no doubt, but if there hadn’t been the case, of course there would’ve been a requirement that Cutty Sark attempt to get the best price they can for the hangar when it was clear that their business failed. And it’s not so much actually that there’s a requirement on them and they don’t have a duty to do that, but they can only recover damages to the extent that they did and that’s the mitigation principle. So the simple point is that in determining whether expenditures reasonably occurred, there’s a remoteness Hadley v Baxendale constraint. And that seems to be the only one up front, but then there’s also this need to mitigate after the breach to reduce your losses, but I think there’s a real question whether the Hadley v Baxendale rule is fit for the purpose of determining whether expenditure is reasonably incurred, because the real question to me is, was it commercially justified to incur the expenditure?
00:50:20DT:Yeah, exactly. And that approach of thinking about the revenue that party would have earned to recoup that wasted expenditure is logically consistent with the availability of it in those circumstances. We’re applying it as a crutch or as a shortcut to get to the compensatory principle where we’re otherwise unable to assess the value of the bargain. Now, when you’re writing about this topic before Cessnock City Council, as we’ve discussed today, you said it was pretty unclear, pretty unsatisfactory from McRae and Amann what the position in Australia was so far as damages for wasted expenditure. If nothing else, has Cessnock City Council cleared up a lot of that or are there still unanswered questions?
00:51:02DW:Yeah. So that’s another important question, David. I think it has clarified the law a lot. Now, arguably, that’s not saying much given how unclear it was before Amann, which as I said, I have a lot of sympathy for the judges. It’s a very difficult area and very difficult questions and really what the judges are trying to do is achieve fine-grained, interpersonal justice, not just achieving in the particular case, but to devise rules that can be applied in a wide variety of cases, which is extremely difficult to do in advance of the disputes arising. So I certainly have a lot of sympathy for them, but yes, Cessnock is very useful in that we have a majority judgment that clearly articulates the approach. Now, I say clearly articulates, I mean, I think the judges have done an admirable job there in attempting to articulate it, but there are a couple of points of potential uncertainty and some issues that I think will arise in the future. So one point is, what’s the precise meaning of the facilitation principle? And this is a point very well made by Justice Gordon in Her Honour’s judgment, which is, I think, the main reason why she didn’t join with the majority. Her Honour says something like, from memory, ‘I think it’s very difficult to expect trial judges to figure out to what extent the evidential uncertainty that arises is resulting from the breach and then to impose a weaker or stronger burden on the breaching party, depending on how much uncertainty is there.’ Now that’s adopting a particular interpretation of the facilitation principle, which is you have to look at how much of the uncertainty results from the breach, which is not, I think, really what the majority were trying to say. I think they were saying it’s enough that there is uncertainty following the breach, irrespective of how much of that is inherent in the contract itself, with the exception of not dealing with aleatory contracts – which we can come back to, which are gambling or insurance contracts – but once you’re in the realm of contracts to which the facilitation principle applies, it’s enough that there’s uncertainty that results from the breach, and that means it is caused by or increased by the breach. So, I think that’s enough that there’s uncertainty inherent in the contract itself, which then is rendered prominent or important because of the breach such that you can’t figure out what would have happened. That’s enough for the facilitation principle to apply and then it’s just a question of how uncertain is it in respect of how much onus is put on the defendant. The other important point made by the majority is that the facilitation principle is consistent with the principle from Blatch v Archer which says all evidence is to be weighed according to the proof which was in the power of one side to have produced and in the power of the other to have contradicted. Now you might note that that might help explain Armory v Delamirie itself, that principle, but the important point is that the onus of proof on the defendant potentially will be more onerous if the court thinks it’s within their power to adduce evidence to demonstrate what would have happened. And I think here, that’s relevant in the context of Cessnock itself, because it does seem like this was a case where actually the breaching party, the council was probably better placed to adduce evidence as to what would have happened if the development had gone ahead, whereas often it will be the plaintiff who’s best placed. If you think about McRae and at least partially in Amann, the prospects of renewal would depend upon how well Amann would have performed the contract and so on, and that seems something that would be better placed for the plaintiff to prove than the defendant, although the prospect of renewal itself might be something that’s better for the defendant to prove but the simple point is that there’s uncertainty as to how those two principles operate together. The majority said that they can, and I think they can, but there, I think, potential would be future litigation as to how exactly you allow those two principles to operate together.
00:54:38DT:As you said before, if only the High Court would just make one decision that would clarify all of these nice issues in commercial contracting for us in one go but what on the horizon do you think is up next for the High Court to clarify?
