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Commonwealth v Amann Pty Ltd

High Court of Australia (1991) 174 CLR 64

Overview

This case considered the issue of the measure of damages - including a claim for damages for wasted expenditure (reliance damages) and expectation damages.

The Court ordered that the appeal be allowed in part, with the sum awarded by the Full Court to be reduced to $3,989,899 plus interest.

Helicopter

 

Facts

The Commonwealth engaged private contractors to conduct aerial surveillance of Australia's northern coastline.

It invited tenders for a three year period and accepted Amann's tender in March 1987. In response, Amann began to acquire and fitted out fourteen specially eqiupped aircraft. Surveillance commenced on 12 September 1987, before Amann had all aircraft ready.

On the same day the Commonwealth gave notice that it regarded the contract as terminated for failure of Amann to comply with contractual obligations. The first question was whether this constituted effective termination of the contract or whether it amounted to a repudiation of the contract that would allow Amann to terminate for breach and sue for damages. On 15 September 1987 elected to terminate and sue for damages.

By the time the matter reached the High Court it was accepted that the Commonwealth's notice of termination was not valid with teh result that the only question before the Court was the assessment of damages.

The trial judge assessed damages on the basis of lost profits.

Amann argued it was entiteld to 'reliance' damages because it had incurred significant expenditure in equipping itself with the aircraft necessary to meet its obligations which was wasted as a result of the Commonwelath's repudiation of the contract. The cost incurred was $5,281,521 for aircraft acquisition and fitting out as well as 'pre-operational expenditure of $854,943.' The resale value of the aircraft was less than $1m, due to the fact that they had been adapted for a special use for which there was limited demand in the market.

The trial judge assessed damages on the basis of lost profits. Amann argued that it was entitled to 'reliance' damages - the heavy expenditure incurrec in equipping itself to perform the contract which was wasted as a result of the repudiation of the contract by the Commonwealth.

 

Trial

Justice Beaumont found in favour of Amann and awarded damages of $410,000.

Full Federal Court

Allowed the appeal by Amann and increased award of damages to $6,600,207.

High Court Judgment

Mason CJ and Dawson J

On the issue of damages for breach of contract their Honours set out the general rule at common law as follows [footnotes omitted; my emphasis added]:

The general rule at common law, as stated by Parke B. in Robinson v Harman , is "that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed". This statement of principle has been accepted and applied in Australia.

The award of damages for breach of contract protects a plaintiff's expectation of receiving the defendant's performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as "expectation damages". The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff's expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.

In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit.

The expression "damages for loss of profits" should not be understood as carrying with it the implication that no damages are recoverable either in the case of a contract in which no net profit would have been generated or in the case of a contract in which the amount of profit cannot be demonstrated. It would be an invitation to the repudiation of contractual obligations if the law were to deny to an innocent plaintiff the right to recoupment by an award of damages of expenditure justifiably incurred for the purpose of discharging contractual obligations simply on the ground that the contract breached would not have been or could not be shown to have been profitable. If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v Harman, as those costs would have been recovered had the contract been fully performed. Similarly, where it is not possible for a plaintiff to demonstrate whether or to what extent the performance of a contract would have resulted in a profit for the plaintiff, it will be open to a plaintiff to seek to recoup expenses incurred, damages in such a case being described as reliance damages or damages for wasted expenditure.

A further example of the application of Robinson v Harman which will result in a plaintiff being entitled to claim damages for wasted expenditure is in a contract for services such as that between a solicitor and a client. Where a solicitor has breached his or her contractual duty of care, the measure of damages to which a client will be entitled will be such an amount as would put the client in the position he or she would have been in had the contract of retainer been performed without negligence. In cases where, had non-negligent advice been given, the client would not have entered into a subsequent transaction, for example a purchase of real property, then, in conformity with Robinson v Harman, the client will be entitled to recover as damages expenditure wasted on account of the negligent advice, less anything subsequently recovered and given reasonable acts of mitigation . The amount of wasted expenditure will be the appropriate measure of damages in such a situation because, it having been established that the client would not have entered into the subsequent contract if proper advice had been given, it is not sensible to speak of loss of profits. Hayes v Dodd is a useful illustration of the statement that the expressions "expectation damages", "damages for loss of profits", "reliance damages" and "damages for wasted expenditure" are simply manifestations of the central principle enunciated in Robinson v Harman rather than discrete and truly alternative measures of damages which a party not in breach may elect to claim.

