Presumption of recovery of damages due to the breach of an agreement

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

The usual basis for a claimant to be compensated when a contract is breached is one of being restored to the same position it would have been in, had the contract been performed. In order to be awarded that compensation, the claimant needs to demonstrate that the loss arises from that breach.

Sometimes, a breach of contract can cause or contribute to uncertainty about the position the claimant would have been in if the contract had been performed.

In Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17, the High Court of Australia held that where a breach had made it difficult for a plaintiff to prove what its position would have been if the contract had been performed, then in order for it to satisfy the onus of proof to establish loss, it is reasonable to assume in the plaintiff’s favour that if the contract had been performed, the plaintiff would have recovered the expenditure reasonably incurred in anticipation of, or in reliance on the performance of the contract.

Background

Cessnock City Council (Council) executed an agreement for lease (AFL) with 123 259 932 Pty Ltd, formerly Cutty Sark Holdings Pty Ltd, (Cutty Sark) for a 30-year lease of a proposed subdivided lot of the Cessnock Airport.

The AFL provided that the Council should take all reasonable steps to apply for and to register a proposed plan of subdivision (PPOS) for the lot by a certain date. In the interim, the Council permitted Cutty Sark to occupy the premises under a licence.

The Council breached the AFL by not taking reasonable action to register the PPOS. Cutty Sark incurred significant expenditure in anticipation of the AFL by constructing a hangar on the proposed lot. However, it never obtained the lease. Cutty Sark’s business failed and the AFL was terminated.

Cutty Sark sued the Council for breach of contract, seeking damages for the wasted expenditure in constructing the hangar.

Primary decision and Court of Appeal

At first instance, the primary judge awarded Cutty Sark only minimal damages, concluding that the presumption of recovery of expenses in situations like this one arose only if the type of breach made it ‘impossible’ to assess damages on the usual basis.

In this case, the Council was not bound under the AFL to develop the airport i.e. leaving the risk of non-development with Cutty Sark.

The New South Wales Court of Appeal overturned the primary judge’s decision. The Court of Appeal held that the presumption was not limited to situations of ‘impossibility’ of proof. The Council had failed to rebut the presumption due to the significant possibility of development of the airport by the Council during the period of the lease. Cutty Sark was awarded damages of $6,154,459.40.

High Court decision

The High Court dismissed the Council’s appeal.

In summary, the High Court held that:

• the Council’s breach caused considerable uncertainty about Cutty Stark’s position (i.e. whether it would have recovered its expenditure during the lease). Its claim was based on expenditure incurred in anticipation of, or reliance on, the performance of the Council’s obligation to take reasonable action to register the proposed lot;
•  while the onus to prove loss resulting from a breach is on the plaintiff, in cases where it is uncertain whether a plaintiff would have recovered expenditure if a contract was performed, the court will assume that the plaintiff would have recovered expenditure reasonably incurred in anticipation of, or reliance on, the other party’s performance of its obligations; and
• the presumption of recovery of damages in situations like this is not limited to situations where it is ‘impossible’ for a plaintiff to prove its loss flowing from a breach. Rather, the principle operates where there is uncertainty and is otherwise capable of coexisting with other principles about facilitating proof.

Key takeaways

The High Court’s decision confirms the orthodox principles of damages for breach of contract.

Where it is uncertain that a claimed loss would have been recovered if the contract had been performed, a claimant’s onus of proof will be assisted by the court presuming recovery of costs reasonably incurred.

The counterparty then needs to rebut that presumption by demonstrating that all or some of the claimed loss would not have been recovered had the contract been performed.

Contact us

If you need advice on the breach of an agreement concerning a construction, engineering or infrastructure project, please contact Stuart Miller on +61 3 9321 7840.