Damages for consequential loss for a breach of contract are awarded to place a plaintiff in the same position as if the contract had been performed.  The legal onus to prove loss arising from a breach of contract rests on the plaintiff, the party seeking to recover damages.  But what about situations where a breach of contract has resulted in, or otherwise caused or increased, uncertainty about the position that the plaintiff would have been in if the contract had been performed?

In Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 the plurality held that, where the breach had made it difficult for a plaintiff to prove its position had the contract been performed,   the discharge of its legal burden of proof to establish loss will be facilitated by assuming (or inferring) in its favour that, had the contract been performed, the plaintiff would have recovered the expenditure they reasonably incurred in anticipation of, or reliance on, the performance of the contract (at [61]). 

Background
The Council entered into an agreement for lease with 123 259 932 Pty Ltd (formerly Cutty Sark Holdings Pty Ltd), for a 30-year lease of a proposed sub-divided lot of the Cessnock Airport.  Under that agreement the Council promised to take all reasonable steps to apply for, and register, a plan of subdivision for the proposed lot by a certain date.  In the meantime, the Council granted Cutty Sark a licence to occupy.  Council breached the lease by not taking reasonable action to register the plan of subdivision and repudiated the agreement.  Cutty Sark never obtained the lease but spent considerable sums in anticipation of, or reliance on, the agreement by constructing a hangar on the proposed lot.  Subsequently, Cutty Sark’s business failed, and the agreement was terminated.

Cutty Sark sued the Council for breach of contract, seeking damages based on its wasted expenditure in constructing the hangar.  The primary judge awarded Cutty Sark nominal damages finding that the presumption of recoupment in circumstances like this only arose if the nature of the breach rendered it “impossible” to assess damages on the usual basis; here, the Council was not contractually bound to develop the airport leaving the risk of non-development with Cutty Sark.  On appeal, the NSW Court of Appeal overturned the primary judge’s decision, finding that the presumption was not confined to cases of “impossibility” of proof, the Council had failed to rebut the presumption as there was a significant possibility of development of the airport by the Council during the period of the lease, and awarded Cutty Sark damages of $6,154,459.40.

High Court’s decision
In four separate judgments, the High Court dismissed the Council’s appeal finding that the Council’s breach caused considerable uncertainty about Cutty Stark’s position—whether it would have recouped its expenditure during the lease—and that its claimed loss, expressed as “wasted expenditure”, was incurred in anticipation of, or reliance on, the performance of the Council’s obligation to take reasonable action to register the proposed lot. 

After restating orthodox principles, the plurality framed four key principles of damages relevant to the discharge of the legal burden of proof relevant to similar situations.  

First, claims for “reliance” or “expectation” damages are not separate heads of damages from which a plaintiff can elect to claim.  Although helpful labels, the enquiry is focused on measuring a plaintiff’s position had the contract been performed (at [119]). 

Secondly, while the onus to prove loss flowing from a breach of contract rests with a plaintiff, a court, in cases where there is uncertainty as to whether a plaintiff would have recouped its expenditure if a contract was performed, will assume or otherwise infer that the plaintiff would have recouped expenditure reasonably incurred in anticipation of, or reliance on, the other party’s performance of its obligations.  On the strength of the assumption or inference to be adopted by a court as a starting proposition, the plurality said (at [61]) that it will “depend on the extent of the uncertainty that results from the breach”.

Thirdly, the presumption of recoupment of damages in situations like this is not limited to circumstances where it is “impossible” for a plaintiff to prove its loss flowing from a breach.  Rather, the principle operates where uncertainty arises and is otherwise capable of coexisting with other principles about facilitation of proof (at [127] and [129]).

Fourthly, the onus is on the defaulting party to rebut the presumption, that is, to prove that the innocent party would not have recouped its wasted expenditure had the contract been performed (at [184]). 

Key takeaways
The High Court’s decision does not alter orthodox principles of damages.  Rather it confirms that in situations where there is uncertainty about whether a claimed loss would have been recouped by a plaintiff had a contract been performed, a plaintiff’s onus of proof will be facilitated by a court adopting, as a starting position, a presumption of recoupment of costs reasonably incurred.  It is then up to a defendant to rebut that presumption, by leading evidence that all or some of the claimed loss would not have been recouped had the contract been performed.

Hugh Foxcroft KC and Andrew Blunt

Liability limited by a scheme approved under professional standards legislation