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Contract law update 2024
Contract law update 2024

Damages

Complications arising from the amount of damages to be awarded

Damages are awarded to put the 'innocent' party in the same position as if the contract had not been breached. This simple principle masks a number of complicated issues that can arise when a court determines the amount of damages to be awarded. Some of those issues, as considered by Australian appellate courts in 2024, include:

  • What if the defendant's breach makes it difficult or impossible to determine the position of the innocent party if the contract had been performed?
  • What limits (if any) are placed on the types of losses that are taken into account in putting a party back into the same position?
  • In determining the 'position' of the 'innocent' party, can regard be had to the 'position' of related parties?1

The first of these issues was discussed by the High Court in Cessnock City Council,2 in an appeal from a decision discussed in our 2023 Contract Law Update. The case focused on the circumstances in which 'reliance damages' might be recovered. The High Court laid down some clear principles on this point:

  • Damages are always awarded to put a party in the same position as if the contract had been performed.
  • 'Reliance damages' are not an exception to the principle that a plaintiff must prove its loss (ie proving the position it would have been in had the contract been performed).
  • However, to the extent that the defendant's breach of contract makes it difficult for a plaintiff to prove its loss, a court will be more willing to infer that a plaintiff would have recovered expenses incurred in reliance on (or in anticipation of) the contract being performed.

This judgment resolves the question as to when 'reliance damages' can be recovered, but did leave open the extent to which principles of remoteness might play a role when a party seeks to recover 'reliance damages'.

The High Court did, however, address principles of remoteness in some detail in Elisha v Vision Australia Limited, which concerned the ability of an employee to recover damages for psychiatric injury caused by an employer breaching contractual obligations governing the conduct of disciplinary hearings. In deciding whether damages are too remote, courts usually refer to the judgment of Baron Alderson in Hadley v Baxendale3. It is apparent from the High Court's judgment, though, that the modern test for remoteness is much more generous to plaintiffs than that stated in Hadley v Baxendale.

The test endorsed by the High Court is that the type of damage suffered by the plaintiff needs to be a 'serious possibility' at the time the contract is entered into. This in turn requires the identification of the relevant 'type of damage': five judges of the court described it as 'psychiatric injury' and two judges described it as 'serious psychiatric injury'. Whether such damage is a 'serious possibility' is in turn a question of fact on which (as shown by this case) different judges will form different views, although a clear majority of the High Court found that the psychiatric damage was a 'serious possibility'.

It is quite common for corporate groups—particularly those with consolidated accounts—to arrange for invoices to be paid by legal entities that are different from the entities that incurred the obligation. Although this may not matter from an accounting perspective, it can have significant consequences from a legal perspective. As shown by the decision of the New South Wales Court of Appeal in Capitalink Pty Ltd v Withnall4, a company may be prevented from recovering damages if the relevant costs were incurred by a different legal entity within the group.

The best means to avoid this consequence is to ensure that the payment and invoice match the legal entity that has the relevant obligation. Alternatively, damages might be recoverable if a corporate group's financial accounts record a debt from the company that has the legal obligation to the company that made the payment, but evidence of such a debt would need to be provided to the court.

Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17

Breach of contract—reliance damages—wasted expenditure

The High Court unanimously dismissed Cessnock City Council's appeal from the New South Wales Court of Appeal in respect of its decision to award the respondent substantive damages of over $3.6 million on the basis that it was entitled to recover reliance damages, even though it could not prove that it would have suffered loss had the appellant complied with the contract.

This case is significant, as it clarifies when a plaintiff can recover damages on a reliance basis for wasted expenses incurred in anticipation of the performance of a contract.

While the plaintiff bears the legal onus of proving its loss, where a defendant's breach has made it difficult for the plaintiff to prove the position it would have been in had the contract been performed, a rebuttable presumption operates such that it will be presumed or inferred that the plaintiff would have recovered reasonable expenditure incurred in 'reliance' on the contract. The evidentiary onus then falls to the defendant to prove that the plaintiff would have recouped that expenditure if the contract had in fact been performed.

Facts

Cessnock City Council entered into an agreement of lease with Cutty Sark, which saw Cutty Sark having the benefit of a 30-year lease of a prospective lot of Cessnock Airport, which the Council was intending to develop. Under the agreement, the Council was to take reasonable action to apply for and register a development plan for Cessnock Airport by the sunset date in the agreement. The Council was the applicant and consent authority for approving the subdivision.