00:54:54DW:Right, in this particular area. Right, so the first thing, as I said, is precisely what the facilitation principle means. Was Justice Gordon’s interpretation correct or was the alternative interpretation I suggested correct? How does it sit with the principle in Blatch v Archer? Another point is, is the assimilation of expenditure incurred in reliance on a contractual promise and expenditure incurred in anticipation of a contractual promise justified? I think that point will potentially be litigated. A further point is, I think the High Court will at some point have to revisit this question of at least does the facilitation principle apply exactly the same way in relation to essential and non-essential expenditure? They’ve said it applies equally to both, but I think there will be cases where one’s intuitive sense of justice will lead one to think that there are at least some cases where there’s consequential expenditure, there should be more of an onus on the plaintiff. So without going into detail, there’s a case that Professor McLauchlan refers to in a piece he wrote about limitations on wasted expenditure claims. I think it’s a Supreme Court decision, certainly an appellate court decision in New Zealand called Ti Leaf v Baikie, which was about, to cut a long story short, similarly a situation where the innocent party had leased premises from the breaching party and they’d spent a huge amount of money, I think over $1 million. The purpose in leasing the premises was to produce a movie and they spent a huge amount of money. The defendant ends up breaching the contract by saying something publicly that hurts the reputation of the plaintiff and then they seek to recover all this expenditure from the defendant and saying that it’s up to the defendant to show that the film wouldn’t have been successful. And for those knowledgeable in the area, this might get them thinking about the famous old English case of Anglia Television v Reed but even putting that aside, you can see that one really has to ask, “well, how likely was it that they’re going to incur the expenditure there?” There’s lots of film projects which are flops and to what extent is it really up to the defendant to show that the plaintiff’s film wouldn’t have been successful? So I think as Professor McLauchlan argues powerfully in the book chapter I’m referencing, this is an untenable position to say that this case should be dealt with the same way as Amann or just, you know, a case of essential expenditure. Now in Cessnock, it’s easy to have sympathy for Cutty Sark for the various reasons that we’ve discussed, but also ultimately it’s a council. They’re a well resourced commercial/administrative agency that again, remember had two roles here as well, and as I think Justice Jago says in her judgment, the first line of her judgment I think sets the tenor for her and some other Justices’ views, she says something like no good can come from a circumstance where a government body enters into a contract with another party without committing to financing the contractual arrangement, or something like that, and so it’s reasonably easy not to have too much sympathy for the council here, but you can imagine another situation where a small business owner or even an individual contracts with a bigger corporation without fully thinking through the implications and then doesn’t deliberately breach, but just innocently breaches the contract, perhaps through no fault of their own, and now they have the onus of establishing that this bigger commercial entity would or would not have recouped their expenditure, which may be impossible for them to do given the access to the evidence that they have. So the simple point is that I think while the result in Cutty Sark might be fine, and I think the High Court and the Court of Appeal just took a quite different view of the facts from the trial judge, there will be cases that come up in the future where our instincts for justice will be a bit different and we’ll have more sympathy for the breaching party in circumstances where the breach is entirely innocent, which is often the case in contract and notably, of course, the legal rules in relation to the recovery of damages for breach of contract generally take no account of whether the breach was deliberate or innocent, which I think generally is the right approach but some people may argue there needs to be some nuance there for at least certain kinds of fact patterns.
00:58:57DT:Yeah, I mean, it is a great point that the justice of the case makes the decision easier to swallow and easier not to look beyond its particular facts and apply them to other scenarios. I think it’s an unusual feature of jurisprudence in this area that all three of the cases we’ve been discussing at length today are cases where a public authority is the breaching party. One wonders how these principles look in practice when it’s not the Commonwealth government or the local council footing the bill.
00:59:23DW:And just on that point, a question asked by Chief Justice Gageler in the appeal, which is available online for anyone who’s interested and if you go to the High Court website, he asks about cases where the benefit that the innocent party hopes to obtain from the contract is a non-pecuniary benefit. So, he gives the example of a government procurement contract where say I contract with you to provide me with computers and I spent all this money preparing the premises to be able to house the computers and then you don’t deliver the computers. Now, I think, without getting bogged down in it, there’s a simple answer to that kind of case, which is you get damages in order to represent the value of the computers that you should have got or the cost of obtaining them from elsewhere but you can imagine other scenarios, which is where the benefits that the innocent party hoped to obtain were non-pecuniary benefits. So to go back to the New Zealand case of Baikie, I think there, it was hoped that the venture would be profitable, but you can imagine a wealthy person spending a lot of money on a hobby project, an artistic endeavour, where they’re not really that worried about whether they recoup the expenditure. It’s just about putting on a film, or writing a play, or whatever it might be.
01:00:32DT:Or, to stick with the Commonwealth, that it’s a defence contract or health or education where there will never be revenue earned from the deployment of that asset but the deployment of it is invaluable nonetheless.