The corollary of the principle in Robinson v Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed. In L. Albert Son v Armstrong Rubber Co., Chief Judge Learned Hand said:

[O]n those occasions in which the performance would not have covered the promisee's outlay, such a result imposes the risk of the promisee's contract upon the promisor. We cannot agree that the promisor's default in performance should under this guise make him an insurer of the promisee's venture.

Chief Judge Learned Hand went on to approve the statement made by Fuller and Perdue in their celebrated article, "The Reliance Interest in Contract Damages":

We will not in a suit for reimbursement for losses incurred in reliance on a contract knowingly put the plaintiff in a better position than he would have occupied had the contract been fully performed.

...

The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v Schiffmann Menzies J. went so far as to say that the "assessment of damages does sometimes, of necessity involve what is guess work rather than estimation". Where precise evidence is not available the court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages.

...

In Anglia Television Ltd. v Reed, Lord Denning M.R. considered that a plaintiff could claim expenditure thrown away when he has not suffered any loss of profits or if he cannot prove what his profits would have been. His Lordship observed:

It seems to me that a plaintiff in such a case as this has an election: he can either claim for loss of profits; or for his wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered any loss of profits — or if he cannot prove what his profits would have been — he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach. ...

Subsequently, in C.C.C. Films Ltd. v Impact Quadrant Films Ltd., Hutchison J. said that "a plaintiff may always frame his claim in the alternative way if he chooses".

We do not regard the language of election or the notion that alternative ways are open to a plaintiff in which to frame a claim for relief as appropriate in a discussion of the measure of damages for breach of contract. In truth, as has been seen, damages for loss of profits and damages for expenditure reasonably incurred are simply two manifestations of the general principle enunciated in Robinson v Harman . So much at least emerges from the judgment of this Court in T.C. Industrial Plant Pty. Ltd. v Robert's Queensland Pty. Ltd.. There the Court did not accede to the submission that the plaintiff was bound to elect whether it would pursue its claim for expenditure uselessly incurred as a result of the defendants' breaches of contract or, in the alternative, its claim to recover for the loss of profits it would have earned had the crusher been fit for the purpose.

Naturally, the categories of case in which a plaintiff is likely to make a claim for the recovery of expenditure incurred are those in which the plaintiff has not suffered a loss of profits and those in which it is impossible to assess what would have been the outcome had the contract been performed or those in which that outcome is otherwise uncertain. .... The manner in which a plaintiff frames his or her claim for damages will be dictated not so much by a choice of alternatives giving rise to an election but simply according to whether the contract, if fully performed, would have been and could be shown to have been profitable (even if the actual amount of profit is not readily ascertainable). If this can be demonstrated, a plaintiff's expectation of a profit, objectively made out, will be protected by the award of damages. Otherwise, subject to it being demonstrated that a plaintiff would not even have recovered any or all of his or her reasonable expenses, a plaintiff's objectively determined expectation of recoupment of expenses incurred will be protected by the award of damages.

An award of damages for expenditure reasonably incurred under a contract in which no net profit would have been realized, while placing the plaintiff in the position he or she would have been in had the contract been fully performed, also restores the plaintiff to the position he or she would have been in had the contract not been entered into. In this particular situation it will be noted that there is a coincidence, but no more than a coincidence, between the measure of damages recoverable both in contract and in tort.

... in a case where it is not possible to predict what position a plaintiff would have been in had the contract been fully performed, as was the case in both McRae and Anglia Television, it is not possible as a matter of strict logic to assess damages in accordance with the principle in Robinson v Harman. But the law considers the just result in such a case is to allow a plaintiff to recover such expenditure as is reasonably incurred in reliance on the defendant's promise. In this case, the law assumes that a plaintiff would at least have recovered his or her expenditure had the contract been fully performed. It will still be open to a defendant, however, to argue that, notwithstanding the fact that it is impossible to assess what profits, if any, the plaintiff would have made had the contract been fully performed, the expenditure claimed by a plaintiff would nevertheless not have been recovered .... In essence, such an argument is to the effect that, far from being impossible to predict what the result of the contract would have been, if fully performed, it is possible to demonstrate that performance of the contract would not even have resulted in the recovery by the plaintiff of reasonable expenses incurred.

Onus of proof

Why the law appears to assume that a plaintiff would at least have recovered reasonable expenses incurred in the case both of contracts not resulting in a net profit and of contracts in which a plaintiff maintains that it is not possible to determine what position the plaintiff would have been in had the contract been fully performed, and why the law puts the burden of displacing this assumption on a defendant are questions to which we now turn.