In reliance on the agreement, Cutty Sark constructed an aircraft hangar on the land for the purposes of its business at a cost exceeding $3.6 million.

The Council did not apply for and register the plan of subdivision by the sunset date and the airport remained undeveloped. Cutty Sark ceased operating its business at the hangar following completion of the building, vacated the hangar, and was subsequently deregistered. The Council terminated the contract and, under its terms, paid the Australian Securities and Investments Commission $1 to acquire the hangar.

Cutty Sark brought proceedings in the Supreme Court, seeking recovery of damages based on its wasted expenditure. The trial judge found that the Council had breached its obligation to take all reasonable action to procure the registration of the plan of subdivision. The court awarded Cutty Sark $1 in nominal damages on the basis that Cutty Sark could not recover wasted expenditure because, among other things, the Council's breach did not make it impossible to assess the position Cutty Sark would have been in had the contract been performed.

Cutty Sark appealed the decision. The Court of Appeal found that Cutty Sark was entitled to the recovery of damages for wasted expenditure based on its reliance on the contract. The presumption that an innocent party could recoup its wasted expenditure was not confined to cases of impossibility of proving loss. The Court of Appeal found that the onus of proof is on the defendant to rebut the presumption that had the contract been performed, those costs would not have been recouped.

The Council was granted special leave to appeal the Court of Appeal's decision.

Judgment

The High Court unanimously dismissed the Council's appeal and upheld the Court of Appeal's decision.

The joint reasons of Justices Edelman, Steward, Gleeson and Beech-Jones outlined the following guiding principles for the assessment of contract damages and the availability of reliance damages:

  • The foundational principle is that contractual damages aim to put the innocent party into the position it would have been had the contract been performed.
  • Claims for 'reliance' or 'expectation' losses are not an alternative to the general rule for assessing damages between which a plaintiff can elect to claim.
  • The party seeking damages bears the legal burden of proving its loss was caused by the defendant's breach.
  • Where the defendant's breach has caused or increased uncertainty about the position the plaintiff would have been in had the contract been performed, the plaintiff's legal burden of proof will be facilitated by assuming or inferring that the plaintiff would have recovered any expenditure reasonably incurred in anticipation of, or reliance on, the contract's performance. The joint judgment explained that this gives the plaintiff a 'fair wind' to establish that its expenditure would have been recouped, but not a 'free ride'.
  • The more difficult the defendant's breach has made it for the plaintiff to prove its position had the contract been performed, the stronger the assumption or inference will be that the plaintiff would have recovered its wasted expenditure. Accordingly, the weight of the defendant's burden of proof in rebutting the inference will depend upon the extent of the uncertainty resulting from its breach.

The idea that wasted expenditure is a separate head of damage was rejected by the plurality and Justice Gordon; however, Chief Justice Gageler disagreed, instead considering that wasted expenditure is itself a category of damage.

The plurality did not explicitly endorse the remoteness principles set out in Hadley v Baxendale as a limit on recovery of wasted expenditure, and on the basis that loss of potential future revenue of at least the amount of the wasted expenditure would have been in the knowledge of the parties at the time of entering into the contract. Their Honours found that remoteness may be better analysed by reference to potential revenue rather than foreseeability of wasted expenditure.

Elisha v Vision Australia Limited [2024] HCA 50

Liability for breach of contract and remoteness of damage concerning psychiatric injury

In this case, the High Court considered the availability of damages for psychiatric injury suffered by an employee who was wrongfully dismissed in breach of an employer's contractual disciplinary procedures.

The court held that liability for psychiatric injury caused by an employer's breach is not beyond the scope of an employer's contractual duties concerning the manner of dismissal. Liability for psychiatric injury was not too remote in the circumstances of the case.

The court's decision is significant as it endorses a test for 'remoteness' that is arguable much more generous to plaintiffs than tests previously applied in Australia.

Facts

The appellant, Mr Elisha, was employed by the respondent, Vision Australia, as an adaptive technology consultant.

In March 2015, Mr Elisha was staying in a rural hotel in Victoria where he became involved in an incident with one of the hotel's proprietors. It was alleged that he was aggressive and intimidating to the owner in the course of making a noise complaint. The incident arose in the course of Mr Elisha's employment and was subsequently reported to Vision Australia's management.