01:00:46DW:Yeah, and so the question there is would you presume that the non-pecuniary benefits that the innocent party would have obtained – the law struggles with valuing non-pecuniary benefits in general, as we all know – but do you assume there that whatever non-pecuniary benefit they would have obtained from performance of the contract is equivalent to the expenditure they’ve wasted? I mean, that’s something I think that will come up for further examination in future cases as well.
01:01:10DT:Well David, we’re nearly out of time. Before you go, I have one last question for you, and it’s a question, speaking of tea leaves, asking you to do a bit of crystal ball gazing on commercial practice. Sometimes these questions of assessment of loss and damage lead to changes in commercial contracting practice. I think of Hadley v Baxendale and the approach to consequential loss being shortcutted by a widespread practice of seeking to exclude liability for the consequential loss in, you know, your commercial contracts. Are we likely to see a contracting practice of attempting to exclude damages for wasted expenditure? I don’t think it would be possible because according to the High Court’s decision, this is a means of giving effect to the fundamental compensatory principle, not some other special head of damage.
01:01:51DW:That’s actually a really important question as well, David. I’m going to answer it indirectly, but then circle back to give you hopefully a satisfactory answer. So there’s an English Court of Appeal decision called Soteria, I think it’s pronounced, against IBM, where there was a clause in the contract between two sophisticated commercial parties that purported to exclude damages, not just for loss of profit, but lost revenue. So there’s an express exclusion clause excluding recovery of certain kinds of consequential loss. Soteria there brought a claim against IBM after they breached the contract in the way that they installed computers or software, or something like that. So, they didn’t provide the contractually promised performance and Soteria, faced with this exclusion clause, sought to claim wasted expenditure, which was quite significant. And the argument run by the breaching party there – IBM – was, well, this express exclusion of consequential loss implicitly or impliedly necessarily excludes a claim for wasted expenditure if, as you just described when asking the question, wasted expenditure is a proxy for consequential loss. Now, the first instance judge said, “yes, it does,” and then the Court of Appeal said, “no, it doesn’t.” I think the language that the court used was to describe the two claims as “a different sort of animal.” Now, applying the reasoning of the majority in Cessnock, which expressly says that the claim for wasted expenditure is a proxy for consequential expectation loss, would seem that the trial judge was right there, that impliedly, you are excluding a claim for wasted expenditure. Now, I’m not sure if the majority would follow that reasoning through, there may be ways in which they could say, “well, it doesn’t follow” but what I would say is – I think perhaps not the only reason, but that’s one reason why Chief Justice Gageler took a different view and said, “no, the claims are different kinds of claims” because he refers to the Soteria decision in his judgment, and makes the point that the Court of Appeal’s decision there to allow a claim for wasted expenditure despite the express exclusion of consequential loss – is more consistent with his conceptualisation that it’s a different sort of claim. So, the simple answer is it’s not clear if Soteria will be followed in Australia and whether there would be an implied exclusion of wasted expenditure in at least certain kinds of cases, but then the second part of your question is will this change commercial practice? I mean, I think to some extent, it might. Sophisticated parties may purport to exclude certain kinds of wasted expenditure. Presumably, the party, if they’re worried about breach, will attempt to exclude liability for any wasted expenditure, but the other party might say, “well, we’re happy to accept no liability for consequential expenditure but not for essential expenditure” or something like that. But I suppose the other point is that you might say, “well, this shifts the balance in favour of innocent parties that now prima facie they can recover all their consequential expenditure so they might be more liberal in incurring the expenditure up front.” And maybe that’s true, but I think they’re only going to be able to recover that if the other party breaches. So given that most of the time when parties contract, at least if they’re both sophisticated commercial actors, which is the kind of situation where there might be some drafting around the rule, you might not know whether you’re going to be the breaching party or the innocent party. So it’s not obvious that it would change behaviour a huge amount, but it might in the sense that it arguably does shift the balance a little bit more in favour of plaintiffs. It at least provides some certainty that wasn’t there after Amann and prior to the Cessnock decision.
01:05:20DT:Dr. David Winterton, thank you so much for joining me on Hearsay.
01:05:22DW:You’re welcome. It’s been a pleasure, David.
01:05:34DT:As always, you’ve been listening to Hearsay, the Legal Podcast. I’d like to thank my guest today, David Winterton, for coming on the show. Now, if you’re a contract law geek like me, why not check out our episode on mergers and acquisition due diligence with Chris Cruikshank? You probably work on a lot of DD transactions if you’re a contract law geek. That one’s episode 80 and it’s called, Careful What You Wish For: Limiting or Waiving Due Diligence in Private Mergers and Acquisitions. We even talk about Elon Musk’s acquisition of Twitter, or X these days, on that episode.

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