In other jurisdictions there is strong authority to the effect that, where a plaintiff claims damages for expenditure reasonably incurred, it is prima facie sufficient for that plaintiff to prove his or her expenditure and that it was reasonably incurred. The onus then shifts to the party in breach of contract to establish that such expenditure would not have been recouped even if the contract had been fully performed. If this onus is not discharged, a plaintiff's entitlement to reliance damages remains intact. ...

The placing of the onus of proof on a defendant ... amounts to the erection of a presumption that a party would not enter into a contract in which its costs were not recoverable. ... such a presumption is not irrebuttable but, until that presumption is rebutted, a plaintiff may rely on it to recover his or her reasonable expenses both in the case of a contract which would not have been profitable and in the case of a contract where the outcome of the contract, if it had been fully performed, cannot be demonstrated, whether at all or with any certainty. This last type of contract ... is to be distinguished from a purely aleatory contract where, almost by definition, it would not be appropriate to apply the presumption we have described for the reason that inherent in the entry into such a contract is the contingency that not even the slightest expenditure will be recovered, let alone the securing of any net profit. In the case of aleatory contracts, damages are awarded for loss of a chance and the burden of establishing the existence and loss of this chance as a result of the defendant's breach lies on a plaintiff although, as has already been observed, mere difficulty of estimation does not relieve a court or jury, in appropriate cases, of the task and responsibility of placing a value on the chance lost. ...

In the context of the discussion of onus of proof and the presumption relating to recovery of reasonable expenditure incurred which we have described, it is necessary to consider the decision of this Court in McRae. There, the plaintiffs recovered as damages the amount of the agreed purchase price together with the expenditure wasted in reliance on the promise that there was an oil tanker at the locality given, there being no oil tanker anywhere in that locality. The expenditure wasted was incurred by the plaintiffs in taking steps to see whether there was a tanker in the locality given and, if so, whether any and what things should be done to turn her to account. Dixon and Fullagar JJ. (with whose conclusions McTiernan J. agreed) considered that the steps taken by the plaintiffs were not unreasonable and that they were such as the defendant would naturally expect them to take. Their Honours concluded that the case fell within the second rule in Hadley v Baxendale. The plaintiffs were therefore entitled to recover damages "measured by reference to expenditure incurred and wasted in reliance on the Commission's promise that a tanker existed at the place specified".

Their Honours pointed out that the plaintiffs had a prima facie case for recovery of wasted expenditure because (1) the expense was incurred; (2) it was incurred in reliance on the promise that there was a tanker; and (3) the fact that there was no tanker meant that the expense was wasted. This threw the burden on the defendant "of establishing that, if there had been a tanker, the expense incurred would equally have been wasted". But it was impossible to assess damages on the basis of a comparison between what was promised and what was delivered, "not because what was promised was valueless but because it is impossible to value a nonexistent thing".

Accordingly, McRae illustrates the proposition that a plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expense was incurred in reliance on the promise of the party in breach, there being a failure of performance by that party. By reason of its facts, the reasoning in McRae does not depend upon the presumption that an innocent party would not have entered into the contract unless it would at least have recovered its reliance expenditure under the contract had it been performed. But the reasoning is not inconsistent with the application, in appropriate cases, of that presumption which, in our view, has much to commend it. Indeed, it is just and fair that the repudiating party should bear the onus of showing that the party not in breach would have made a loss on the contract.

The present case differs from McRae in that it was not impossible, as a matter of theory, for Amann to establish what its profits (if any) would have been had the Commonwealth not repudiated the contract. Indeed, the trial judge's assessment of damages proceeded on that footing although, significantly, he did not take into account the value to Amann of the prospects of renewal of the contract. But the difficulties attending that undertaking were legion, as appears from the judgments in the Full Court. Not the least of those difficulties were the problems of assessing what were the prospects of early termination of the contract by the Commonwealth had the contract proceeded and, more importantly, the prospects of Amann securing a renewal of the contract. Add to those uncertainties the fact that, on any view, the most substantial part of Amann's damages flowing from the Commonwealth's breach of the original contract was represented by the wasted expenditure.