Vision Australia issued Mr Elisha with a 'stand down letter' requiring him to attend a meeting two days later to respond to the hotel incident allegations. The letter stated that the meeting would be conducted in accordance with Vision Australia's Disciplinary Procedure, a copy of which was enclosed, and the enterprise agreement.

During the meeting, Mr Elisha denied the hotel incident allegations. In advance of the disciplinary meeting, Vision Australia's management had already formed a view preferring the evidence of the hotel owner. Vision Australia concluded that Mr Elisha's conduct was part of an established 'history of aggression and excuse making'. Vision Australia determined that Mr Elisha presented an unacceptable risk and his employment was terminated.

Contrary to the Disciplinary Procedure, Mr Elisha was never afforded the opportunity to respond to the broader 'pattern of aggression' allegations, nor was he made aware that his termination had been informed by matters other than the allegations concerning the hotel incident.

Following the termination, Mr Elisha was diagnosed with a major depressive disorder and adjustment disorder that rendered him incapable of work.

The trial judge awarded Mr Elisha damages for breach of contract, finding that the Disciplinary Procedure was incorporated as a term in Mr Elisha's employment contract, and it had been breached. This decision was overturned by the Victorian Court of Appeal. Mr Elisha was granted special leave to appeal to the High Court.

Judgment

The High Court allowed the appeal, and reinstated the damages award at first instance.

The issues before the court included, relevantly:

  • whether the Disciplinary Procedure was incorporated as a term of Mr Elisha's employment contract;
  • if so, was liability for psychiatric injury caused by Vision Australia's breaches beyond the scope of its contractual obligations concerning dismissal; and
  • were damages for psychiatric injury too remote in the circumstances?

Incorporation of terms

As regards the issue of incorporation, Vision Australia submitted that the reference in the 2006 employment contract to compliance with 'all other Company Policies and Procedures' undermined the contractual goal of certainty, as those policies could change over time.

The court rejected this submission, stating that the loss of some certainty is not a reason to deny the clearly expressed intention of the parties that the policies and procedures from time to time would have contractual effect.

Contract damages and psychiatric injury

Vision Australia relied upon the orthodox position enunciated by the House of Lords in Addis v Gramophone Company Ltd [1909] AC 488 that liability for psychiatric injury was beyond the scope of an employer's duties concerning the manner of dismissal.

The court held that Addis does not reflect the current state of the law in Australia, noting that it had been significantly undercut by more recent decisions in the UK and Australia, most notably Baltic Shipping Co v Dillon (1993) 176 CLR 344, which confirmed the availability of damages for psychiatric injury for breach of contract. The court considered there to be no principled basis to recognise a special exception for employment contracts.

In considering remoteness of the injury, the court referred to the principle in Hadley v Baxendale that the damage must arise according to the usual course of things or otherwise be reasonably in the contemplation of both parties as the probable result of breach. The court referred to the many different tests that had been used to determine whether damage was too remote, such as 'reasonably forseeable', 'not unlikely', quite likely', 'serious possibility', 'real danger' and 'on the cards'. The majority preferred the test of 'serious possibility', which is arguably a much more generous test than has previously been applied by courts in Australia.

The majority found that Mr Elisha suffering a psychiatric injury was not too remote, given:

  • the seriousness of Vision Australia's breaches during the disciplinary process, which left him acutely bewildered as to what happened and why; and
  • that the Disciplinary Procedure and its requirements for due process and the provision of support (including counselling) were intended to address risks of psychiatric injury. Vision Australia implicitly acknowledged that risk.  

Capitalink Pty Ltd v Withnall [2024] NSWCA 172

Orthodox principle to establish loss—evidential onus—implied promise to repay

The New South Wales Court of Appeal considered a contractual claim arising from a promise by the respondent to guarantee performance of a construction company's obligations in relation to a partially completed property development. An issue on appeal was whether the appellant had proved that it had (and in future would) suffer losses arising from the beach in circumstances where some of the rectification costs had been paid by family companies rather than the appellant.

This case reaffirms the need to sufficiently support a claim of loss, particularly in cases where the parties involved are not at arm's length. The case also demonstrates the application of common law principles concerning the establishment of loss and restitution.

Facts

The case concerned a contractual claim brought by Capitalink Pty Ltd against Marc Withnall, based on a promise by Mr Withnall to guarantee the performance of Development Delivery Construction Pty Ltd in relation to the development of partially completed townhouses in Queensland. The guarantee was contained in a Deed of Agreement between Capitalink and Development Delivery, to which Mr Withnall was also a party. It was common ground that Development Delivery had failed to complete its obligations under the Deed.

Capitalink sued Mr Withnall on the guarantee to recover damages for both past and future costs associated with the completion of the project. Although many of the invoices issued by third-party contractors in relation to past costs were addressed to Capitalink, two companies other than Capitalink, namely LBT Corp Pty Ltd and Ray White Tingalpa, paid the invoices in respect of past work, including those that had been issued to Capitalink. A large number of other invoices said to relate to past costs incurred to complete Development Delivery’s obligations were addressed to First State but also paid by LBT.

The primary judge held that, while Mr Withnall’s guarantee was binding, Capitalink had not established a right to substantial damages, as it had not proved that it was liable for the amounts that had been or would be paid to complete the project, as most of the costs had been paid by other companies and there was no evidence that Capitalink was obliged to reimburse them.

Capitalink appealed.

Judgment

The issues before the Court of Appeal included:

  • whether the primary judge erred in finding that the future costs remaining to complete the works were not a measure of loss suffered by Capitalink;
  • whether the primary judge should have found that the past costs paid by LBT and First State were paid by them at the request of Capitalink;
  • whether the primary judge should have found that Capitalink was liable to reimburse LBT and First State for costs paid by them to complete the works (alternatively, for payments made by LBT and First State that discharged a liability of Capitalink); and
  • whether the primary judge erred in finding that the past costs paid by Ray White from the rent account were not loss suffered by Capitalink.

On the first issue, the court found that the primary judge erred in holding that it was necessary for Capitalink to prove that it 'undertook to become liable to other entities' in respect of future costs.

The court rejected Mr Withnall's argument that Capitalink was not entitled to the future costs because they would be paid by a third party, holding that Mr Withnall’s evidence of his understanding in respect of the future costs did not supply a basis upon which the present case could be distinguished from the orthodox principle that Mr Withnall otherwise accepted.

The orthodox principle was that, to establish loss and entitlement to payment under the guarantee, all that the Capitalink needed to establish was that the development was still defective because Development Delivery admitted non-performance of its obligations, and the costs claimed for remediation were necessary and reasonable.

Accordingly, the court held that Capitalink was entitled to the future costs.

On the second and third issues, the court dismissed Capitalink's restitutionary argument that the past costs were paid by LBT and First State, two related companies, at Capitalink's request, and that Capitalink was obliged to reimburse them, thus creating a loss for which Mr Withnall was liable under the guarantee.

While the court found Capitalink's argument 'in play' at first instance and found no question of prejudice to Mr Withnall, it held that the primary judge had been correct to find that the evidentiary onus that lay on Capitalink was not discharged in relation to the past costs issue and that the material relied upon by Capitalink was insufficient to establish an implied promise to repay by Capitalink.

The court further observed that the implication of a promise to repay was less readily drawn in a family group of companies, where the payments made by LBT and First State may have been for their own benefit or interest.

As to the fourth issue, the court found that the primary judge erred in finding that expenses paid by Ray White, the managing agent of the property, had been paid indirectly by LBT as opposed to Capitalink.

Capitalink contended that those expenses were paid from a trust account in Capitalink's name and thus represented a loss suffered by Capitalink for which Mr Withnall was liable under the guarantee. The court agreed with Capitalink and held that the evidence showed that Ray White paid third-party creditors from funds held by it in Capitalink's name.

The court also rejected Mr Withnall's argument that Capitalink had not established that all of the past costs incurred were in fact referable to the non-performance of the obligations guaranteed by Mr Withnall, as an expenditure report received in evidence had categorised the expenses paid for from the trust account as past costs in respect of the development.

Accordingly, the court awarded Capitalink the sum of the payments from the trust account.

Footnotes

  1. Elisha v Vision Australia Limited [2024] HCA 50.  

  2. Cessnock City Council v 123 239 932 Pty Ltd [2024] HCA 17.  

  3. (1854) 9 Ex 341.  

  4. [2024] NSWCA 172.