In this respect it is significant that the contract was of such a kind that the parties clearly contemplated that the contractor would be in an advantageous and preferred position to secure a renewal of the contract had it run its expected course. In that event Amann would, subject to any variations in the Commonwealth's requirements, have had the necessary equipment (written down in value), facilities and personnel in place at the relevant time. The prospect of renewal was an important commercial benefit which would then have accrued to the contractor. Amann was looking to that commercial benefit as well as revenue receipts arising under the original contract as the reward which it would obtain under that contract. In other words, it was a contract which enabled the contractor to recoup part, if not all, of its expenditure during the currency of the original contract and placed the contractor in a favourable position to secure a renewal of the contract and earn substantial profits under any renewed contract. On this score alone it was a case in which, it being natural and appropriate for Amann to sue to recover its wasted expenditure by way of reliance damages, the onus rested on the Commonwealth of establishing that the reliance expenditure would have been wasted even if the contract had been performed.

The prospect of renewal of the contract and discharge of the onus

In seeking to discharge this onus, the Commonwealth submits that it is irrelevant, when considering the position Amann would have been in had the contract been fully performed, to have regard to the value of Amann's prospects of renewal of the contract. This is because, so the argument runs, the Commonwealth was under no legal obligation to renew the contract. According to the argument, a defendant is not liable for that which he or she has not promised to do; a plaintiff is not entitled to recover compensation for the non-realization of his or her expectation that the defendant would provide him or her with a benefit when the defendant has not assumed a legal obligation to do so. A variation of this argument is that to take into account loss arising from deprivation of the prospects of renewal is to take into account a loss arising from nonperformance of an act which the Commonwealth was under no legal obligation to perform. Damages for the loss of a chance or an opportunity to secure a benefit may be awarded but, argues the Commonwealth, only in those cases in which there is a legal obligation to provide a chance or an opportunity of obtaining that benefit. Chaplin v Hicks is the classic illustration of just such a case.

Amann relies upon Richardson v Mellish in support of the contrary argument that damages for breach of contract may be assessed so as to include the prospect that the contract will be renewed even though the defendant is under no legal obligation to renew the contract. In Richardson v Mellish the plaintiff recovered damages on the footing that he would be employed as master of the "Minerva" for two remaining voyages. In fact, the defendant had promised the plaintiff to appoint him for the two voyages subject to certain contingencies. Those contingencies included the East India Company approving the master of the ship for each individual voyage. It was argued that the Company might withhold its approval of the plaintiff's appointment for the second voyage as approval for that voyage had not yet been given and that, therefore, the damages in respect of the second voyage should not have been awarded. However, it was established that the Company's approval of a renewal of an appointment of a master for a second voyage was "almost to a certainty". Accordingly, the case was one in which the value to the plaintiff of the defendant's promise depended in part upon the occurrence of an event extraneous to the contract, the approval of the Company, and the probability of its occurrence was relevant to the assessment of the value of the promise. The award of damages to the plaintiff for the loss of two voyages was upheld.

Richardson v Mellish does not support Amann's submission, however, because in that case there was a promise by the defendant to appoint the plaintiff for two voyages. So understood, the case is consistent with the firmly established rule that, in an action for breach of contract, a defendant is not liable in damages for not doing that which he or she has not promised to do. In Lavarack, the English Court of Appeal (Diplock and Russell L.JJ., Lord Denning M.R. dissenting) rejected the submission that damages for wrongful dismissal could include extra benefits which the contract did not oblige the employer to confer upon the plaintiff but which he might reasonably expect the employer to have conferred upon him otherwise than in performance of the contract.

However, the rule that the defendant is not liable in damages for not doing that which he or she has not promised to do is necessarily subject to the rule in Hadley v Baxendale. According to Alderson B.'s renowned formulation, the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or 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. It is now accepted that this is the statement of a single principle and that its application may depend on the degree of relevant knowledge possessed by the defendant in the particular case.

However, in the present case, the application of the rule in Hadley v Baxendale turns not on the degree of knowledge possessed by the defendant but on what may reasonably be supposed to have been in the contemplation of the parties as the probable result of the breach. If it be right to suppose that the loss of the prospect of securing a renewal of the contract was within the contemplation of the parties as a probable result of the breach, then, notwithstanding the principle established by Abrahams and Lavarack, Amann is entitled to compensation which takes into account the value of the loss of the prospect of securing a renewal of the contract.

What was in the contemplation of the parties depends upon a consideration of the terms of the contract in the light of the matrix of circumstances in which it was made. As we have seen, performance of the contract by Amann would have placed it in an advantageous position to secure a renewal of the contract with the benefits that would entail. The prospect of renewal was a distinct commercial benefit, inevitably contemplated by the parties as enuring to the advantage of Amann on, and by reason of, its performance of the contract. It was not an advantage which would accrue to Amann independently of performance of the contract or incidentally. The corollary is that the parties necessarily contemplated the loss of that prospect as the probable result of a repudiation or fundamental breach of the contract on the part of the Commonwealth.

The Commonwealth also submits that the Full Court of the Federal Court was wrong in taking into account the prospect of renewal of the contract because to do so infringed the rule that, where there are two or more ways in which a defendant might perform the contract, the court, in assessing damages, adopts the mode of performance which is most beneficial to the defendant. That rule, which is a manifestation of the principle that damages will not be awarded for not doing that which there is no legal obligation to do, is well supported by authority.

...

Where compensation is sought in respect of the deprivation of a possible benefit which is dependent upon the unrestricted volition of another it may be impossible to say that any assessable loss results from the breach. However, this statement must be understood in the light of the principle that the mere existence of a contractual right in a party to terminate does not operate automatically to restrict the damages that can be awarded. The court does not reach a conclusion by reference to an improbable factual hypothesis. The court must have regard to the facts and evaluate the possible exercise of the right in all the relevant circumstances of the case. Moreover, in determining what is or would be beneficial for the defendant, the court does not confine its attention to the relationship between the plaintiff and the defendant; it would be wrong to reduce the defendant's legal obligations to the plaintiff on the footing that he or she would incur greater loss in other respects.

If we make the assumption that the contract would have proceeded to completion, which is a necessary assumption for present purposes, it would be wrong, in the circumstances of the case, to conclude that the Commonwealth would have refused to renew the contract simply because that outcome would reduce the Commonwealth's liability in damages to Amann in the light of the events as they have actually fallen out. In assessing damages, the Court is necessarily engaged in a hypothetical exercise, that is, ascertaining how the contract would have turned out had it not been brought to an end by Amann's acceptance of the Commonwealth's wrongful repudiation. On the assumption that the contract would have proceeded to completion, it would have been to the Commonwealth's advantage to have agreed to a renewal, rather than to have negotiated a fresh contract with a third party who would have been in the position of starting from scratch and thus have sought and insisted upon large financial rewards in order to compensate for heavy initial expenditure of the kind incurred by Amann. Accordingly, there would have been a strong prospect of renewal.

This being so, the value of the prospect of a renewal of the contract was a matter to be taken into account in determining whether Amann would or would not have recouped its expenditure. As in a case such as Richardson v Mellish where the value of the legal obligation to the plaintiff depends upon the occurrence of an event extraneous to the contract, the probability of the occurrence is relevant to the estimate . As we have said, there was a strong prospect of such an occurrence in this case.

It follows that we consider that the Full Court was correct in taking into account the prospect of renewal of the contract as a factor relevant to the assessment of damages. The consequence of this conclusion, in view of the onus cast upon the Commonwealth as the party in breach, is that the Commonwealth must demonstrate that the value to Amann of the prospect of renewal of the contract when combined with those expenses that would have been recovered by way of gross receipts was less than the total expenses to be incurred by Amann in the performance of its contractual obligations. If the Commonwealth was able to demonstrate that this would have been the result, had the contract been fully performed, then, in conformity with Robinson v Harman, Amann would not be entitled to all of its expenditure incurred in reliance on the Commonwealth's promise to perform and wasted as a result of the Commonwealth's breach. The Commonwealth was unable, however, to demonstrate this and so discharge the onus. Accordingly, the presumption that Amann would not have entered into a contract in which it would not recover the value of its expenditure incurred remains undisturbed. We agree with the Full Court's conclusion that Amann was entitled to recover as damages an amount commensurate with what it had expended in reliance upon the Commonwealth's promise to perform its contractual obligations.

Justice Deane

Damages should be reduced by 20% based on finding that likelihood of renewal of the contract was 80%.

Justice Brennan

On the issue of remoteness Justice Brennan quoted (with approval) Lord Reid in C. Czarnikow Ltd. v Koufos [(1854) 9 Ex. 341 at 354]:

[99] "The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation."

Appeal should be dismissed

Justice Toohey

Generally agreed with the principles set out by Mason CJ and Dawon J. However, Justice Toohey took a different view on some issues (like onus of proof in relation to reliance damages) which would have led him to reduce the awrd of damages from $5,475,184 to $2,737,592 (plus interest).

Justice Guadron

Dismissed the appeal finding no error by the Full Court.

Justice McHugh

Allowed the appeal with a discount of 20% (taking the view that Amman had only an 80% chance fo recorering expenditure).

 

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